<PAGE>
As filed with the Securities and Exchange Commission on May 3, 2000
Registration No. 333-32104
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
ONI SYSTEMS CORP.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 3661 77046-9657
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification no.)
incorporation or
organization) ---------------
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1621
(408) 965-2600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
HUGH C. MARTIN
President, Chief Executive Officer and Chairman
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1621
(408) 965-2600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
HORACE L. NASH, ESQ. JOHN L. SAVVA, ESQ.
RICHARD L. DICKSON, ESQ. ALBERT Y. LIU, ESQ.
DAVID A. BELL, ESQ. HARRY H. DEMAS, ESQ.
STEVEN S. LEVINE, ESQ. Sullivan & Cromwell
Fenwick & West LLP 1888 Century Park East
Two Palo Alto Square Suite 2100
Palo Alto, California 94306 Los Angeles, California 90067-1725
(650) 494-0600 (310) 712-6600
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Amount Proposed Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Share Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.0001
par value.............. 9,200,000 $16.00 $147,200,000 $38,861
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Fees of $30,360 and $8,501 were paid on March 10, 2000 and April 26, 2000,
respectively.
---------------
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 May 3, 2000.
[LOGO OF ONI SYSTEMS]
8,000,000 Shares
ONI Systems Corp.
Common Stock
-----------
This is an initial public offering of shares of common stock of ONI Systems
Corp. All of the 8,000,000 shares of common stock are being sold by ONI
Systems.
Prior to this offering, there has been no public market for our common stock.
ONI Systems estimates that the initial public offering price per share will be
between $14.00 and $16.00. We have applied for approval for quotation of our
common stock on the Nasdaq National Market under the symbol "ONIS".
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of our common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Initial public offering price....................................... $ $
Underwriting discount............................................... $ $
Proceeds, before expenses, to ONI Systems........................... $ $
</TABLE>
To the extent that the underwriters sell more than 8,000,000 shares, the
underwriters have the option to purchase up to an additional 1,200,000 shares
from ONI Systems at the initial public offering price, less the underwriting
discount.
-----------
The underwriters expect to deliver the shares in New York, New York on ,
2000.
Goldman, Sachs & Co.
Banc of America Securities LLC
Chase H&Q
Robertson Stephens
-----------
Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER ARTWORK]
At the top of the diagram the ONI Systems logo and the words "All-optical
networking equipment for metropolitan and regional service providers" appear.
Upper Half--An oval placed in the center of the diagram with figures inside
the oval.
Interior of the Oval--The oval is divided into three portions:
The right-hand portion of the oval is a schematic symbol used to represent
an optical cross- connect linking the metro network to the long haul network.
The words "To Long-haul Networks" appear below the schematic.
The center portion of the oval contains a multi-color ellipse or "ring"
with four ONLINE9000 boxes or "nodes" at approximately 12 o'clock, 3 o'clock,
6 o'clock and 9 o'clock on the ring The left-most node of the ring is shared
as the right-most node of the ring contained in the left portion of the oval.
The ring represents a ring-based fiber optic network. The words "Metro Core
Optical Fiber Ring" appear inside the ring. The ring is connected by two lines
(representing fiber links) to the optical cross-connect schematic in the
right-hand portion of the oval.
The left portion of the oval contains a multi-color ellipse or "ring" with
three ONLINE7000 boxes or "nodes" at approximately 12 o'clock, 6 o'clock and 9
o'clock on the ring, and a ONLINE7000 node at approximately 3 o'clock. The
right-most node of the ring is shared as the left-most node of the ring
contained in the center portion of the oval. The upper-most node of the ring
is connected to a diagram of a building representing the enterprises connected
to the communications network. The building is connected to a diagram of two
computer screens and one telephone representing the end users. The words
"Metro Access Optical Fiber Ring" appear inside the ring. The words "Typical
Metro Communications Network Using ONI Systems Equipment" appear below the
oval.
Lower Right Quadrant--A globe showing the North American continent and
portions of South America, Africa, Europe and Asia with a network of white
lines superimposed. The ovals in the upper half and lower half of the diagram
are each connected to one of the dots in the map-network (approximately in the
vicinity of San Francisco and New York, respectively) with trace lines
indicating that the ovals represent a representative node on the network.
Lower Half--A second smaller oval offset to the left of the diagram with
figures inside the oval.
Interior of the Oval--The oval is divided into the same three portions as
the oval contained in the upper half of the diagram, except that the three
portions of the oval are in reverse order of the three portions in the oval in
the upper half of the diagram and there are no interior labels.
At the bottom of the page is a legend showing the symbols that represent
the ONLINE9000, ONLINE7000, Enterprises, End Users, Long-haul Networks and
Optical Fiber Link.
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus. Unless otherwise indicated, all
information contained in this prospectus assumes no exercise of the
underwriters' option to purchase additional shares in this offering and gives
effect to the automatic conversion of outstanding shares of preferred stock
into shares of common stock upon the closing of this offering. The share and
per share numbers presented in this prospectus have been retroactively restated
to give effect to all stock splits. Information in this prospectus gives effect
to our reincorporation in Delaware.
ONI Systems Corp.
We develop, market and sell communications networking equipment, based
entirely on all-optical technology, for metropolitan area and regional
networks. Our equipment uses pulses of light rather than electric current in
the transmission and switching of telephone, Internet and other data
communications in these networks. Our customers are communication service
providers. Our products enable them to relieve traffic bottlenecks in their
metropolitan and regional networks and to deliver new data communication
services sought by their subscribers. Our products help our customers to
rapidly build high-capacity metro networks that are flexible, easy to expand
and capable of supporting multiple services for end-users.
Internet usage has increased in terms of both the number of users and the
quantity of information transmitted. In response, communication service
providers have deployed optical technology to increase the transmission
capacity in long-distance networks and in the local area networks used by
enterprises. However, similar improvements have not been made to the metro
networks that bridge the gap between enterprise networks and long-distance
networks. To date, optical products available to metro network service
providers have been based on technologies which were originally designed to
serve long distance or enterprise networks, and are costly, difficult to expand
and difficult to manage in the metro environment.
We believe that our product offerings represent the first commercially
available, all-optical solution specifically designed for metro networks. Our
first product, the ONLINE9000(TM), has been generally available since January
2000. We expect our next product, the ONLINE7000(TM), to be available by June
2000. These products incorporate our OPTX(TM) network operating system and our
OLMP(TM) inter-network communications protocols to manage and support a diverse
mix of service offerings by our customers.
The benefits of our solution include:
. Multi-service capability. Our products allow service providers to
introduce and support a changing mix of services without deploying
dedicated equipment for each service type. Our products are also
compatible with existing services based on the Synchronous Optical
Network standard, commonly referred to as SONET.
. Manageability and flexibility. Our products enable real time end-to-end
management, surveillance, service activation, network inventory
management and billing within our OPTX network operating system.
. Cost effectiveness and scalability. Our products eliminate costly
optical-to-electrical conversions, and the scalability of our products
allows service providers to build metro networks in a pay-as-you-grow
fashion.
3
<PAGE>
. Rapid and efficient service restoration. Our products provide for rapid
restoration of mission critical services without the need to dedicate
network capacity for this capability.
The following are key elements of our strategy:
. leverage our all-optical architecture to achieve early design wins in
metro networks;
. work closely with service providers to identify and enable new revenue-
generating services for their end-users;
. extend our technology leadership through continued investment in research
and development;
. leverage our optical manufacturing expertise and relationships to reduce
costs and increase flexibility to meet demand;
. expand our direct sales and service and support capabilities worldwide;
and
. establish strategic alliances and pursue acquisitions to broaden our
product, service and technology portfolios.
Since commencing operations in December 1997, our expenses have
significantly exceeded our revenue as we have developed our products and
strategy. Through March 31, 2000, we incurred cumulative losses of $86.5
million. We expect to have large fixed expenses and to incur increasing sales,
research, manufacturing and administrative expenses, and we expect to operate
at a loss for a period of time. We expect to continue to need to raise capital
to fund losses and expansion. Our first product has been generally available
only since January 2000, so the likelihood of success of this and future
products is impossible to predict.
Corporate Information
We were incorporated in California on October 20, 1997 as Optical Networks,
Incorporated. In April 2000, we reincorporated in Delaware and changed our name
to ONI Systems Corp. Our principal executive offices are located at 166
Baypointe Parkway, San Jose, California 95134-1621. Our telephone number is
(408) 965-2600.
Recent Developments
In March 2000, we agreed to sell $4.0 million of common stock to Internet
Initiative Japan Inc. at the initial public offering price in a private
placement that will close concurrent with this offering. Internet Initiative
Japan will be granted the right to include these shares in future registered
offerings that we may file. We also entered into a trial system purchase
agreement with Internet Initiative Japan for our ONLINE9000 product in April
2000.
In April 2000, we agreed to sell $10.0 million of common stock to CCT
Telecom Holdings Limited at the initial public offering price in a private
placement that will close concurrent with this offering. CCT Telecom will be
granted the right to include these shares in future registered offerings that
we may file.
In May 2000, we entered into an agreement with Sun Microsystems, Inc. to
sell to it 1,333,333 shares of Series H preferred stock at a price per share of
$15.00 for an aggregate purchase price of $20.0 million in a private placement
that we anticipate will close on May 8, 2000 or another date agreed to by Sun
Microsystems and us. Sun Microsystems will be granted the right to include
these shares in future registered offerings that we may file. Based on an
assumed initial public offering price of $15.00 per share, these shares of
Series H preferred stock to be issued to Sun Microsystems will automatically
convert into 1,616,161 shares of common stock upon the closing of this
offering.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............. 8,000,000 shares
Common stock to be outstanding
after this offering............. 124,688,270 shares
Use of proceeds.................. For general corporate purposes, including
working capital, capital expenditures and
potential acquisitions of, or investments in,
complementary technologies or businesses. See
"Use of Proceeds".
Proposed Nasdaq National Market
symbol.......................... ONIS
</TABLE>
At the request of ONI Systems, the underwriters are reserving up to 960,000
shares of common stock at the initial public offering price for sale to
individuals and entities designated by ONI Systems.
The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding as of March 31, 2000
assuming the one-to-one conversion of preferred stock outstanding as of March
31, 2000 upon completion of this offering. The number of shares outstanding
after this offering includes:
. 1,616,161 shares of common stock into which the shares of Series H
preferred stock issuable to Sun Microsystems will automatically convert
upon completion of this offering, based on an assumed public offering
price of $15.00 per share;
. 266,667 shares of common stock issuable to Internet Initiative Japan upon
the closing of a private placement, concurrent with this offering, based
on an assumed private placement price of $15.00 per share; and
. 666,667 shares of common stock issuable to CCT Telecom upon the closing
of a private placement, concurrent with this offering, based on an
assumed private placement price of $15.00 per share.
The number of shares to be outstanding excludes, as of March 31, 2000:
. 19,343,345 shares of common stock subject to options outstanding under
our stock incentive plans with a weighted average exercise price of $0.64
per share, and 1,377,819 shares of common stock available for future
grant under these plans; and
. 1,434,394 shares of common stock subject to outstanding warrants with a
weighted average exercise price of $2.72 per share.
In addition, from April 1, 2000 through April 21, 2000, we granted or agreed
to grant options to purchase 1,782,050 shares of common stock with a weighted
average exercise price of $6.63 per share. Of these shares, 1,000,000 shares
will be subject to an option that is outside of the stock plans described in
this prospectus. In April 2000, we adopted our 2000 Equity Incentive Plan,
under which 7,000,000 shares of common stock will be available for future
grant, and our 2000 Employee Stock Purchase Plan, under which 1,000,000 shares
of common stock will be available for future grant.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period From
October 20, 1997 Year Ended Three Months
(Inception) to December 31, Ended March 31,
December 31, ----------------- -----------------
1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue................. $ -- $ 1,733 $ 3,034 $ 565 $ 3,633
Gross profit............ -- 525 2,002 140 783
Operating expenses...... 198 9,559 49,195 5,082 32,432
Operating loss.......... (198) (9,034) (47,193) (4,942) (31,649)
Net loss................ (199) (8,852) (46,572) (4,777) (30,847)
Basic and diluted net
loss per share......... (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257 11,919 18,043 13,542 24,219
Pro forma basic and
diluted net loss per
share.................. $(0.60) $(0.30)
Shares used in computing
pro forma basic and
diluted loss per share. 78,025 103,154
</TABLE>
Pro forma basic and diluted net loss per share has been calculated assuming
the conversion of all preferred stock outstanding at March 31, 2000 into common
stock, as if all shares had converted at the beginning of the year or, if
later, on the date of their issuance.
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------
Pro Pro Forma Pro Forma
Actual Forma Series H As Adjusted
------- ------- --------- -----------
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents................ $50,307 $50,307 $ 70,307 $194,407
Working capital.......................... 59,101 59,101 79,101 203,201
Total assets............................. 95,869 95,869 115,869 239,969
Capital lease obligations, less current
portion................................. 295 295 295 295
Total stockholders' equity............... 78,699 78,699 98,699 222,799
</TABLE>
The pro forma Series H balance sheet data as of March 31, 2000 gives effect
to the expected sale of 1,333,333 shares of Series H preferred stock to Sun
Microsystems in a private placement that we anticipate will close on or about
May 8, 2000 at a private placement price of $15.00 per share. These shares will
automatically convert into 1,616,161 shares of common stock upon the completion
of this offering, based upon an assumed initial public offering price of $15.00
per share.
The pro forma as adjusted balance sheet data as of March 31, 2000 gives
effect to:
. the sale of 8,000,000 shares of common stock in this offering at an
assumed initial public offering price of $15.00 per share, after
deducting an assumed underwriting discount and estimated offering
expenses;
. the sale of 266,667 shares of common stock to Internet Initiative Japan
in a private placement concurrent with this offering at an assumed
private placement price of $15.00 per share; and
. the sale of 666,667 shares of common stock issuable to CCT Telecom in a
private placement concurrent with this offering at an assumed private
placement price of $15.00 per share.
See note 1 of notes to our consolidated financial statements for a
description of the method that we used to compute our basic and diluted net
loss per share. See "Capitalization".
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below and the other
information in this prospectus before deciding whether to invest in shares of
our common stock.
We have a history of losses, expect to continue to incur additional losses, and
may never achieve profitability.
Through March 31, 2000 we incurred cumulative losses of $86.5 million, and
we expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large fixed expenses,
and we plan to incur significant and increasing sales and marketing, research
and development, manufacturing, and general and administrative expenses. In
February 2000, we began to ship our first product, the ONLINE9000, and our
revenue to date has been limited. In order for us to become profitable, we will
need to generate and sustain higher revenue while maintaining reasonable cost
and expense levels.
Our limited operating history makes forecasting our future revenue and
operating results difficult, which may impair our ability to manage our
business and your ability to assess our prospects.
We commenced business as an independent company in December 1997 and
introduced our ONLINE9000 product in January 2000. Consequently, we have a
limited history upon which we can rely in planning and making the critical
decisions that will affect our future operating results. Similarly, because of
the relatively immature state of our business, it will be difficult for
investors to evaluate our prospects. We will need to make decisions in the
immediate future regarding resource allocations for research and development
and marketing and sales. If our predictions about the best use of our resources
turn out to be inaccurate, we may not make the best use of our resources and we
may forego better opportunities. Our limited history makes it difficult for
investors to gauge our capability in making these decisions.
We expect our operating expenses to increase significantly as we increase
spending in order to fund more research and development, expand our sales and
marketing operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that will result from being a public company and the expected growth of our
business. Our operating expenses are largely based on anticipated revenue
trends and a high percentage of our expenses are, and will continue to be,
fixed in the short term. As a result, a delay in generating or recognizing
revenue could cause significant variations in our operating results from
quarter to quarter and annually and could result in substantial operating
losses.
The ONLINE9000 is our only currently available product and, if it is not
commercially successful, our revenue will not grow and we may not achieve
profitability.
If our potential customers do not adopt, purchase and successfully deploy
our ONLINE9000 product in large numbers, our revenue may not grow and our
business, financial condition and results of operations will be seriously
harmed. Since the market for our products is relatively new, future demand for
our products is uncertain and will depend on the speed of adoption of optical
networking, in general, and optical equipment in metro networks, in particular.
No communications service provider has fully deployed the ONLINE9000 in large
network environments, and they may choose not to do so. Even if service
providers do deploy our product fully, it may not operate as expected, which
could delay or prevent its adoption.
7
<PAGE>
If we fail to enhance existing products or to develop and achieve market
acceptance for new products that meet customer requirements, our sales will
suffer.
The communications network equipment market is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. The introduction of new
technologies could render our existing or future products obsolete. We may not
be able to develop new products or product enhancements in a timely manner, or
at all. Even if we are able to develop and commercially introduce new products
and product enhancements, they may not achieve widespread market acceptance.
Any failure of our future products to achieve market acceptance could harm our
business and financial results.
For example, we are developing a new product, the ONLINE7000, for metro
access applications. We have devoted and expect to continue to devote
significant engineering and financial resources to the development and
marketing of the ONLINE7000. Unexpected technical challenges could prevent us
from successfully developing the ONLINE7000 in a timely manner or at all. In
addition, the ONLINE7000 could be more costly to develop and test than we
anticipate. Even if we are able to develop and introduce the ONLINE7000, it may
not achieve market acceptance if it does not include features or performance
desired by customers or if competitors develop products that customers prefer.
We expect that substantially all of our revenue will be generated from a small
number of customers, and our revenue will not grow if we do not sell products
to them in large numbers and if we do not add customers.
We expect that substantially all of our revenue will depend on sales of our
products to a small number of customers and that our revenue will only grow if
these customers purchase substantial quantities of our products. We currently
have purchase agreements covering seven companies, four of which directly or
indirectly hold our equity securities. None of these companies is contractually
committed to purchase any minimum quantities of our products. If these
companies or future customers do not purchase large quantities of our products
for any reason, our ability to succeed would be harmed. The decision to
purchase substantial quantities of our products will depend, in part, on our
customers' and potential customers' desire and ability to introduce or expand
commercial services. We cannot be sure that any customer will introduce or
expand commercial services utilizing our products on a timely basis, if at all.
Any delay in introducing, or failure to introduce, these services would
seriously harm our revenue, results of operations and financial condition.
In addition, if we fail to attract new customers, our growth will be
limited. The growth of our customer base could be limited by:
. unwillingness of potential customers to adopt our optical networking
architecture;
. delays or difficulties in completing the development and introduction of
our planned products or product enhancements;
. failure of our products to perform as expected;
. difficulties in meeting customers' delivery requirements;
. introductions of new products by our competitors; and
. other competitive factors such as aggressive pricing or financing by our
competitors.
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
8
<PAGE>
also expect many new competitors to emerge as the market for optical networking
equipment expands and evolves in response to technical innovations and
increasing demand for new broadband and wavelength-based services. We currently
compete with both public and private companies providing solutions for network
and bandwidth management in the metropolitan market. Many of these companies
have existing relationships with communication service providers, making it
more difficult for us to sell our products to these potential customers.
Some of our current and potential competitors are large public companies
that have longer operating histories, significantly greater financial,
technical and marketing resources, wider customer relationships and a broader
product line than we do. Consequently, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. These large public companies are better positioned than we are to
acquire companies and new technologies that may displace our products or make
them obsolete. Any of these acquisitions could give the acquiring competitor a
strategic advantage. Unlike these large public companies, we have limited
ability to provide vendor-sponsored financing, which may influence the
purchasing decisions of prospective customers. In addition, a number of start-
up companies are attracting large amounts of capital and rapidly developing
competing technologies in an attempt to market products to communication
service providers. These private companies can offer investment opportunities
to induce potential customers to purchase their products.
We expect the average selling prices of our products to decline, which may
reduce gross margins and revenue.
Our industry has experienced rapid erosion of average product selling
prices. We anticipate that the average selling prices of our products will
decline in response to competitive pressures, increased sales discounts, new
product introductions by our competitors or other factors. If we are unable to
achieve sufficient cost reductions and increases in sales volumes, this decline
in average selling prices will reduce our gross margins and revenue.
We face risks associated with our international operations that could limit our
sales and add to our cost of operations.
We market and sell our products in the United States and internationally. We
intend to expand our international operations substantially and to enter new
international markets. This expansion will require significant management
attention and financial resources. We may not be able to maintain or increase
international market demand for our products.
We have limited experience in marketing and distributing our products
internationally. International operations are subject to inherent risks,
including:
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. difficulties and costs of staffing and managing foreign operations;
. certification requirements with which we may be unfamiliar; and
. reduced protection for intellectual property rights in some countries.
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. Sole or
limited source suppliers may be vulnerable to pressure from large purchasers of
their products, who may be competitors of ours, not to sell their products to
us.
We rely on contract manufacturers to produce our products, and our business
would be harmed if they were to stop meeting our manufacturing requirements.
We rely on contract manufacturers to complete most of the manufacturing of
optical assemblies for our products. If for any reason these manufacturers were
to stop satisfying our needs without providing us with sufficient warning to
procure an alternate source, our ability to sell our products would be harmed.
Except for our agreement with E-TEK Dynamics, Inc., we have no long term
contracts with our manufacturers. As a result, our contract manufacturers are
not obligated to supply products to us for any specific period, in any specific
quantity or at any certain price, except as may be provided in a particular
purchase order.
The process of qualifying a new contract manufacturer for complex products
such as our optical assemblies is lengthy and would consume a substantial
amount of the time of our technical personnel and management. If we sought to
change manufacturers in a short period of time, our business would be
disrupted. In addition, we may be unsuccessful in identifying a new
manufacturer capable of and willing to meet our needs on terms that we would
find acceptable.
If we fail to predict our manufacturing and component requirements accurately,
we could incur additional costs or experience manufacturing delays.
We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our 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.
10
<PAGE>
If we underestimate our requirements, we may have an inadequate inventory of
components and optical assemblies. Inadequate inventory could interrupt
manufacturing of our products and result in delays in shipments. In addition,
lead times for materials and components that we order are long and depend on
factors such as the procedures of, or contract terms with, a specific supplier
and demand for each component at a given time. In the case of some optical
components in short supply, component suppliers have imposed strict allocations
that limit the number of these components they will supply to a given customer
in a specified time period. These suppliers may choose to increase allocations
to larger, more established companies, which could reduce our allocations and
harm our ability to manufacture our products.
We expect that our revenue and operating results will vary significantly from
quarter to quarter, which may cause our stock price to decline.
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. It is likely that in some
future quarters, our operating results may be below the expectations of market
analysts and investors, which could cause the trading price of our common stock
to fall.
In addition, we expect to experience seasonality in the sales of our
products. Historically, the communications equipment market has higher sales in
the first and fourth quarters of the year, due in part to purchasers' budgetary
cycles. In addition, we expect that sales may decline during summer months,
particularly in European markets, which we expect to represent a significant
portion of the market for our products for the foreseeable future. These
seasonal variations in our sales may lead to fluctuations in our quarterly
operating results.
Due to the long sales cycle for our products, the timing of revenue is
difficult to predict and may cause our operating results to fluctuate
unexpectedly.
The sales and deployment cycle for our products is lengthy; it may extend
for six months or more. The length of our sales cycle may cause our revenue and
operating results to vary unexpectedly from quarter to quarter. A customer's
decision to purchase our products involves a significant commitment of its
resources and a lengthy evaluation and product qualification process.
Consequently, we may incur substantial expenses and devote senior management
attention to potential relationships that never materialize, in which event our
investments will largely be lost and we may miss other opportunities. In
addition, our lengthy sales cycle makes it difficult to predict the quarter in
which we may recognize revenue from any sale.
If we do not manage growth, improve existing processes and implement new
systems, procedures and controls, we may make inefficient use of resources,
including your investment, and we may not achieve profitability.
Our ability to sell our products and implement our business plan requires an
effective planning and management process. Our processes may not be able to
support our growth if our products become widely accepted. We continue to
increase the scope of our operations domestically and internationally and have
increased the number of our employees substantially. At December 31, 1998, we
had 63 employees, at December 31, 1999, we had 202 employees and at March 31,
2000, we had 326 employees. In addition, we plan to continue to hire a
significant number of employees this year. This growth has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management systems and resources. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems
and procedures, and will need to continue to expand, train and manage our work
force worldwide.
11
<PAGE>
If we are unable to hire additional qualified personnel as necessary, or if we
lose key personnel, we may be unable to manage or grow our business.
If we are unable to identify, attract or retain qualified personnel or to
retain the services of key personnel, especially engineers and sales personnel,
it would be difficult for us to manage our business, make timely product
introductions and increase sales. We intend to continue to hire many
engineering, sales, marketing and support personnel. Competition for these
employees, particularly optical engineers, is intense, especially in the San
Francisco Bay area. We may not be successful in attracting and retaining
qualified personnel.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel,
including Hugh C. Martin, our President, Chief Executive Officer and Chairman
of our board of directors. None of our officers or key employees is bound by an
employment agreement for any specific term, and we do not have "key person"
life insurance policies covering any of our employees.
If we or our employees become subject to unfair hiring claims, we could be
precluded from hiring needed personnel, incur substantial costs in defending
ourselves and incur damages.
Companies in our industry frequently claim that their competitors have
engaged in unfair hiring practices. As a result of these types of claims, we
may incur damages, lose potential employees or encounter disruptions in the
operation of our business. We have received claims of this kind in the past and
we may receive claims of this kind in the future. In October 1999, Nortel
Networks filed suit against us seeking, among other things, an injunction
against us and several of our employees that were formerly employed by Nortel
Networks, to prevent us from hiring additional Nortel Networks employees. In
addition, the former employer of one of our employees sought an injunction and
obtained a temporary restraining order against him, and the employee was
prevented from continuing to work for us. We could incur substantial costs,
including management time and attention, in defending ourselves and our
employees against these types of claims, regardless of their merits.
Our potential customers operate in an intensely competitive business and our
success will depend on the success of our customers, which we have limited
ability to foresee.
The companies in our target market of communication service providers face
an extremely competitive environment. If the companies with whom we establish
business relations are not successful in building their systems, promoting
their products, including new revenue-generating data services, receiving
requisite approvals and accomplishing the many other requirements for the
success of their businesses, our growth will be limited. Many factors in
addition to the effectiveness of our products influence the ultimate success of
our customers, and we have no control over these factors. In addition, we have
limited ability to foresee the competitive success of our customers and to plan
accordingly.
If our products do not interoperate with other equipment in our customers'
networks, product installations could be delayed, orders cancelled or products
returned, and our reputation could be harmed.
Our products are designed to interface with our customers' existing
networks, each of which has its own specifications and is based on various
industry standards. Many of our customers' networks contain multiple
generations of products that were added as their networks grew and evolved. Our
products must interoperate with other existing and future products within these
networks. When interoperability problems occur, it may be difficult to identify
their source. Whether or not these problems are due to our products, they may
cause us to incur significant warranty, support and repair costs, divert the
attention of our engineering personnel from our product development efforts and
suffer significant customer relations problems.
12
<PAGE>
Our products may have defects that we find only after full deployment in
complex networks, which could seriously harm our business.
The ONLINE9000 is a technically advanced and highly complex device that has
been deployed on only a limited basis. It is common for complex hardware and
software to have defects, some of which are significant, that are not
discovered in limited trials. The ONLINE9000 can only be fully tested when
deployed for an extended period of time as part of networks that include
equipment from other vendors. Consequently, our customers may discover defects
in our hardware or software after deployment, and we could experience:
. loss of or delay in revenue and loss of market share;
. loss of customers;
. damage to our reputation;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by customers exposing us to product liability claims and
significant legal expenses; and
. increased insurance costs.
Our products may become obsolete if we do not quickly meet industry standards
that may emerge.
Our success depends in part on both the adoption of industry standards for
new technologies in our market and our products' compliance with industry
standards. To date, no industry standard for our products has been adopted. The
absence of an industry standard may prevent market acceptance of our products
if potential customers delay purchases of new equipment until standards are
adopted. In addition, if our products cannot support an industry standard,
potential customers may not choose our products. As a result, we may incur
significant losses due to lack of customer demand, excess inventory and
diversion of our engineers from product development efforts.
If we are unable to protect and enforce our intellectual property rights, we
may be unable to compete effectively.
We regard substantial elements of our products and services as proprietary
and attempt to protect them by relying on patent, trademark, service mark,
copyright and trade secret laws. We also rely on confidentiality procedures and
contractual provisions with our employees, consultants and corporate partners.
Any steps we take to protect our intellectual property may be inadequate, time
consuming and expensive. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property, which could harm our business.
It is possible that no patents will be issued from our currently pending or
future patent applications. Moreover, any issued patents may not provide us
with any competitive advantages over, or may be challenged by, third parties.
Because legal standards relating to the validity, enforceability and scope
of protection of intellectual property rights of software are uncertain and
still evolving, the future viability or value of our intellectual property
rights is uncertain. Effective patent, trademark, copyright and trade secret
protection may not be available in some countries in which our products are
distributed. Furthermore, our competitors may independently develop similar
technologies that limit the value of our intellectual property or design around
patents issued to us. See "Business--Intellectual Property".
13
<PAGE>
Necessary licenses for third-party software may not be available to us or may
be very expensive.
In the future, we may be required to license from third parties software
that is used in our products or is required to develop new products or product
enhancements. While we have been able to license third-party software to date,
in the future third-party licenses may not be available to us on commercially
reasonable terms or at all. Third parties who hold exclusive rights to software
technology that we seek to license may include our competitors. If we are
unable to obtain any necessary third-party licenses, we would be required to
redesign our product or obtain substitute technology, which may perform less
well, be of lower quality or be more costly.
We are involved in an intellectual property dispute and in the future we may
become involved in similar disputes, which could subject us to significant
liability, divert the time and attention of our management and prevent us from
selling our products.
In March 2000, Nortel Networks filed suit against us in the United States
District Court for the Northern District of California. The suit alleges that
our products infringe five patents held by Nortel Networks, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. We are in the preliminary stages of
investigating these allegations. Nortel Networks is seeking preliminary and
permanent injunctions and damages against us in connection with these claims.
If Nortel Networks is able to obtain an injunction preventing us from selling
our products, we would suffer a substantial reduction in our revenues and incur
losses over an extended period of time. We expect to incur substantial legal
and other expenses as well as diversion of management and technical time and
attention in connection with this litigation. The expenses and diversion of
resources associated with this litigation could seriously harm our business and
financial condition and could affect our ability to raise capital in the
future. In the event of an adverse ruling, we may be unable to sell our
products or be required to pay substantial damages to Nortel Networks, and if
this litigation is resolved by settlement, we might need to make substantial
payments to Nortel Networks. See "Business--Legal Proceedings".
In the future, we may be a party to litigation to protect our intellectual
property or as a result of other alleged infringements of intellectual
property. These claims and any resulting lawsuit, if successful, could subject
us to significant liability for damages and invalidate our proprietary rights.
These lawsuits, regardless of their success, would be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or
more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign those products that use the challenged technology.
If we are forced to take any of these actions, our business may be harmed.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. For more information concerning our intellectual
property rights, see "Business--Intellectual Property".
We may not be able to obtain additional financing to satisfy our future capital
needs.
We intend to expand our sales and marketing activities, manufacturing
activities and inventory significantly ahead of actual or forecasted revenue.
We may need to raise additional capital in order to fund our rapid expansion.
We may also need additional capital in order to develop new or enhance
14
<PAGE>
existing services or products, to respond to competitive pressures or to
acquire complementary services, businesses or technologies. In addition, we may
need to raise funds in the future to meet our working capital needs. Additional
financing may not be available on terms favorable to us, or at all. Future debt
financing may limit our financial and operating flexibility. If we issue
additional equity securities, stockholders may experience additional dilution
or the new equity securities may have rights, preferences or privileges senior
to those of the then-existing holders of common stock.
Any acquisitions we make could disrupt our business and harm our financial
condition.
We intend to acquire or invest in complementary businesses, products and
technologies. We may not successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and, as a
result, our operating results could suffer. These acquisitions or investments
could lead to:
. stock issuances that would reduce our current stockholders' percentage
ownership;
. debt that will give rise to interest charges and may impose material
restrictions on the manner in which we operate our business;
. responsibility for unanticipated liabilities;
. amortization expenses related to goodwill and other intangible assets;
. large and immediate write-offs;
. problems combining the purchased operations, technologies or products
with ours;
. unanticipated costs;
. diversion of management's attention from our core business;
. adverse effects on existing relationships with suppliers and customers;
. risks associated with entering markets in which we have limited prior
experience; or
. potential loss of key employees, particularly those of the acquired
organizations.
The continuing control of ONI Systems by insiders after this offering could
delay or prevent a change in corporate control, which could prevent you from
realizing a premium over the market price of our common stock, or insiders
could engage in transactions to the detriment of stockholder value.
As of March 31, 2000, our executive officers, directors and entities
affiliated with them beneficially owned approximately 37.3% of our outstanding
common stock. We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
34.2% of our outstanding common stock following the completion of this
offering. These stockholders, if acting together, would be able to influence
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This ability to exercise influence over all matters requiring
stockholder approval could prevent or significantly delay another company or
person from acquiring or merging with us. As a result, offers to acquire ONI
Systems which represent a premium over the available market price of our common
stock may be withdrawn or otherwise fail to be realized. See "Principal
Stockholders".
In addition, we have engaged in transactions with related parties, including
loans to executive officers. The ability to exercise influence over all matters
requiring stockholder approval could enable insiders to approve transactions
involving each other that might otherwise not be approved and which could
reduce the market price of our common stock. See "Related Party Transactions".
15
<PAGE>
We expect to experience volatility in our share price which could negatively
affect your investment.
The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:
. changes in financial estimates by securities analysts;
. changes in market valuations of communications and Internet
infrastructure-related companies;
. announcements, by us or our competitors, of new products or of
significant acquisitions, strategic partnerships or joint ventures; and
. volume fluctuations, which are particularly common among highly volatile
securities of Internet-related companies.
Further, the stock markets, particularly the Nasdaq National Market on which
we have applied to have our common stock listed, have experienced substantial
price and volume fluctuations. These fluctuations have particularly affected
the market prices of equity securities of many technology, networking and
Internet-related companies and have often been unrelated or disproportionate to
the operating performance of those companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. Litigation,
if instituted, could result in substantial costs and a diversion of
management's attention and resources.
There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Immediately after
this offering, in addition to the shares offered by this prospectus,
approximately 849,636 shares may be resold without limitation; 180 days later,
an additional 101,125,721 shares may be resold; and a further 14,712,913 shares
may be resold at various times thereafter. Sales of a substantial number of
shares of our common stock after this offering could cause our stock price to
fall. In addition, the future sale of shares by existing stockholders could
impair our ability to raise capital through the sale of additional stock. See
"Shares Eligible for Future Sale".
Provisions of Delaware law, our certificate of incorporation and our bylaws
could delay or prevent a takeover of us, which could prevent you from realizing
a premium over the market price of our common stock.
Provisions of Delaware law, our certificate of incorporation and bylaws
could have the effect of delaying or preventing a third party from acquiring
us, even if a change in control would be beneficial to our stockholders. These
provisions include:
. authorizing the issuance of preferred stock without stockholder approval;
. providing for a classified board of directors with staggered, three year
terms;
. prohibiting cumulative voting in the election of directors;
. prohibiting stockholders from calling stockholders meetings; and
. prohibiting stockholder actions by written consent.
These provisions and other provisions of Delaware law could make it more
difficult for a third party to acquire us, even if doing so would benefit our
stockholders. As a result, offers to acquire ONI Systems which represent a
premium over the available market price of our common stock may be withdrawn or
otherwise fail to be realized. For a further discussion of these provisions,
see "Description of Capital Stock--Anti-Takeover Provisions".
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. These forward-looking statements are not historical
facts, but rather are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks" and
"estimates", and variations of these words and similar expressions, are
intended to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control and difficult to predict
and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus.
These forward-looking statements reflect our view only as of the date of this
prospectus.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 8,000,000 shares of
common stock that we are offering will be approximately $110.1 million, based
on an assumed initial public offering price of $15.00 per share, after
deducting an assumed underwriting discount and estimated offering expenses. If
the underwriters' option to purchase additional shares in this offering is
exercised in full, we estimate that our net proceeds will be approximately
$126.8 million. In addition, we expect to receive:
. $20.0 million net proceeds from the sale of 1,333,333 shares of Series H
preferred stock in a private placement to Sun Microsystems that we
anticipate will close on or about May 8, 2000 at a private placement
price of $15.00 per share;
. $4.0 million net proceeds from the sale of shares of common stock in a
private placement to Internet Initiative Japan, concurrent with the
completion of this offering; and
. $10.0 million net proceeds from the sale of shares of common stock in a
private placement to CCT Telecom, concurrent with the completion of this
offering.
The principal purposes of this offering are to obtain additional capital, to
create a public market for our common stock, to enhance our ability to acquire
other businesses, products or technologies and to facilitate future access to
public equity markets. We intend to use the net proceeds for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or products that are complementary to our business. We
currently have no commitments or agreements with respect to any acquisitions or
investments. We have not determined the amounts we plan to spend on any of the
uses described above or the timing of these expenditures. Pending our use of
the net proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into common stock upon the closing
of this offering;
. on a further pro forma basis to reflect the expected sale of 1,333,333
shares of Series H preferred stock, which, based on an assumed public
offering price of $15.00 per share, will convert into 1,616,161 shares of
common stock, to Sun Microsystems in a private placement that we
anticipate will close on or about May 8, 2000, at a private placement
price of $15.00 per share of Series H preferred stock; and
. on a pro forma as adjusted basis to reflect:
. the sale of 8,000,000 shares of common stock in this offering at an
assumed initial public offering price of $15.00 per share, after
deducting an assumed underwriting discount and our estimated offering
expenses;
. the sale of 266,667 shares of common stock to Internet Initiative Japan
in a private placement, concurrent with this offering, based on an
assumed private placement price of $15.00 per share; and
. the sale of 666,667 shares of common stock issuable to CCT Telecom in a
private placement, concurrent with this offering, based on an assumed
private placement price of $15.00 per share.
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------------------
Pro
Forma Pro Forma
Actual Pro Forma Series H As Adjusted
-------- --------- -------- -----------
(in thousands, except share and per
share data)
<S> <C> <C> <C> <C>
Capital-lease obligations............ $ 466 $ 466 $ 466 $ 466
Stockholders' equity:
Preferred Stock, $0.0001 par value
per share, 80,309,408 shares
authorized, 79,194,900 shares
issued and outstanding, actual;
10,000,000 shares authorized and
no shares issued and outstanding,
pro forma, pro forma Series H or
pro forma as adjusted............. 8 -- -- --
Common stock, $0.0001 par value per
share, 159,690,592 shares
authorized, 34,943,875 shares
issued and outstanding, actual;
159,690,592 shares authorized,
114,138,775 shares issued and
outstanding, pro forma;
115,754,936 shares issued and
outstanding, pro forma Series H;
700,000,000 shares authorized,
124,688,270 shares issued and
outstanding, pro forma as
adjusted.......................... 4 12 12 13
Additional paid-in capital......... 246,195 246,195 270,437 394,536
Notes receivable from stockholders. (8,430) (8,430) (8,430) (8,430)
Services receivable from
stockholder....................... (49) (49) (49) (49)
Deferred stock compensation........ (72,560) (72,560) (72,560) (72,560)
Accumulated deficit................ (86,469) (86,469) (90,711) (90,711)
-------- -------- -------- --------
Total stockholders' equity....... 78,699 78,699 98,699 222,799
-------- -------- -------- --------
Total capitalization........... $ 79,165 $ 79,165 $ 99,165 $223,265
======== ======== ======== ========
</TABLE>
19
<PAGE>
The outstanding share information in the preceding table excludes:
. 19,343,345 shares of common stock subject to options outstanding under
our stock incentive plans with a weighted average exercise price of $0.64
per share, and 1,377,819 shares of common stock available for future
grant under these plans; and
. 1,434,394 shares of common stock issuable upon the exercise of
outstanding warrants with a weighted average exercise price of $2.72 per
share.
From April 1, 2000 through April 21, 2000, we granted or agreed to grant
options to purchase 1,782,050 shares of common stock with a weighted average
exercise price of $6.63 per share. Of these shares, 1,000,000 shares will be
subject to an option that is outside of the stock plans described in this
prospectus. In April 2000, we adopted our 2000 Equity Incentive Plan, under
which 7,000,000 shares of common stock will be available for future grant, and
our 2000 Employee Stock Purchase Plan, under which 1,000,000 shares of common
stock will be available for future grant.
You should read this table together with "Management--Director
Compensation", "Management--Employee Benefit Plans", "Description of Capital
Stock", "Related Party Transactions" and notes 7, 9, 12 and 13 of the notes to
our consolidated financial statements.
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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 initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per
share of our common stock after this offering. Net tangible book value is equal
to total assets less intangible assets and total liabilities.
Our pro forma net tangible book value as of March 31, 2000 was $74.6
million, or approximately $0.65 per share assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value per share is determined by dividing the pro forma
number of outstanding shares of common stock into our net tangible book value.
After giving effect to the receipt of:
. the estimated net proceeds from this offering based upon an assumed
initial public offering price of $15.00 per share and after deducting an
assumed underwriting discount and estimated offering expenses;
. net proceeds of $20.0 million we expect to receive before completion of
this offering from the sale of Series H preferred stock in a private
placement to Sun Microsystems;
. net proceeds of $4.0 million we expect to receive from the sale of common
stock in a private placement to Internet Initiative Japan, concurrent
with this offering; and
. net proceeds of $10.0 million we expect to receive from the sale of
common stock in a private placement to CCT Telecom, concurrent with this
offering;
our pro forma net tangible book value as of March 31, 2000 would have been
approximately $218.7 million, or $1.75 per share. This represents an immediate
increase in pro forma net tangible book value of $0.17 attributable to the
Series H investor and $0.93 attributable to new investors, or a total increase
of $1.10 per share to existing stockholders, and an immediate dilution in net
tangible book value of $13.25 per share to new investors purchasing shares at
the initial public offering price. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $15.00
Pro forma net tangible book value per share as of March 31,
2000.......................................................... $0.65
Increase in pro forma net tangible book value per share
attributable to the Series H investor......................... 0.17
Increase in pro forma net tangible book value per share
attributable to new investors................................. 0.93
-----
Pro forma as adjusted net tangible book value per share after
offering...................................................... 1.75
------
Dilution per share to new investors............................ $13.25
======
</TABLE>
The following table summarizes as of March 31, 2000, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid to us by
existing stockholders and by investors purchasing shares of our common stock in
this offering, before deducting the underwriting discount and our estimated
offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 114,138,775 91.5% $134,884,904 46.7% $ 1.18
Series H investor....... 1,616,161 1.3 19,999,995 6.9 12.38
New investors........... 8,933,334 7.2 134,000,010 46.4 15.00
----------- ----- ------------ -----
Total................. 124,688,270 100.0% $288,884,909 100.0%
=========== ===== ============ =====
</TABLE>
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<PAGE>
As of March 31, 2000, there were options outstanding to purchase a total of
19,343,345 shares of our common stock with a weighted average exercise price of
$0.64 per share and warrants outstanding to purchase a total of 1,434,394
shares of our common stock with a weighted average exercise price of $2.72 per
share. From April 1, 2000 through April 21, 2000, we granted or agreed to grant
options to purchase 1,782,050 shares of common stock with a weighted average
exercise price of $10.00 per share. Of these shares, 1,000,000 shares will be
subject to an option that is outside of the stock plans described in this
prospectus. To the extent that any options or warrants are exercised, there
will be further dilution to new public investors. See "Capitalization",
"Management--Employee Benefit Plans", "Description of Capital Stock", "Related
Party Transactions" and notes 7, 9, 12 and 13 of the notes to our consolidated
financial statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes to our financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
consolidated statement of operations data set forth below for the period from
October 20, 1997 (inception) to December 31, 1997, and for the fiscal years
ended December 31, 1998 and 1999, and the consolidated balance sheet data as of
December 31, 1998 and 1999 have been derived from our consolidated financial
statements, which have been audited by KPMG LLP, independent auditors, and are
included elsewhere in this prospectus. The consolidated statement of operations
data for the periods ended March 31, 1999 and 2000, and the balance sheet data
as of March 31, 2000, are unaudited but include all adjustments, consisting
only of normal recurring adjustments, which are considered necessary for a fair
presentation of the data. The historical results are not necessarily indicative
of results to be expected for any future period. For an explanation of the
determination of the shares used to compute net loss per share and pro forma
net loss per share, see note 1(r) of our notes to consolidated financial
statements.
<TABLE>
<CAPTION>
Year Ended Three Months
Period From December 31, Ended March 31,
October 20, 1997 ----------------- -----------------
Consolidated Statements of (Inception) to
Operations Data December 31, 1997 1998 1999 1999 2000
- -------------------------- ----------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................... $ -- $ 1,733 $ 3,034 $ 565 $ 3,633
Cost of revenue.......... -- 1,208 1,032 425 2,850
------ ------- -------- ------- --------
Gross profit........... -- 525 2,002 140 783
------ ------- -------- ------- --------
Operating expenses:
Research and
development, excluding
deferred stock
compensation
amortization amounts ... 39 4,009 25,400 2,850 12,037
Sales and marketing,
excluding deferred
stock compensation
amortization amounts.... 21 649 4,557 426 3,002
General and
administrative,
excluding deferred
stock compensation
amortization amounts ... 49 1,591 4,756 510 2,556
Amortization of deferred
stock compensation...... 89 3,310 11,422 1,296 11,281
Common stock warrant
expense ................ -- 2,891 -- 3,555
In-process research and
development............. -- -- 170 -- --
------ ------- -------- ------- --------
Total operating
expenses.............. 198 9,559 49,195 5,082 32,432
------ ------- -------- ------- --------
Operating loss......... (198) (9,034) (47,193) (4,942) (31,649)
Interest income (expense),
net...................... (1) 183 623 181 868
Other income (expense),
net...................... -- -- -- (14) (63)
------ ------- -------- ------- --------
Loss before income
taxes................. (199) (8,851) (46,570) (4,775) (30,844)
Income taxes.............. -- 1 2 2 3
------ ------- -------- ------- --------
Net loss............... $ (199) $(8,852) $(46,572) $(4,777) $(30,847)
====== ======= ======== ======= ========
Basic and diluted net loss
per share................ $(0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................... 257 11,919 18,043 13,542 24,219
Pro forma basic and
diluted net loss per
share.................... $ (0.60) $ (0.30)
Shares used in computing
pro forma basic and
diluted net loss per
share ................... 78,026 103,154
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, March 31,
Balance Sheet Data 1998 1999 2000
- ------------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................ $19,092 $ 80,023 $50,307
Working capital.......................... 19,627 81,758 59,101
Total assets............................. 21,312 100,942 95,869
Capital lease obligations, less current
portion................................. 79 367 295
Total stockholders' equity............... $20,565 $ 91,728 $78,699
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with the
"Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes, which are included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
We develop, market and sell all-optical networking equipment specifically
designed to address the bandwidth and service limitations of metropolitan and
regional networks. From our inception in October 1997 through November 1999,
our operating activities consisted primarily of research and development. We
also formed and expanded our administrative, marketing, sales, manufacturing
and customer service and support organizations and commenced sales and
marketing activities. In January 2000, we released our first product, the
ONLINE9000, which is a combined hardware and software product for optical
transmission and switching of voice, Internet and other data communication
services.
In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In December 1997, we were spun
out of Optivision and Optivision distributed its holdings of our common stock
and half of its holdings of our preferred stock to Optivision shareholders.
Optivision also retained 4,000,000 shares of our Series A preferred stock. In
connection with the spin-out, we have reserved, and are obligated to issue,
233,468 shares of our common stock upon the exercise of warrants to purchase
capital stock of Optivision. We will not receive any proceeds from the exercise
of these warrants. In January 1998, all of the shares of our Series A preferred
stock were converted into Series B preferred stock on a one-to-one basis. In
January 1998, Optivision sold 2,666,667 shares of our preferred stock to our
initial venture investors. In March 1998, we repurchased all of our outstanding
stock owned by Optivision, consisting of 1,333,333 shares of our Series B
preferred stock, for an aggregate purchase price of $1.0 million. Optivision
does not currently own any shares of ONI Systems. See "Related Party
Transactions--Optivision Spin-out" and note 5 of notes to our consolidated
financial statements.
In June 1999, we acquired all of the outstanding common shares of Object-
Mart, Inc. in exchange for 4,569,276 shares of our common stock and
approximately $3.2 million in cash. Object- Mart was located in San Jose,
California, and provided software products and services to software equipment
manufacturers in the telecommunications industry. The combination was accounted
for using the purchase method and, accordingly, the results of operations of
Object-Mart have been included in our consolidated financial statements since
June 29, 1999. Upon consummation of this acquisition, we recorded goodwill of
$5.7 million that is to be amortized over a period of two years. As of March
31, 2000, the remaining unamortized goodwill is $3.5 million.
Since our inception, we have incurred significant losses, and as of March
31, 2000, we had an accumulated deficit of $86.5 million. We have not achieved
profitability on a quarterly or annual basis. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, will need to generate significant revenue to achieve
and maintain profitability.
On January 31, 2000, we announced general availability of our first product,
the ONLINE9000, which we began to ship in February 2000. In March 2000, we
recognized revenue from sales of this product to four customers. For the three
months ended March 31, 2000, sales to Williams Communications, Inc., COLT
Telecom plc, Marietta Fibernet and StorageNetworks, Inc. accounted
24
<PAGE>
for 33%, 30%, 23% and 14% of revenue, respectively. Sales to COLT Telecom,
which is based in the United Kingdom, are denominated in United States Dollars.
While we will continue to seek to diversify and grow our customer base, we
anticipate that our operating results for any given period may depend on a
small number of customers. In April 2000, we entered into a limited trial
system purchase agreement with Internet Initiative Japan Inc. and an OEM
relationship with Lucent Technologies, Inc. We plan to introduce new products,
including the ONLINE7000, and product enhancements, although we may be
unsuccessful in these efforts.
We primarily market and sell our products through our direct sales force and
marketing organization. We are expanding our direct sales force to sell to
potential customers outside of North America and Europe. However, in those
markets where it is difficult to maintain a direct sales force, we may rely on
resellers for distribution of our product. For example, in April 2000, we
entered into an OEM relationship with Lucent Technologies that expires on
December 31, 2001. Under the terms of our agreement, Lucent Technologies has
the exclusive right to sell some of our products in China for a period of 12
months.
Our policy is to recognize revenue at the time of shipment unless we have
future obligations or customer acceptance is required, in which case all or a
portion of revenue is deferred until these obligations are met or the customer
accepts the product. Services revenue consists primarily of training and
installation services and associated revenue is recognized as the services are
performed. To date, we have not been obligated to provide installation services
to our customers. We provide a limited warranty on our products. Estimated
expenses for warranty obligations are recorded at the time revenue is
recognized.
Our cost of revenue consists of raw materials, direct labor, manufacturing
overhead and amounts paid to third-party manufacturers. Our manufacturing
operations are generally outsourced, and accordingly a significant portion of
our cost of revenue consists of payments to third-party contract manufacturers.
We conduct supply chain management, production engineering, documentation
control, quality assurance and final assembly at our assembly facility in San
Jose, California. We currently purchase many of our electronic and optical
components through purchase orders. In order to help us maintain our supply of
components, especially optical components, we intend to enter into long-term
supply agreements with vendors. For example, in March 2000, we entered into an
agreement with E-TEK Dynamics, Inc., under which E-TEK Dynamics will supply
optical components and module integration services to us at least through
December 31, 2001.
Research and development expenses consist primarily of salaries and related
expenses for research and development personnel, fees paid to outside
consultants, non-recurring engineering charges and prototype costs related to
design, development, testing and enhancement of our products. We expense all of
our research and development costs as they are incurred. We believe that
research and development is critical to our strategic objectives, and we devote
substantial resources to the development of new products and product features.
We also believe that to meet our customers' evolving needs, we will need to
fund investments in several development projects simultaneously. As a result,
we expect our research and development expenses to increase in absolute dollars
in the future.
Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in marketing, sales, and customer service and support
functions, as well as costs associated with trade shows, promotional activities
and public relations. We expect that sales and marketing expenses will increase
substantially in absolute dollars as we continue to build and expand our direct
sales, marketing, and customer service and support organizations in the United
States and internationally.
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
25
<PAGE>
absolute dollars as we add personnel, improve and expand our information system
infrastructure and incur additional expenses as we grow and operate as a public
company.
In 1998, we recorded total deferred stock compensation of approximately $8.4
million in connection with stock sales and stock options granted during 1998 at
prices subsequently deemed to be below fair value on the date of sale or grant.
Options granted are typically subject to a four-year vesting period. We are
amortizing the deferred stock compensation over the vesting periods of the
applicable options and the repurchase periods for restricted stock purchases.
The period over which deferred stock compensation is amortized is determined
separately for each 25% portion of the total award, in accordance with
Financial Accounting Standards Board Interpretation No. 28. The result of this
accounting treatment is that approximately 59% of the unearned deferred
compensation will be amortized in the first year, 25% in the second year, 12%
in the third year and 4% in the fourth year following the date of the grant. We
amortized $3.3 million of deferred stock compensation in the year ended
December 31, 1998. For the year ended December 31, 1999 and for the quarter
ended March 31, 2000, we recorded approximately $41.7 million, and $46.2
million, respectively, in additional deferred stock compensation for stock
options granted at prices subsequently deemed to be below fair value on the
date of grant. We amortized a total of approximately $11.4 million and $11.3
million of deferred stock compensation in the year ended December 31, 1999 and
the quarter ended March 31, 2000, respectively. Approximately $35.5 million and
$72.6 million of deferred stock compensation related to all prior issuances
remained to be amortized over four years as of December 31, 1999 and March 31,
2000, respectively.
In May 2000, we agreed, subject to board approval, to grant to Chris A.
Davis, our new Executive Vice President, Chief Financial and Administrative
Officer, an option to purchase 1,000,000 shares of common stock outside of the
stock plans described in this prospectus with an exercise price of $4.00 per
share. This grant will result in additional deferred stock compensation of
$11.0 million, which will be amortized over four years from the date of grant.
Results of Operations
We plan to increase our operating expenses significantly in order to fund
greater levels of research and development, expand our sales and marketing
operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that will result from being a publicly traded company and the increasing size
of our business. Our operating expenses are largely based on anticipated
revenue trends and a high percentage of our expenses are, and will continue to
be, fixed in the short term. As a result, a delay in generating or recognizing
revenue could cause significant variations in our operating results from
quarter-to-quarter and could result in substantial operating losses.
In addition, we expect to experience seasonality in the sales of our
products. Historically, the telecommunications equipment market has experienced
increased sales in the first and fourth quarter of the year due in part to
purchasers' budgetary cycles. In addition, we expect that sales may decline
during summer months, particularly in European markets which we expect to
represent a substantial portion of the market for our products for the
foreseeable future. These seasonal variations in our sales may lead to
fluctuations in our quarterly operating results.
Comparison of Three Months Ended March 31, 1999 and 2000
Net Revenue
Net revenue increased by $3.1 million, or 543%, from $565,000 for the three
months ended March 31, 1999 to $3.6 million for the three months ended March
31, 2000. All of the net revenue for the three months ended March 31, 2000 was
from sales of our ONLINE9000 product. Net revenue recorded for
26
<PAGE>
the three months ended March 31, 1999 was from government research and
development contracts. The government research and development contracts were
completed in June 1999.
Cost of revenue
Cost of revenue increased by $2.4 million, or 572%, from $425,000 for the
three months ended March 31, 1999 to $2.8 million for the three months ended
March 31, 2000. As a percentage of net revenue, cost of revenue for the three
months ended March 31, 2000 was 78%, compared to 75% for the three months ended
March 31, 1999. We believe the comparison of these two periods is not
meaningful, because our revenue for the three months ended March 31, 1999, and
the related cost of revenue, were from governmental research and development
contracts. Cost of revenue as a percentage of revenue for the three months
ended March 31, 2000 are higher than they are anticipated to be in the future,
due to the high cost of initial start-up of production, including the increase
in personnel and the low volume of sales.
We expect to develop additional products in the future such that the product
mix of our sales may vary. Correspondingly, we expect the quarterly gross
profit percentages to fluctuate in accordance to the product mix of related
quarterly sales.
Research and development expense
Research and development expense was $2.8 million for the three months ended
March 31, 1999, and increased by 322% to $12.0 million for the three months
ended March 31, 2000, representing 56% and 37% of the total quarterly operating
expenses for the three months ended March 31, 1999 and 2000, respectively. The
increase in quarterly research and development expense is primarily due to the
significant expansion of our research and development department, particularly
attributable to the increase of engineering staff. As of March 31, 1999, we had
approximately 51 research and development employees and approximately 147 as of
March 31, 2000.
Sales and marketing expense
Sales and marketing expense was $426,000 for the three months ended March
31, 1999, and increased by 605% to $3.0 million for the three months ended
March 31, 2000, representing 8% and 9% of total quarterly operating expenses
for the three months ended March 31, 1999 and 2000, respectively. This increase
in quarterly sales and marketing expense is primarily due to the higher number
of sales and marketing personnel in the quarter ended March 31, 2000 as
compared to that of March 31, 1999. As of March 31, 1999, we had approximately
four sales and marketing personnel, and 59 as of March 31, 2000.
General and administrative expense
General and administrative expense was $510,000 for the three months ended
March 31, 1999, and increased by 401% to $2.6 million for the three months
ended March 31, 2000, representing 10% and 8% of the total quarterly operating
expenses for the three months ended March 31, 1999 and 2000, respectively. This
increase in quarterly general and administrative expense primarily reflects
personnel increases. As of March 31, 1999, we had 12 general and administrative
employees and 52 as of March 31, 2000.
Amortization of deferred stock compensation
Amortization of deferred stock compensation was $1.3 million for the three
months ended March 31, 1999, and increased by 770% to $11.3 million for the
three months ended March 31, 2000. This increase in quarterly amortization of
deferred stock compensation was primarily a result of higher deferred stock
compensation expense, which increased from $5.2 million as of December 31, 1998
to $35.5 million as of December 31, 1999.
27
<PAGE>
Common stock warrant expense
We issued a warrant to purchase 223,000 shares of common stock to a
communication service provider, in connection with the signing of a purchase
agreement under which the service provider may, but is not obligated to,
purchase our products. The warrant issued in connection with this purchase
agreement reflects our strategic initiatives with this customer. We believe
that, given our early stage of development, the issuance of this warrant is a
cost of establishing a relationship with this potential customer. The value of
$2.3 million ascribed to the warrant was expensed in the three months ended
March 31, 2000. In addition, we also issued a warrant to purchase 200,000
shares of common stock as consideration for professional services rendered. The
value of $1.3 million ascribed to the warrant was expensed in the three months
ended March 31, 2000.
Interest income (expense), net
Interest income (expense), net increased by $687,000, or 380%, from $181,000
for the three months ended March 31, 1999 to $868,000 for the three months
ended March 31, 2000. The increase was primarily due to the interest income
earned on proceeds from sales of preferred stock.
Comparison of Year Ended December 31, 1998 and 1999
Although we were incorporated on October 20, 1997, we did not effectively
commence operations until January 1998 when we completed our first preferred
stock financing. As a result, we believe that our results of operations prior
to 1998 are not meaningful.
Revenue
In connection with our spinout from Optivision, we inherited several
government research and development contracts. Prior to 1999, all of our
revenue resulted from these contracts. In 1999, we recognized approximately
$1.1 million in revenue from the licensing of our operating system software.
The remaining revenue of approximately $1.9 million was derived from government
research and development contracts and other consulting services. The
government research and development contracts were completed in June 1999. We
will not continue these activities, and they will not contribute to our revenue
in the future.
As of December 31, 1999, our ONLINE9000 product was undergoing field trial
testing and was not generally available for sale; accordingly, no product
revenue was recorded.
Cost of revenue
Cost of revenue for 1998 and 1999 consisted primarily of salaries,
contracted services and materials required in the fulfillment of obligations
under government contracts.
Research and development
Research and development expenses were $4.0 million in 1998 and increased by
534% to $25.4 million in 1999, representing 41.9% of total operating expenses
in 1998 and 51.6% of total operating expenses in 1999. The increase in research
and development expenses was primarily related to the increase in the number of
personnel and an increase in engineering and prototype expenses related to the
design, development and testing of our ONLINE9000 product. At December 31,
1998, we had a total of approximately 43 research and development employees
and, at December 31, 1999, we had approximately 110 research and development
employees.
Sales and marketing
Sales and marketing expenses were $649,000 in 1998 and increased by 602% to
$4.6 million in 1999, representing 6.8% of total operating expenses in 1998 and
9.3% of total operating expenses in
28
<PAGE>
1999. The increase in sales and marketing expenses was primarily related to the
increase in the number of personnel, including the establishment of a direct
sales force and customer service and support team, as well as costs associated
with tradeshows, promotional activities and public relations. At December 31,
1998, we had a total of three sales and marketing employees, and at December
31, 1999, we had approximately 21 sales and marketing employees.
General and administrative
General and administrative expenses were $1.6 million in 1998 and increased
by 198.9% to $4.8 million in 1999, representing 16.6% of total operating
expenses in 1998 and 9.7% of total operating expenses in 1999. The increase in
general and administrative expenses was primarily related to the increase in
personnel and increased legal, information systems, facilities and consulting
services associated with our growing business activities. At December 31, 1998,
we had a total of approximately 12 general and administrative employees, and at
December 31, 1999, we had approximately 30 general and administrative
employees.
Amortization of deferred stock compensation
In connection with grants of stock options and sales of stock to employees
with exercise or sales prices subsequently determined to be below the deemed
fair value of our common stock on the dates of grant or sale, we recorded
amortization of deferred stock compensation of $3.3 million in 1998 and
$11.4 million in 1999, an increase of 245.0%. As of December 31, 1999, our
unamortized deferred stock compensation was $35.5 million, of which
approximately $21.6 million will be amortized in 2000. In addition, we have
granted additional stock options in 2000 that will result in a substantial
increase in deferred stock compensation and amortization expense.
Common stock warrant expense
In 1999, we expensed $2.9 million related to a warrant to purchase 500,000
shares of common stock issued to a communication service provider in connection
with entering into an agreement under which the service provider may, but is
not obligated to, purchase our products. The warrant issued in connection with
this purchase agreement reflects our strategic initiatives with this customer.
We believe that, given our early stage of development, the issuance of this
warrant is a cost of establishing a relationship with this potential customer.
Interest income (expense), net
Interest income (expense), net, includes interest income from our cash
investments net of interest expense related to our lease financing obligations
and amortization of warrants issued in conjunction with our equipment lease and
credit facilities. We had interest income, net, of $183,000 in 1998 and
$623,000 in 1999, an increase of 241.0%. The increase was primarily due to the
interest income earned on proceeds from preferred stock issuances.
Income taxes
Income taxes for 1998 and 1999 consisted of minimum state taxes. As of
December 31, 1999, we had net operating loss carryforwards for federal and
California income tax purposes of $34.0 million and research credit
carryforwards of approximately $1.1 million. The federal carryforwards will
expire at various dates from 2012 through 2019. Utilization of the net
operating losses may be subject to a substantial annual limitation due to the
ownership change limitations contained in Section 382 of the Internal Revenue
Code. There is sufficient uncertainty regarding the reliability of the deferred
tax assets that we have recorded a full valuation allowance.
Liquidity and Capital Resources
From inception through December 31, 1999, we financed our operations
primarily through private sales of convertible preferred stock, for net
proceeds of approximately $122.9 million, and common
29
<PAGE>
stock, for net proceeds of approximately $329,000. We raised an additional $2.0
million from the sale of preferred stock and $783,000 from the sale of common
stock during the three months ended March 31, 2000.
The following table describes the preferred stock issuances that have funded
our operations from inception through March 31, 2000:
<TABLE>
<CAPTION>
Date Consideration Price per Preferred
Closed Series ($ million) Share Shares Sold
------ ------ ------------- --------- -----------
<S> <C> <C> <C> <C>
12/97-3/98 B $ 4.3 $0.24 18,128,843
12/97-3/98 C $ 2.0 $0.75 2,733,332
4/98 D $ 4.4 $0.88 4,969,148
12/98-5/99 E $23.8 $0.91 26,284,024
9/99 F $15.0 $1.82 8,249,468
12/99-3/00 G $76.9 $6.32 12,163,418
</TABLE>
In 1997, we were spun-out from Optivision, Inc. In connection with this
spin-out, Optivision, Inc. retained, among other equity issuances, 4,000,000
shares of Series A preferred stock. All Series A preferred stock subsequently
converted into Series B preferred stock. In 1998, Optivision sold two-thirds of
its Series B holdings, and we repurchased the remaining one-third of its Series
B holdings. Optivision does not currently own any of our shares.
In connection with an equipment lease financing arrangement, we issued
warrants to purchase a total of 68,062 shares of Series B convertible preferred
stock at $0.88 per share. The warrants expire on the earlier of February 10,
2009, or five years from this offering. No warrants had been exercised as of
March 31, 2000.
We used $29.6 million in cash in operating activities in 1999, an increase
of $23.8 million, or 409%, from the $5.8 million used in 1998. The increase was
primarily due to the increase in our net loss of $37.7 million, an increase in
inventory of $9.6 million and other working capital of $9.5 million, offset by
increased amortization of deferred stock compensation and common stock warrants
of $11.0 million, and depreciation and amortization of $2.5 million. We used
$21.0 million in cash in operating activities in the three months ended March
31, 2000, an increase of $18.4 million, or 703%, from the $2.6 million used in
the three months ended March 31, 1999. The increase was primarily due to the
increase in our net loss of $26.1 million, an increase of inventory of $11.1
million and a decrease of other working capital of $3.3 million, offset by
increased amortization of deferred stock compensation of $10.0 million,
amortization of common stock warrants of $3.6 million and depreciation and
amortization of $1.7 million.
We used $6.6 million in cash in investing activities in 1999, an increase of
$5.6 million, or 550%, from the $1.0 million used in 1998. The increase was
primarily related to the purchase of property and equipment and the net cash
portion of our acquisition of Object-Mart of $1.7 million. We used $11.4
million in cash in investing activities in the three months ended March 31,
2000, an increase of $11.0 million from the $385,000 used in the three months
ended March 31, 1999. The increase was due to the purchase of property and
equipment, primarily engineering and test equipment.
We generated $97.1 million in cash from financing activities in 1999, an
increase of $71.2 million, or 275%, from the $25.9 million generated in 1998,
primarily from the private sales of convertible preferred stock and issuance of
common stock. We have used leases to partially finance capital purchases of
property and equipment. We had $119,000 in capital lease obligations
outstanding at December 31, 1998 and $533,000 at December 31, 1999. We
generated $2.7 million in cash from investing activities in the three months
ended March 31, 2000, a decrease of $4.6 million from the $7.3 million
generated in the three months ended March 31, 1999. The
30
<PAGE>
decrease was primarily due to a reduction in proceeds from preferred stock
financings of $5.3 million, offset by an increase in proceeds from the issuance
of common stock of $744,000.
At December 31, 1999, cash and cash equivalents totaled $80.0 million, an
increase of $60.9 million, or 319%, from the balance of $19.1 million at
December 31, 1998. The increase was due to the receipt of $97.1 million,
primarily from the sale of convertible preferred stock, offset by $29.6 million
of cash used in operating activities and $6.6 million of cash used in investing
activities. At March 31, 2000, cash and cash equivalents totaled $50.3 million,
a decrease of $29.7 million from December 31, 1999. The decrease was due to the
use of $21.0 million in operating activities and $11.4 million in investing
activities offset by the receipt of $2.7 million, primarily from the sale of
preferred stock.
As of December 31, 1999, we had entered into a line of credit that allowed
us to borrow up to $2,000,000 and $1,000,000, respectively. We had not borrowed
any amounts under these agreements as of December 31, 1999, and they both
expired in February 2000, unutilized.
We have a lease financing facility for $1.5 million, of which $467,000 had
been drawn as of December 31, 1999. This facility with a 7.51% annual interest
charge expires in December 2002.
Our capital requirements depend on numerous factors, including:
. the resources we devote to developing, manufacturing, marketing, selling
and supporting our products;
. market acceptance of our products and the timing and extent of sales of
our products; and
. the timing and extent of capital expenditures required to establish our
international operations.
We expect to devote substantial capital resources to continue our research
and development activities, to expand our sales, marketing and customer service
and support organizations, to support our information systems requirements and
for other general corporate activities. We believe that our current cash
balances will be sufficient to fund our operations for at least the next 12
months. In addition, we believe that the net proceeds from this offering will
provide us with substantial working capital. However, we may require additional
financing within that time frame. If needed, additional financing may not be
available on terms acceptable to us or at all.
In March 2000, we agreed to sell $4.0 million of common stock to Internet
Initiative Japan Inc. at the initial public offering price in a private
placement that will close concurrent with this offering. Internet Initiative
Japan will be granted the right to include these shares in future registered
offerings that we may file. We also entered into a trial system purchase
agreement with Internet Initiative Japan for our ONLINE9000 product in April
2000.
In April 2000, we agreed to sell $10.0 million of common stock to CCT
Telecom Holdings Limited at the initial public offering price in a private
placement that will close concurrent with this offering. CCT Telecom will be
granted the right to include these shares in future registered offerings that
we may file.
In May 2000, we entered into an agreement to sell 1,333,333 shares of Series
H preferred stock to Sun Microsystems, Inc. at a price of $15.00 per share for
an aggregate purchase price of $20.0 million in a private placement that we
anticipate will close on or about May 8, 2000. These preferred shares will
convert into 1,616,161 shares of common stock upon the completion of this
offering, based on an assumed initial public offering price of $15.00 per
share. The number of common shares to be issued on conversion will be computed
on a 17.5% discount of the initial public offering price. In the period of
conversion, this beneficial conversion feature will increase the net loss
attributable to common stockholders by approximately $4,242,000 and increase
the basic and diluted net loss per share.
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Effect of Year 2000
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000, as a leap year date
as a result of an exception to the calculation of leap years that will occur in
the year 2000 and otherwise occurs only once every 400 years. This problem
could result in miscalculations, data corruption, system failures or
disruptions of operations.
As of March 31, 2000, we had not experienced any significant disruptions in
our business related to year 2000 issues, nor do we expect to experience any
year 2000 related disruption in the operation of our systems.
We are not aware of any of the companies to which we have shipped our
ONLINE9000 product experiencing any year 2000 related problems with our product
or their ability to deploy our product. In addition, we have not received
notice from any of our contract manufacturers or our other suppliers that they
have experienced any year 2000 problems with the parts supplied by them or that
would affect their ability to supply products and services to us. Although most
year 2000 problems should have become evident on or shortly after January 1,
2000, additional year 2000 related problems may become evident. We will
continue to monitor our mission critical equipment and computer applications
and those of our suppliers and vendors throughout the year, in an effort to
ensure that any late year 2000 matters that may arise are promptly addressed.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
We do not currently use derivative financial instruments for speculative
trading or hedging purposes. In addition we maintain our cash equivalents in
money market funds. Accordingly, we are not a party to financial instruments or
contracts, and do not have investments, that expose us to material interest
rate risk.
Exchange Rate Sensitivity
Currently, all of our sales and expenses are denominated in United States
Dollars. Therefore, we have not engaged in any foreign exchange hedging
activities to date. We do expect to conduct transactions in foreign currencies
in the future, so we may engage in foreign exchange hedging activities at that
time.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
will be effective for our fiscal year ending December 31, 2001. We do not
expect SFAS 133 to have a material effect on our financial position or results
of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), which summarizes views of the
Commission staff in applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our current
revenue recognition principles comply with this bulletin.
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BUSINESS
The prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
forward-looking statements.
Overview
We develop, market and sell all-optical communications networking equipment
specifically designed to address the bandwidth and service limitations of
metropolitan area and regional networks, which we refer to as metro networks.
We believe that we offer the first commercially available products,
specifically designed for metro networks, that are based entirely on optical
rather than electronic technology. Communication service providers can cost-
effectively deploy our products to relieve the growing traffic bottleneck in
these networks and offer new revenue-generating data services. By installing
our equipment, service providers can rapidly build high-capacity metro networks
that are flexible, scalable, and able to support multiple services on a single
platform.
Industry Background
Increased Demand for Network Capacity
Rapid growth in the popularity of the Internet and in the number of
Internet-based applications and services has fueled dramatic growth in the
volume of data traffic. According to Ryan, Hankin & Kent, Internet traffic will
increase from 350,000 terabytes, or trillions of bytes, per month at the end of
1999 to over 15,000,000 terabytes per month during 2003. This growth will
increase demand for capacity in the public communications network. This
capacity is usually measured in bits of data per second and is commonly known
as bandwidth. Bandwidth improvements make it possible for communication service
providers to offer new revenue-generating services such as remote data storage
and local area network extensions to their customers. As these new bandwidth-
intensive services are introduced and gain commercial acceptance, additional
network bandwidth and optical infrastructure will be required.
Evolution of Optical Networking
The existing communications network infrastructure was designed and built to
carry voice calls, based on standards such as Synchronous Optical Network, or
SONET. The rapid adoption of the Internet and the resulting growth of data
traffic are driving service providers toward deploying equipment and networks
designed, built and optimized for both data and voice traffic. Given the scope
of existing and projected Internet traffic, many communication service
providers are designing and installing networks based on optical technology,
which generally enables greater capacity and higher transmission speed.
Optical networking technology transmits data using pulses of light over
optical fiber, rather than pulses of electricity over copper wires. Advances in
optical technology such as dense wavelength division multiplexing allow
transmission of multiple signals on a single strand of optical fiber, each
signal using a different wavelength of light. Dense wavelength division
multiplexing technology currently enables transmission of up to 160 different
wavelengths on a single fiber. This means that today a service provider using
dense wavelength division multiplexing can multiply the transmission capacity
of its existing fibers 160 times.
As shown below, the current communications network infrastructure can be
divided into four segments--long-haul, metro core, metro access and enterprise
networks. To satisfy the technical, pricing and performance needs of service
providers, we believe that optical networking equipment must be specifically
designed for each of these segments.
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[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING THE SEGMENTS OF THE
COMMUNICATIONS NETWORK]
Upper Right Quadrant--A map of the continental United States (showing state
boundaries) with a network superimposed. The network is formed from
approximately forty large dots indicating "nodes" on the network with lines
connecting the nodes in a web or dot-to-dot fashion. The words "LONG-HAUL
NETWORKS" appear above the map.
Lower Half--An oval offset to the left of the diagram with figures inside the
oval. The oval is connected to one of the dots in the map-network
(approximately in the vicinity of San Diego) with trace lines indicating that
the oval represents a representative node on the network. The words "METRO
NETWORK" appear above and to the left of the oval.
Interior of the Oval--The oval is divided into thirds:
The right-hand portion of the oval is a schematic symbol used to represent an
optical cross-connect linking the metro network to the long haul network. The
words "To Long-haul Networks" appear below the schematic.
The center portion of the oval contains two ellipses or "rings" (one directly
above the other) each with for boxes or "nodes" at approximately 12 o'clock, 3
o'clock, 6 o'clock and 9 o'clock on the ring. The bottom-most node of the top
ring is shared as the top-most node of the bottom ring. Each ring represents a
ring-based fiber optic network. The words "Metro Core Ring" appear inside each
ring. The right-most node of each ring is connected by two lines (representing
fiber links) to the optical cross-connect schematic in the right-hand portion
of the oval. The left-most node of each ring protrudes into the left section of
the oval. The words "Metro Core Networks" appear at the bottom of the center
portion with arrows on each side leading to the left and right edges of the
center portion.
The left portion of the oval contains diagrams of ten buildings representing
enterprises connected to the communications network. Seven of the buildings are
connected by a smaller ring (similar to the rings in the center portion of the
oval) to each other and to the left-most node of the lower ring in the center
portion of the oval. This ring represents a metro access fiber optic ring
connecting enterprises to the metro network. Above this ring are three
individual buildings, each of which is connected by lines to the left-most node
of the upper ring in the center portion of the oval. The lines represent direct
fiber links to the metro core. The words "Metro Access Networks" appear at the
bottom of this portion of the oval below all of the buildings. The words
"Enterprise Networks" appear to the left of the buildings.
[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING THE SEGMENTS OF THE
COMMUNICATIONS NETWORK]
Long-haul networks. Long-haul networks connect the communications networks
of metropolitan areas around the world. These networks move large amounts of
data and voice traffic point-to-point over long distances. The focus of
companies designing equipment for this segment has been to provide as much
bandwidth as possible between any two points.
Metro core networks. Metro core networks connect long-haul networks to metro
access networks over distances of a few miles in dense urban business corridors
or a few hundred miles in regional urban and suburban settings. These networks
aggregate metro access traffic and distribute it throughout the metropolitan
area and to and from long-haul networks. They face a heterogeneous networking
environment due to the number and variety of access providers that they serve
and the service types that they support.
Metro access networks. Metro access networks connect end-users such as
enterprises and individuals to the metro core network. These networks are the
points at which traffic enters and exits the public communications network.
Metro access networks are complex because they must manage a wide variety of
services to meet the needs of end-users.
Enterprise networks. Enterprise networks provide data and voice connections
among end-users within a building or group of buildings. These networks also
connect end-users to the public communications network infrastructure.
Metro Network Bottleneck
Optical technologies were first deployed in long-haul networks, where the
capacity constraints of the existing infrastructure were first encountered and
the simple architecture and homogeneous traffic made it technically feasible
and cost effective. Over time, enterprise networks have also benefited from the
deployment of new optical technology, including high-speed data communication
services such as Gigabit Ethernet and Fibre Channel.
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To date, optical solutions specifically designed to address the challenges
faced by metro core and access networks have not been available, which has
impeded the growth of bandwidth in metro networks.
We believe that the transmission speed in the metro portion of the network
over the last several years has grown at a small fraction of the growth rate
seen in long-haul and enterprise networks. This has created a bottleneck
impeding service delivery.
Challenges Facing Metro Core and Metro Access Network Service Providers
Communication service providers seeking to develop and introduce next
generation services to their customers face significant challenges that are not
adequately addressed by current metro solutions, including:
Enabling emerging service offerings and supporting existing
services. Communication service providers that serve regions and metropolitan
areas endeavor to offer business enterprises and consumers a variety of high-
speed connectivity services, such as:
. access to the public switched telephony network, for voice and fax
service;
. Internet access for data services, including high-speed digital
subscriber lines;
. access to offsite data facilities, for data backup and storage; and
. extension of the local area network to multiple locations within the
metro area.
In addition, service providers seek to offer next generation services to
create new revenue- generating opportunities. Most current solutions require
dedicated equipment and interfaces that are unique for each particular service
and transmission rate. Given the dominance of data traffic, next generation
equipment must be specifically designed for efficient transmission of data
traffic and delivery of emerging services, while accommodating voice traffic.
This equipment must also support an unpredictable and changing mix of service
offerings on a single platform.
Manageability and Flexibility. As the introduction of new services increases
network complexity, service providers will require software and systems that
allow for easy and effective end-to-end management of data and voice services.
Since the metro network must constantly adapt to changes in the number and
location of users, the equipment must be flexible enough to accommodate
bandwidth deployment, where needed and when needed.
Low cost and scalability. Service providers need solutions that are cost-
effective to deploy initially and easily scale to handle rapid growth. To
expand their existing networks, they must add new equipment to their previously
deployed infrastructure, which is costly, utilizes the limited space in metro
service providers' facilities inefficiently and increases the complexity of
network management. Service providers seek new systems that can replace
existing systems at a price point that will allow revenue from new services to
provide a return on deployment costs and can be deployed in a pay-as-you-grow
fashion.
Reliability. Because the applications carried over metro networks are
critical to enterprises and users, rapid restoration of service is a key
requirement for all metro networks. Communication service providers require
equipment that meets existing reliability standards, while improving
reliability for higher bandwidth applications.
To date, attempts to solve the problems faced by metro networks have focused
on increasing bandwidth. These attempts include using SONET, deploying
additional fiber, and adapting long-haul solutions such as existing point-to-
point implementations of wavelength division multiplexing to the
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metro network. When applied to metro networks, these efforts are costly, time-
consuming, difficult to scale or difficult to manage. For example, SONET
network architecture was originally designed for voice traffic, is not easily
scalable and therefore hinders introduction of today's emerging high-speed data
services. In addition, SONET requires that at least 50% of network capacity be
reserved to provide alternative routing for traffic in the event of a network
outage. Similarly, deploying additional fiber in metropolitan areas is
expensive and time-consuming because it requires permits, rights-of-way and
physical installation of fiber. Likewise, wavelength division multiplexing was
originally designed for long-haul point-to-point applications in a SONET
environment. Wavelength division multiplexing, as designed for long-haul
networks, is inefficient and expensive to deploy in metro networks. To be
applied in the metro network, currently available point-to-point
implementations of wavelength division multiplexing technologies require
additional electrical equipment such as SONET-based equipment to add and drop
traffic and to provide rapid service restoration.
In addition, today's networks are not all-optical. Transmitted signals in
these networks undergo multiple optical-to-electrical-to-optical conversions.
These conversions are costly because they require deployment of additional
equipment and are inefficient because they are limited by the bandwidth
constraints and inflexibility of existing electronics embedded in today's
networks.
The ONI Systems Solution
We develop, market and sell all-optical networking equipment that enables
communication service providers to offer new revenue-generating services while
fully supporting existing voice and data services. Our data-optimized, scalable
solution increases available bandwidth in metropolitan areas and delivers end-
to-end manageability and rapid restoration for all services. Our family of
products consists of the ONLINE9000 for metro core networks, the ONLINE7000,
which we expect to be available by June 2000 for metro access networks, our
OPTX network operating system and our OLMP inter-network communications
protocol.
Our product offerings provide the following benefits to communication
service providers:
Multi-service capability. Our equipment and interfaces support multiple
service offerings. As a result, a service provider using our solution can
provide a changing mix of services as customer needs evolve, without deploying
dedicated equipment for each service. Our solution is compatible with SONET,
providing service providers with an evolutionary upgrade path. Our products are
also designed for efficient transmission of high-speed data traffic and
delivery of emerging services, while supporting voice services. For example,
multiple services, including SONET, Gigabit Ethernet and Fibre Channel, are
supported on the same platform by our equipment and interfaces.
Manageability and flexibility. As network complexity increases, service
providers require software and systems that allow easy end-to-end service
management. Our products combine a network operating system, management
software and inter-network communications protocols to enable:
. real-time control of bandwidth allocation as needed, where needed and
when needed;
. real-time surveillance of network performance;
. interoperability with third-party management software and data routing
and switching equipment; and
. point-and-click activation of services.
Cost effectiveness and scalability. Our solution is designed to scale
efficiently as demand for bandwidth and new services increases. Our products
lower service providers' equipment acquisition and network operation costs by
reducing the amount of equipment required, and by allowing them to
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<PAGE>
install their equipment incrementally in a pay-as-you-grow fashion without
sacrificing their existing infrastructure investments. In addition, our
solution requires less space in service providers' facilities because our
products are designed to handle current networking standards and can readily be
upgraded to handle emerging services without the deployment of additional
equipment.
Rapid and efficient service restoration. Survivability is a key factor for
all metro networking services. Our products provide for restoration of service
within the SONET standard of 50 milliseconds, without the need to dedicate
bandwidth for restoration, as is required by typical SONET-based equipment.
Since our products do not require dedicated bandwidth, communications service
providers can utilize their existing fiber more efficiently by placing more
traffic on each fiber route.
The ONI Systems Strategy
Our objective is to be a leading provider of all-optical networking
solutions for communication service providers worldwide. The key elements of
our strategy are to:
Leverage our all-optical approach to achieve early design wins in metro core
and metro access networks.
We believe that the challenges facing metro service providers are most
efficiently addressed through our all-optical approach. Since service providers
are in the early stages of deployment of optical metro networks, we expect that
service providers will select vendors with the strongest technology positions.
We plan to take advantage of our position as a technology leader to achieve
design wins with these service providers, which will position us to grow
rapidly as these new networks are deployed.
Enable our customers to offer new revenue-generating services to their end-
users.
We intend to continue to develop and provide solutions that will enable our
customers to deliver emerging revenue-generating services to end-users. We
believe the demand for new services is a key driver of our customers' growth
and we intend to ensure that our hardware and software architectures continue
to offer the performance and flexibility to allow rapid introduction of new
services. We intend to work closely with our customers to help them identify
new services that they can deliver using our products.
Extend technology leadership.
Our all-optical architecture and dynamic network operating system are key
elements of our technology leadership. We believe that these elements can be
incorporated into future product offerings for other segments of the
communications network. We intend to extend our technology leadership and to
develop new product offerings and future product enhancements through continued
investment in research and development.
Leverage optical manufacturing expertise.
Our ability to manufacture complex optical networking products is a key to
our success. We believe we have developed a world-class manufacturing
capability through a combination of our own manufacturing systems and third-
party manufacturing relationships. We believe that this combination gives us a
competitive advantage and will enable us to reduce our manufacturing costs,
while providing us with manufacturing flexibility to meet changing demand.
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Expand direct sales, service and support organizations to address global
opportunities.
We intend to expand our direct sales capability into global markets. We
believe that sales efforts on a customer-by-customer basis are most effective
because deployment of communications equipment involves careful technical
evaluation, multiple levels of decision making and significant investments by
our customers. While we may consider indirect sales channels where appropriate,
we intend to continue to focus our sales and distribution efforts on direct
sales. We have developed a direct sales organization in North America and
Europe and are expanding that sales force as well as developing direct sales
forces for Asia and Latin America. In addition to our existing teams in the
United States, we are also establishing service and support teams
internationally to support our major customers.
Establish strategic alliances and pursue acquisitions to extend our leadership
in optical networking.
We intend to establish strategic alliances with complementary technology
suppliers in order to leverage our technology leadership in providing optical
networking solutions. We believe that alliances with companies that provide
complementary products to enable new services will bring our customers greater
value. In addition, we intend to pursue acquisitions that will enable us to
broaden our product, service and technology portfolios.
All-Optical Architecture
Rather than processing network signals by converting incoming optical
signals to electrical form, processing them and converting them back to optical
form, our product architecture performs the following functions in an all-
optical manner:
. combination and separation of
multiple optical channels;
. per channel and grouped
wavelength routing;
. real-time flexible adding or
dropping of optical channels;
. switching and routing around
optical fiber failure or
equipment failure;
. signal amplification; and
. supervisory channels for
performance monitoring.
[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' ALL-OPTICAL
ARCHITECTURE]
Centered in the diagram are a stack of six long rectangles representing
functional layers within our ONLINE9000 or ONLINE7000 products. Superimposed
over the rectangles is a flow chart representing movement of the optical
signals through the functional layers.
From top to bottom:
The words "Interface to Client Equipment" appear above the top-most (or first)
rectangle in the stack. The portion of the flowchart shown in this rectangle
are squares representing interfaces to the client equipment.
The portion of the flowchart shown in each of the second and fourth rectangle
are trapezoids representing combination and separation of optical signals on
the signal. The words "Multiplexing, Demultiplexing" appear to the left of
these rectangles.
The portion of the flowchart shown in each of the third and fifth rectangle is
a smaller rectangle representing optical switching of the signal. The word
"Switching" appears in the flowchart rectangle. The word "Switching" appears to
the right of the third and fifth rectangle in the stack.
The portion of the flowchart shown in the sixth rectangle are triangles
representing amplification of signals to and from the network. The word
"Amplifiers" appears in the center of this rectangle. The words "To Fiber
Network" appear below the bottom-most rectangle of the stack.
[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' ALL-OPTICAL
ARCHITECTURE]
Our OPTX operating system software architecture integrates network design
tools, operations management software and end-to-end service management and
activation systems, as shown in the diagram below. This integrated environment
enables automated transfer of data through open interfaces to craft and
management terminals as well as local administrative networks for the
communications service provider.
Built with software infrastructure based on the XML standard, OPTX also
provides standards-based CORBA interfaces to the service provider's operations
support systems and network wide service applications, including billing,
service ordering and activation, and inventory systems. Our OPTX architecture
enables information exchange with data switching and routing equipment through
our OLMP inter-network communications protocols. OPTX helps provide
comprehensive and integrated network
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design, operations and service management capabilities by managing networks
built with our ONLINE9000 product.
[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' OPTX
ARCHITECTURE]
The center of the diagram is a large square. The name "OPTX" appears in the
upper right corner of the square. Below this word appear three upright
rectangles. The words "Network Design Application" appear in the left
rectangle. The words "Network Configuration Application" appear in the center
rectangle. The words "Network Operation Application" appear in the right
rectangle. Below these rectangles occupying the bottom quarter of the square is
a rectangle with the words "Embedded Software" inside.
Above the main square is an ellipse with the words "Operations Support Systems
(Network Management, Service Management)" inside. To the left of the main
square is an upright ellipse with the words "Graphical User Interface and
Users" inside. To the right of the main square is an upright ellipse with the
words "Client Equipment" inside. Each of these ellipses is connected to the
main square by a two-way arrow. The name OLMP appears directly above the two-
way arrow connecting the main square and the right-hand ellipse.
[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' OPTX ARCHITECTURE]
Products
ONLINE9000
The ONLINE9000 is designed for metropolitan area and regional networks and
delivers cost-effective, scalable capacity for the metro communications service
provider. It features dynamic optical add-drop capabilities on all deployed
channels and provides restoration faster than the SONET standard of 50
milliseconds. To help service providers deploy large networks, the ONLINE9000
includes optical amplifiers to extend transmission distances. The ONLINE9000
can be used in conventional ring, ring-mesh and mesh network topologies. In its
base configuration, the ONLINE9000 includes the following key features:
. 33 protected or 66 unprotected channels;
. line-based or per-wavelength optical rerouting of channels in the event
of optical fiber failure;
. a universal optical interface supporting multiple bit rates and
protocols, including OC-3, OC-12, OC-48, OC-192, Gigabit Ethernet and
Fibre Channel; and
. integrated optical amplifiers with sophisticated power management
capabilities.
ONLINE7000
We have recently introduced the ONLINE7000, which we anticipate will be
available by June 2000. The ONLINE7000 is designed to provide metro service
providers with a cost-effective solution for metro access applications.
Integrated monitoring and surveillance capabilities will ensure managed
operation from the operator's perspective across metro core and metro access
networks. The ONLINE7000 shares the same management and operating system as the
ONLINE9000 and can be deployed as an extension of the ONLINE9000.
The ONLINE7000 includes the functions of a typical SONET and data
multiplexer. This capability will allow the carrier to deploy multiple SONET or
native-format data services using a single
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wavelength. The ONLINE7000 is scalable up to 33 protected or 66 unprotected
channels. In its base configuration, key features of the ONLINE7000 will
include:
. the ability to add or drop multiple SONET or data channels to or from a
single wavelength;
. per-wavelength optical rerouting of channels in the event of optical
fiber failure; and
. a 199 shelf form factor suitable for metro access networks.
OPTX Operating System
Our optical network operating system, called OPTX, provides a unified
environment for metro core and metro access service providers to manage diverse
networking resources and hardware and software systems. Analogous to the
operating systems of personal computers, OPTX manages all resources in the
transmission network, including transmission systems, connections, protection
resources and terminals, and allocates resources to various users and
applications, based on user-selected policies. OPTX brings the ability to
manage, arbitrate and dynamically control network-wide resources to metro
network service providers. Multiple application programmer interfaces within
OPTX link to other management systems and applications. The OPTX architecture
and infrastructure makes extensive use of the XML standard to enable
interaction with other network management equipment without developing
dedicated interfaces. The key features of the OPTX operating system include:
. OPTXNET, an integrated optical network design tool that provides
automatic optical link analysis, link optimization and system
configuration for each node in the network;
. Network and service management interface and applications, including
surveillance, billing, service activation and ordering systems and
network inventory reports; and
. CORBA-based interfaces to the service provider's network operations
support systems.
OLMP (Optical Link Management Protocol)
Our inter-network communications protocol, OLMP, enables data routing and
switching equipment to exchange information with our optical transmission
equipment in metro networks. This information exchange allows data switching
and routing equipment to request and receive required resources from optical
transmission equipment. Utilizing our OLMP protocol, data equipment can
directly request the metro network to set up and drop optical channels when
required in real time. For example, OLMP enables Fibre Channel equipment to
exchange route-length, latency and bandwidth availability for end-to-end
management of storage area networks. We believe that our OLMP is the first
network-level internetworking protocol to link the data and switching equipment
to optical transmission equipment.
Customers
Our target customers include communication service providers such as
regional Bell operating companies, competitive local exchange carriers, long-
distance carriers with local operations, cable operators, Internet service
providers, and foreign telephone companies. We have entered into agreements
under which the following communication service and equipment providers may,
but are not obligated to, purchase our products: COLT Telecom plc, KVH
Industries Inc., Lucent Technologies, Inc., Marietta Fibernet, MetroRED
Telecommunicaciones S.A., StorageNetworks, Inc. and Williams Communications,
Inc. We have also entered into a limited trial system purchase agreement with
Internet Initiative Japan Inc.
In addition, we have shipped the ONLINE9000 to Marietta Fibernet,
StorageNetworks and Williams Communications in the United States, COLT Telecom
in the United Kingdom, Internet Initiative Japan in Japan and Lucent
Technologies for deployment in China.
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Sales and Marketing
In North America and Europe, we have developed a direct sales force and in
some limited circumstances may join with other communications equipment
providers to bid on major proposals. Our direct sales force consists of sales
teams made up of an account manager, systems engineers and technical support
and training personnel. Each team is assigned responsibility for specific
geographic territories and specific customers within each territory. We are
continuing to expand our existing direct sales force and are developing a
direct sales force to sell to potential customers outside North America and
Europe.
In some international regions where it is difficult or expensive to maintain
a direct sales force, we may rely on resellers for distribution of our
products. For example, in April 2000, we entered into an OEM relationship with
Lucent Technologies that expires on December 31, 2001. Under the terms of our
agreement, Lucent Technologies has the exclusive right to sell some of our
products in China for a period of 12 months.
Our marketing programs are designed to inform existing and potential
customers about the capabilities and benefits of our products. We also use our
marketing programs to support the sale and distribution of our products through
our direct sales force. Our marketing efforts include public relations,
participation in industry trade shows and conferences.
Customer Service and Support
Our customer service and support organization provides maintenance services
and training in the use of our products after they are installed at a
customer's site. Installation services are provided by ONI Systems or third-
party providers of engineering, furnishing and installation services. Our
customer service centers, located at our facilities in San Jose, California and
London, England, include highly-qualified teams of systems engineers and
technical personnel who work closely with our direct sales force and provide
24-hour-a-day, 7-day-a-week support for our customers.
Research and Development
We believe that to be successful we must continue to enhance our existing
products and develop new products that maintain technological competitiveness.
We have assembled a team of approximately 165 highly skilled optical hardware
and software engineers, manufacturing and test engineers and system and network
architects. Research and development expenses were $4.0 million for the year
ended December 31, 1998 and $25.4 million for the year ended December 31, 1999.
We will continue to make substantial investments in research and development.
Our product development process is driven by market demand and a close
collaboration between our product marketing, sales and product development
organizations. Our product development process begins with a detailed set of
specifications prepared by our product management organization. We also
incorporate feedback from our customers in the product development process. In
addition, we participate in industry and standards organizations where
appropriate and incorporate information from these contacts throughout the
product development process.
Manufacturing and Supply
We conduct supply chain management, production engineering, documentation
control and quality assurance at our assembly facility in San Jose, California.
We outsource most of the manufacturing of optical modules used in our products,
and we complete the final assembly of these optical modules at our facilities.
The majority of our electronic manufacturing and assembly is
41
<PAGE>
outsourced. Currently, we use a number of manufacturing vendors for electronic
assemblies while E-TEK Dynamics, Inc. performs the majority of our outsourced
optical assembly.
This approach to manufacturing allows us to:
. reduce the capital equipment expenditures that would be required for a
turnkey manufacturing operation;
. reduce our facilities square footage requirements by limiting the amount
of space dedicated to manufacturing and operations;
. conserve working capital by limiting the amount of inventory we must
stock; and
. respond to market demand flexibly.
We currently purchase many of our electrical and optical components through
purchase orders. In order to help us maintain a supply of components, and
specifically optical components, we intend to use long term supply agreements
with vendors. For example, in March 2000, we entered into an agreement with E-
TEK Dynamics under which E-TEK Dynamics will supply optical components and
module integration services to us through at least December 31, 2001.
Competition
Competition in the metro communications networking equipment market is
intense. Our existing and potential competitors are numerous and include
established companies such as Alcatel, CIENA, Cisco Systems, Juniper Networks,
Lucent Technologies, Nortel Networks, Siemens, Sycamore Networks and Tellabs. A
number of private companies have recently announced plans for new products to
address the same problems that our products address and have attracted
substantial amounts of venture capital funding. Many of these companies,
particularly the large public companies, have substantially greater financial,
marketing and development resources than we have, which puts us at a
competitive disadvantage. Many of them have existing relationships with
communication service providers, which will make it more difficult for us to
sell our products to those customers. Some competitors may seek to use
intellectual property rights to limit our ability to compete. For example,
Nortel Networks claims that we infringe some of its patents.
We believe that the principal methods of competition in the market for metro
communications networking equipment are product performance, reliability and
expandability, and the ability of a product to deliver cost-effective results.
We believe that to be competitive in the communications networking equipment
market we must deliver products that:
. provide extremely high network reliability;
. provide high performance capabilities;
. scale easily and efficiently with minimum disruption to the network;
. interoperate with existing network designs and equipment vendors;
. reduce the complexity of the network by decreasing the need for multiple
layers of equipment; and
. provide a cost-effective solution for service providers.
While our first product has only been generally available since January
2000, we believe that positive factors pertaining to our competitive position
include our technology, the expertise of our research and development
personnel, our manufacturing expertise and our intellectual property rights. We
believe that negative factors pertaining to our competitive position include
our relative newness in the market and the fact that some of our competitors
have large financial resources available to promote sales of their products and
to develop products more directly competitive with
42
<PAGE>
ours. If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, reduced gross margins and
loss of market share, any one of which could materially harm our business,
operating results and financial condition.
Intellectual Property
Our success and ability to compete depends on our ability to develop
technological expertise internally. We rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. We have been issued six patents in
the United States. However, only two of these patents are currently significant
to our products. In addition, we currently have 16 patent applications pending
in the United States and internationally. These patents relate to optical
architecture, hardware, software and management systems. Issued patents may not
protect our intellectual property or may be challenged by third parties. In
addition, others may independently develop similar or competing technology or
design around our patents.
We enter into confidentiality or license agreements with our employees,
consultants and corporate partners and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. These precautions
may not prevent misappropriation or infringement of our intellectual property.
ONI Systems(TM), ONI(TM), our logo, ONLINE9000(TM), ONLINE7000(TM),
OPTX(TM), OPTXNET(TM), OLMP(TM), Dynamic Transport System(TM) and DTS(TM) are
trademarks of ONI Systems. All other names or trademarks appearing in this
prospectus are the property of their holders.
Employees
As of March 31, 2000, we had a total of 326 employees:
. 147 in research and development;
. 41 in sales and marketing;
. 18 in customer service and support;
. 68 in manufacturing; and
. 52 in finance and administration.
Our future success will depend in part on our ability to attract and retain
highly qualified technical and management personnel. Competition for such
talent is intense. None of our employees are represented by any collective
bargaining unit, and we believe that our relations with our employees are good.
Facilities
Our headquarters are currently located in a leased facility in San Jose,
California, consisting of approximately 53,000 square feet under a lease that
expires in 2002. We also lease a facility of approximately 58,000 square feet
in San Jose, California, under a lease that expires in 2006, and a facility of
approximately 1,500 square feet in Raleigh, North Carolina, under a short-term
lease. We expect to require additional space within the next 12 months.
Legal Proceedings
In October 1999, Nortel Networks filed suit in the Superior Court for the
Province of Quebec, District of Montreal, Canada against us and several of our
employees who were former employees of
43
<PAGE>
Nortel Networks. The suit seeks an injunction to prevent us from hiring
additional Nortel Networks employees and to prohibit the use of Nortel
Networks' trade secrets by us. In October 1999 and November 1999, temporary
orders were issued prohibiting the former Nortel Networks employees from
soliciting current Nortel Networks' employees and from using specified Nortel
Networks trade secrets. The temporary orders were renewed on several occasions,
by court order following agreement of the parties to such renewal, and remain
effective through September 5, 2000.
In March 2000, Nortel Networks filed an additional suit against us in the
United States District Court for the Northern District of California. The suit
involves allegations that our products infringe five patents held by Nortel
Networks, and sets forth allegations of misappropriation of trade secrets,
unlawful business practices and common law unfair competition. Nortel Networks
seeks preliminary and permanent injunctions and damages against us in
connection with these claims.
We are in the preliminary stages of investigating the claims asserted by
Nortel Networks. We believe that we have meritorious defenses against Nortel
Networks' allegations, and we intend to defend the Nortel Networks litigation
vigorously. Based on our investigation to date, we believe that our products do
not infringe the Nortel Networks patents and that we have not engaged in
misappropriation of trade secrets, unlawful business practices or common law
unfair competition.
In April 2000, we filed a motion to dismiss Nortel Networks' claims for
misappropriation of trade secrets, unlawful business practices and common law
unfair competition from the California suit. We also filed an answer and
counterclaims asserting unfair business practices, tortious interference,
breach of contract and seeking declarations of invalidity, unenforceability and
non-infringement of the patents against Nortel Networks.
In the event that an injunction is granted that prevents us from selling our
products, we would have to either negotiate a license with Nortel Networks or
engage in a redesign of our products. We may not be able to obtain a license
from Nortel Networks on commercially reasonable terms, or at all. A redesign of
our products would result in an interruption in sales that could extend for
some time. Accordingly, a permanent injunction would result in a substantial
reduction in our revenue and result in losses over an extended period of time.
We expect to incur substantial legal and other expenses in connection with
the Nortel Networks litigation. In addition, we expect the Nortel Networks
litigation to continue to divert the efforts and attention of our management
and technical personnel. Patent litigation is highly complex and can extend for
a protracted period of time, which can substantially increase the cost of
litigation. Accordingly, the expenses and diversion of resources associated
with this litigation could seriously harm our business and financial condition
and could affect our ability to raise capital in the future. In the event of an
adverse ruling, we also could be required to pay damages to Nortel Networks,
and if this litigation is resolved by settlement, we might need to make
substantial payments to Nortel Networks, which could harm our business and
financial condition.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Significant Employees
Our executive officers, directors and significant employees, and their ages
and positions as of May 1, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers
and Directors:
Hugh C. Martin................ 46 President, Chief Executive Officer and
Chairman of the Board of Directors
Chris A. Davis................ 49 Executive Vice President, Chief Financial
and Administrative Officer
Hon Wah Chin.................. 45 Chief Technology Officer
William R. Cumpston........... 38 Senior Vice President, Engineering and
Operations
Michael A. Dillon............. 41 Vice President, General Counsel and
Secretary
Robert J. Jandro.............. 44 Executive Vice President, Worldwide Sales
and Marketing
Andrew W. Page................ 34 Vice President, Corporate Development
Matthew W. Bross.............. 39 Director
Kevin R. Compton.............. 41 Director
Jonathan D. Feiber............ 42 Director
James F. Jordan............... 60 Director
Gregory B. Maffei............. 39 Director
Significant Employees:
Kenneth H. Calhoun............ 34 Vice President, Product Marketing
Martin Desroches.............. 35 Vice President, Operations
William S. Jarvis............. 37 Vice President, Worldwide Sales
Rohit Sharma.................. 31 Vice President, Optical Hardware Development
</TABLE>
Hugh C. Martin has served as President and Chief Executive Officer of ONI
Systems, and a member of the board of directors, since January 1998. He was
appointed Chairman of the Board of Directors in February 2000. From July 1997
to January 1998, he served as Entrepreneur-in-Residence at Kleiner Perkins
Caufield & Byers, a venture capital firm. Mr. Martin served as President of The
3DO Company, an entertainment software company, from 1992 to June 1997. He is a
member of the board of directors of The 3DO Company. He holds a B.S. in
Electrical Engineering from Rutgers University.
Chris A. Davis has served as Executive Vice President, Chief Financial and
Administrative Officer of ONI Systems since May 2000. Ms. Davis served as
Executive Vice President, Chief Financial and Administrative Officer of
Gulfstream Aerospace Corporation from 1993 until April 2000 and as Vice
President of General Dynamics from July 1999, when it acquired Gulfstream
Aerospace, until April 2000. She is a member of the boards of directors of
Compaq Computer Corporation, Cytec Industries, Inc. and Wolverine Tube, Inc.
She holds an M.S. in Finance and Statistics and a B.S. in Finance from the
University of Florida.
Hon Wah Chin has served as Chief Technology Officer of ONI Systems since
June 1998. Mr. Chin served as Senior Systems Architect at Cisco Systems, Inc.,
a network equipment company, from 1994 to June 1998 and was a Cisco
Distinguished Engineer. He holds a S.B. in Electrical Engineering and Computer
Science from the Massachusetts Institute of Technology.
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<PAGE>
William R. Cumpston has served as Senior Vice President, Engineering and
Operations of ONI Systems since June 1999 and served as Vice President,
Engineering of ONI Systems from September 1998 to June 1999. Prior to joining
us, Mr. Cumpston served in various management positions at DSC Communications
Corp., a telecommunications company, from 1995 to August 1998. He holds a B.S.
in Math Science from the University of North Carolina at Chapel Hill.
Michael A. Dillon has served as Vice President and General Counsel of ONI
Systems since October 1999 and as Secretary since March 2000. From August 1995
to October 1999, Mr. Dillon served as Director and as Senior Director of Sun
Microsystems, Inc., a computer company, and from 1993 to August 1995, he served
as Senior Counsel for Sun Microsystems. He holds a J.D. from Santa Clara
University and a B.A. in Communications/Sociology from the University of
California, San Diego.
Robert J. Jandro has served as Executive Vice President, Worldwide Sales and
Marketing of ONI Systems since March 2000. Mr. Jandro served as Group Vice
President of Oracle Corporation, a database software company, from May 1999 to
March 2000. From 1994 to May 1999, he served as Oracle's Vice President, North
America Communications and Vice President, United States Central Region, Latin
America and Canada. He holds an M.B.A. from the Kellogg Graduate School of
Management at Northwestern University and a B.S. in Business from the
University of Missouri, St. Louis.
Andrew W. Page has served as Vice President, Corporate Development of ONI
Systems since February 2000. Mr. Page served as Managing Director and head of
the Global Communications Group of FleetBoston Robertson Stephens Inc., an
investment bank, from April 1997 to February 2000. He served as a Principal of
Volpe, Welty & Company from 1993 to March 1997. He holds an M.B.A. from Harvard
University Graduate School of Business and a B.A. in English Literature from
Princeton University.
Matthew W. Bross has served as a director of ONI Systems since November
1999. Since May 1999, he has served as Senior Vice President and Chief
Technology Officer of Williams Communications, Inc., a communications service
provider. From March 1997 to May 1999, he served in various management
capacities for Williams Communications. From 1991 to March 1997, he served as
the founder and Chief Executive Officer of Critical Technologies, Inc., a
telecommunications infrastructure company, which was acquired by Williams
Communications.
Kevin R. Compton has served as a director of ONI Systems since January 1998.
Mr. Compton has served as a general partner at Kleiner Perkins Caufield & Byers
since 1990. Mr. Compton serves on the boards of directors of Active Software,
Inc., Citrix Systems, Inc., Corsair Communications, Inc., Rhythms
NetConnections Inc. and VeriSign, Inc. He holds a B.S. in Business Management
from the University of Missouri.
Jonathan D. Feiber has served as a director of ONI Systems since January
1998. Mr. Feiber has served as a general partner at Mohr Davidow Ventures, a
venture capital investment firm, since 1991. From 1983 to 1991, he served in
various capacities at Sun Microsystems, most recently as Vice President of
Networking. He is a director of several privately-held companies. He holds a
B.A. in Computer Science and Mathematics from the University of Colorado.
James F. Jordan has served as a director of ONI Systems since March 1998.
Mr. Jordan has privately managed his investment fund since 1994. He was one of
the founders of Ungermann-Bass Inc. and was President and Chief Executive
Officer of Kalpana, Inc. prior to the sale of the company to Cisco Systems in
1994. He holds a B.S. in Business and Marketing from the University of Utah.
46
<PAGE>
Gregory B. Maffei has served as a director of ONI Systems since February
2000. Mr. Maffei has served as Chief Executive Officer and as a member of the
board of directors of 360networks Inc., a communications service provider,
since December 1999. From 1993 to December 1999, Mr. Maffei served in various
capacities with Microsoft Corporation, a software company, most recently as
Senior Vice President, Finance and Administration, and Chief Financial Officer.
He serves on the board of directors of Avenue A, Inc., Expedia, Inc. and
Starbucks Corporation. He holds an M.B.A. from Harvard University Graduate
School of Business and a B.A from Dartmouth College.
Kenneth H. Calhoun has served as Vice President, Product Marketing of ONI
Systems since February 1999 and served as Senior Director, Product Marketing of
ONI Systems from August 1998 to February 1999. He served as Senior Manager,
Account Marketing and Senior Manager, Product Marketing at Nortel Networks
Corporation, a telecommunications company, from March 1997 to August 1998. Mr.
Calhoun served as Senior Manager and Manager, Broadband Product Planning with
Fujitsu Network Communications, Inc. from September 1995 to March 1997. He
holds a Ph.D. in Electrical Engineering and a B.S. in Electrical Engineering
from the Georgia Institute of Technology.
Martin Desroches has served as Vice President, Operations of ONI Systems
since October 1999. Mr. Desroches served as Senior Manager, High Speed Optics
Operations for Nortel Optoelectronics, an optical components company, from
September 1998 to October 1999. He served as Senior Manager and Manager, OC-192
Manufacturing Engineering for Nortel Networks from June 1994 to September 1998.
He holds a B.S. in Electrical Engineering from the University of Sherbrooke.
William S. Jarvis has served as Vice President, Worldwide Sales of ONI
Systems since May 1999. Mr. Jarvis served as Sales Vice President for NEC
America, a telecommunications company, from October 1996 to May 1999 and
Director of Sales for NEC America from January 1995 to January 1996. He holds
an M.B.A. from Santa Clara University and a B.S. in Business Administration
from San Jose State University.
Rohit Sharma founded ONI Systems in our spin-out from Optivision, Inc. and
has served as Vice President, Optical Hardware Development since January 1999.
He served as Chief Architect from April 1998 to January 1999. Prior to the
spin-out, he served as a member of Optivision's technical staff from October
1996 to April 1998. He holds a Ph.D. and a M.Sc. in Electrical Engineering from
the University of Alberta, Canada and a B.Sc. in Electronics and Communications
Engineering from R.E.C. Kurukshetra, India.
Board Composition
Our board currently consists of six members. Each director is elected for a
period of one year at our annual meeting of stockholders and serves until the
next annual meeting or until his successor is duly elected and qualified.
Our bylaws provide that, following this offering, our board of directors
will be divided into three classes as nearly equal in size as possible with
staggered three-year terms. The classification of our board of directors could
have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from acquiring, control of ONI Systems.
Board Committees
Our board of directors has two committees:
Compensation Committee. The current members of our compensation committee
are Messrs. Compton and Feiber. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers. The compensation committee also administers our stock plans.
47
<PAGE>
Audit Committee. The current members of our audit committee are Messrs.
Jordan, Feiber and Maffei. Our audit committee reviews and monitors our
financial statements and accounting practices, makes recommendations to our
board regarding the selection of independent auditors and reviews the results
and scope of the audit and other services provided by our independent auditors.
Members serve on these committees until their resignation or until otherwise
determined by our board.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been an officer or employee of ours. None of our executive officers
currently serves or in the past has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee. Prior to the
creation of our compensation committee, all compensation decisions were made by
our full board.
Director Compensation
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending board
and board committee meetings. The following directors have been granted stock
awards or options to purchase our common shares. In March 1998 and November
1998, we granted stock awards to purchase 360,000 shares and 180,000 shares of
common stock to Mr. Jordan for $0.08 and $0.09 per share, respectively, which
he purchased in full. In November 1999, we granted an option to purchase
180,000 shares of common stock to Mr. Bross at an exercise price of $0.91 per
share. In December 1999, we granted an option to purchase 1,215,834 shares of
common stock to Mr. Martin at an exercise price of $1.25 per share in
connection with his services as President and Chief Executive Officer. In March
2000, we granted an option to purchase 120,000 shares of common stock to Mr.
Maffei at an exercise price of $3.20 per share.
Members of the board who are not employees of ONI Systems, or any parent,
subsidiary or affiliate of ONI Systems, will be eligible to participate in the
2000 Equity Incentive Plan. The option grants under the plan are automatic and
nondiscretionary, and the exercise price of the options is the fair market
value of the common stock on the date of grant.
Each non-employee director who becomes a member of the board on or after the
effective date of the registration statement of which this prospectus forms a
part will be granted an option to purchase 80,000 shares of common stock. Also,
each non-employee director who became a member of the board prior to the
effective date of the registration statement of which this prospectus forms a
part and who did not receive an option grant will receive an option to purchase
80,000 shares. Immediately following each annual meeting of stockholders, each
eligible director will automatically be granted an additional option to
purchase 40,000 shares of common stock if the director has served continuously
as a member of the board since the date of the prior annual meeting. The board
of directors may make discretionary supplemental grants to an eligible director
who has served for less that one year from the date of that director's initial
grant. The options have ten-year terms. They will terminate three months
following the date the director ceases to be a director or a consultant or 12
months following termination due to death or disability. All options granted
under the 2000 Equity Incentive Plan will become exercisable over a four year
period at a rate of 25% after one year and 2.083% per month thereafter so long
as he or she continues as a member of the board or as a consultant. In the
event of our dissolution or liquidation or a change in control transaction,
options granted to directors under the plan will become 100% vested and
exercisable in full.
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<PAGE>
Executive Compensation
The following table presents compensation information for our fiscal year
ended December 31, 1999 paid to or accrued for our Chief Executive Officer and
each of our executive officers whose salary and bonus was more than $100,000.
The compensation table includes long-term awards granted in 1999. The
compensation table excludes other compensation in the form of perquisites and
other personal benefits that constituted less than 10% of the total annual
salary and bonus for the named executive officer in the fiscal year ended
December 31, 1999.
The table includes compensation information for Terrence J. Schmid, our
former Chief Financial Officer and Vice President, Finance and Administration,
who resigned effective April 28, 2000.
The table does not include compensation information for three executive
officers who commenced employment after December 31, 1999. These three officers
would have been among the five most highly compensated executive officers had
they been employees of ONI Systems in 1999. Chris A. Davis, our Executive Vice
President, Chief Financial and Administrative Officer, commenced employment
with ONI Systems on May 1, 2000. Ms. Davis' salary on an annualized basis for
2000 is $400,000, which does not include a $300,000 bonus received upon
commencement of employment. Robert J. Jandro, our Executive Vice President,
Worldwide Sales and Marketing, commenced employment with ONI Systems on March
1, 2000. Mr. Jandro's salary on an annualized basis for 2000 is $295,000, which
does not include a $200,000 bonus payable upon the satisfaction of established
performance goals. Andrew W. Page, our Vice President, Corporate Development,
commenced employment with ONI Systems on February 29, 2000. Mr. Page's salary
on an annualized basis for 2000 is $300,000, which does not include a $30,000
bonus received upon commencement of employment.
Summary Compensation Table for 1999
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
---------------------
Annual
Compensation Restricted Securities
---------------- Stock Underlying
Name and Principal Positions Salary Bonus Awards Options
---------------------------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Hugh C. Martin......................... $270,001 $ -- -- 1,215,834
President and Chief Executive Officer
Terrence J. Schmid..................... 173,335 -- -- 320,000
Chief Financial Officer and Vice
President, Finance and Administration
Hon Wah Chin........................... 182,820 -- -- 200,000
Chief Technology Officer
William R. Cumpston.................... 191,666 85,000 -- 800,000
Senior Vice President, Engineering and
Operations
</TABLE>
49
<PAGE>
Option Grants in 1999
The following table sets forth grants of stock options in 1999 to the
executive officers named in the summary compensation table above.
All options granted generally vest over four years, either:
. at the rate of 25% of the shares subject to the option on the first
anniversary of the date of grant and 2.083% each month thereafter; or
. at the rate 2.083% of the shares subject to the option each month.
Options expire ten years from the date of grant. Options were granted at an
exercise price equal to the fair market value of our common stock, as
determined by the board as of the date of grant.
Estimated values are computed by (a) multiplying the number of shares of
common stock subject to a given option by the assumed initial public offering
price of $15.00 per share, and (b) subtracting from that result the aggregate
option exercise price. Potential realizable values are computed by (a)
multiplying the number of shares of common stock subject to a given option by
the assumed initial public offering price of $15.00 per share, (b) assuming
that the aggregate stock value derived from that calculation compounds at the
annual 5% or 10% rates shown in the table for the entire ten-year term of the
option and (c) subtracting from that result the aggregate option exercise
price. The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.
The percentage of total options granted to employees in 1999 is based on
options to purchase a total of 19,269,998 shares of common stock of ONI Systems
granted to employees during 1999.
Mr. Schmid resigned as our Chief Financial Officer and Vice President,
Finance and Administration effective April 28, 2000.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percentage of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration Estimated ----------------------------
Name Granted in 1999 Per Share Date Value 5% 10%
- ---- ---------- ------------- --------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hugh C. Martin.......... 1,215,834 6.31% $1.25 12/21/09 $16,717,718 $ 28,187,190 $45,783,612
Terrence J. Schmid...... 120,000 0.62 0.09 3/4/09 1,789,200 2,921,210 4,657,936
200,000 1.04 1.25 12/21/09 2,750,000 4,636,684 7,531,227
Hon Wah Chin............ 100,000 0.52 0.09 7/15/09 1,491,000 2,434,342 3,881,614
100,000 0.52 1.25 12/21/09 1,375,000 2,318,342 3,765,614
William R. Cumpston..... 300,000 1.56 0.09 3/4/09 4,473,000 7,303,026 11,644,841
200,000 1.04 0.91 9/15/09 2,818,000 4,704,684 7,599,277
300,000 1.56 1.25 12/21/09 4,125,000 6,955,026 11,296,841
</TABLE>
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<PAGE>
Option Grants in 2000
The following table sets forth grants of stock options to new executive
officers since December 31, 1999:
<TABLE>
<CAPTION>
Potential Realizable Value
Number of at Assumed Annual Rates
Securities Exercise of Stock Price Appreciation
Underlying Price for Option Term
Options Per Expiration Estimated ---------------------------
Name Granted Share Date Value 5% 10%
- ---- ---------- -------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Chris A. Davis (1)...... 1,000,000 $4.00 5/3/10 $11,000,000 $ 20,433,419 $ 34,906,137
Robert J. Jandro........ 900,000 3.20 3/1/10 10,620,000 19,110,077 32,135,523
Andrew W. Page.......... 300,000 3.20 3/1/10 3,540,000 6,370,025 10,711,841
</TABLE>
- --------
(1) We have agreed to grant to Ms. Davis an option to purchase up to 1,000,000
shares of common stock with an exercise price of $4.00 per share, subject
to board approval. However, Ms. Davis can elect alternative compensation
arrangements, as described on page 55.
Aggregated Option Exercises in the Fiscal Year Ended December 31, 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during the fiscal year ended December
31, 1999.
The value realized equals the fair market value of the purchased shares on
the option exercise date, less the exercise price paid for those shares. None
of the individuals named in the table below held any options at December 31,
1999. The shares acquired upon exercise of those options will be subject to
repurchase by ONI Systems, at the original exercise price paid per share, if
the optionee ceases service with ONI Systems before those shares have vested.
Mr. Schmid resigned as our Chief Financial Officer and Vice President,
Finance and Administration effective April 28, 2000.
In March 2000, Mr. Jandro acquired 900,000 shares of common stock on the
exercise of an option and Mr. Page acquired 300,000 shares of common stock on
the exercise of an option. Neither Mr. Jandro or Mr. Page had any value
realized on their respective option grants. As of May 2, 2000, Ms. Davis had
not exercised any options.
<TABLE>
<CAPTION>
Number of
Shares
Acquired on Value
Name Exercise Realized
---- ----------- --------
<S> <C> <C>
Hugh C. Martin........................................ 1,215,834 $ --
Terrence J. Schmid.................................... 320,000 98,400
Hon Wah Chin.......................................... 200,000 82,000
William R. Cumpston................................... 1,300,000 656,000
</TABLE>
Employee Benefit Plans
1997 Stock Option Plan. As of March 31, 2000, options to purchase 318,088
shares of common stock were outstanding under our 1997 Stock Option Plan. The
options outstanding as of March 31, 2000 had a weighted average exercise price
of $0.03 per share. The board of directors terminated this plan in April 1998,
and no options have been granted under it since that time. Termination did not
affect any outstanding options, all of which will remain outstanding and
subject to the terms of our 1997 Stock Option Plan and stock option agreement
until exercise or until they terminate or expire by their terms. Options
granted under our 1997 Stock Option Plan are subject to terms substantially
similar to those described below with respect to options granted under our 2000
Equity Incentive Plan.
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1998 Equity Incentive Plan. As of March 31, 2000, options to purchase
18,039,257 shares of common stock were outstanding under our 1998 Equity
Incentive Plan and 1,029,653 shares of common stock remained available for
issuance upon the exercise of options that may be granted in the future. The
options outstanding as of March 31, 2000 had a weighted average exercise price
of $0.63 per share. Our 1998 Equity Incentive Plan will terminate upon this
offering, at which time our 2000 Equity Incentive Plan will become effective.
As a result, no options will be granted under our 1998 Equity Incentive Plan
after this offering. However, termination will not affect any outstanding
options under our 1998 Equity Incentive Plan, all of which will remain
outstanding and subject to the terms of our 1998 Equity Incentive Plan and
stock option agreement until exercise or until they terminate or expire by
their terms. Options granted under our 1998 Equity Incentive Plan are subject
to terms substantially similar to those described below with respect to options
granted under our 2000 Equity Incentive Plan.
1999 Equity Incentive Plan. As of March 31, 2000, options to purchase
986,000 shares of common stock were outstanding under our 1999 Equity Incentive
Plan and 348,166 shares of common stock remained available for issuance upon
the exercise of options that may be granted in the future. The options
outstanding as of March 31, 2000 had a weighted average exercise price of $0.96
per share. Our 1999 Equity Incentive Plan will terminate upon this offering, at
which time our 2000 Equity Incentive Plan will become effective. As a result,
no options will be granted under our 1999 Equity Incentive Plan after this
offering. However, termination will not affect any outstanding options under
our 1999 Equity Incentive Plan, all of which will remain outstanding and
subject to the terms of our 1999 Equity Incentive Plan and stock option
agreement until exercise or until they terminate or expire by their terms.
Options granted under our 1999 Equity Incentive Plan are subject to terms
substantially similar to those described below with respect to options granted
under our 2000 Equity Incentive Plan.
2000 Equity Incentive Plan. Our 2000 Equity Incentive Plan will become
effective on the date of this prospectus and will serve as the successor to our
1998 Equity Incentive Plan and our 1999 Equity Incentive Plan. We have reserved
7,000,000 shares of common stock to be issued under this plan. In addition,
shares under our 1997 Stock Option Plan, 1998 Equity Incentive Plan and 1999
Equity Incentive Plan not issued or subject to outstanding grants on the date
of this prospectus and any shares issued under these plans that are forfeited
or repurchased by us or that are issuable upon exercise of options that become
unexercisable for any reason without having been exercised in full will be
available for grant and issuance under our 2000 Equity Incentive Plan. Shares
will again be available for grant and issuance under our 2000 Equity Incentive
Plan that:
. are subject to issuance upon exercise of an option granted under our 2000
Equity Incentive Plan that cease to be subject to the option for any
reason other than exercise of the option;
. have been issued upon the exercise of an option granted under our 2000
Equity Incentive Plan that are subsequently forfeited or repurchased by
us at the original purchase price;
. are subject to an award granted under a restricted stock purchase
agreement under our 2000 Equity Incentive Plan that are subsequently
forfeited or repurchased by us at the original issue price; or
. are subject to a stock bonus granted under our 2000 Equity Incentive Plan
that terminates without shares being issued.
On each January 1, the aggregate number of shares reserved for issuance
under our 2000 Equity Incentive Plan will increase automatically by a number of
shares equal to 5% of our outstanding shares on December 31 of the preceding
year. Our board of directors or compensation committee may reduce the amount of
the increase in any particular year.
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Our 2000 Equity Incentive Plan will terminate after ten years from the date
our board of directors approved the plan, unless it is terminated earlier by
our board of directors. The plan authorizes the award of options, restricted
stock awards and stock bonuses. No person is eligible to receive more than
1,000,000 shares in any calendar year under the plan other than a new employee
of ONI Systems, who will be eligible to receive no more than 2,000,000 shares
in the calendar year in which the employee commences employment.
Our 2000 Equity Incentive Plan will be administered by our compensation
committee, all of the members of which are non-employee directors under
applicable federal securities laws and outside directors as defined under
applicable federal tax laws. The compensation committee will have the authority
to construe and interpret the plan, grant awards and make all other
determinations necessary or advisable for the administration of the plan. Also,
our non-employee directors are entitled to receive automatic annual grants of
options to purchase shares of our common stock, as described under
"Management--Director Compensation".
Our 2000 Equity Incentive Plan will provide for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees of ONI Systems or of a parent or subsidiary of ONI Systems. All other
awards other than incentive stock options may be granted to employees,
officers, directors and consultants of ONI Systems or any parent or subsidiary
of ONI Systems, provided the consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. The exercise price of incentive stock options must be at least
equal to the fair market value of our common stock on the date of grant. The
exercise price of incentive stock options granted to 10% stockholders must be
at least equal to 110% of that value. The exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of our common
stock on the date of grant.
Options may be exercised only as they vest or may be immediately exercisable
with the shares issued subject to our right of repurchase that lapses as the
shares vest. In general, options will vest over a four-year period. The maximum
term of options granted under our 2000 Equity Incentive Plan is ten years.
Awards granted under our 2000 Equity Incentive Plan may not be transferred
in any manner other than by will or by the laws of descent and distribution.
They may be exercised during the lifetime of the optionee only by the optionee.
The compensation committee may determine otherwise and provide for these
provisions in the award agreement, but only with respect to awards that are not
incentive stock options. Options granted under our 2000 Equity Incentive Plan
generally may be exercised for a period of three months after the termination
of the optionee's service to ONI Systems or a parent or subsidiary of ONI
Systems. Options will generally terminate immediately upon termination of
employment for cause.
The purchase price for restricted stock will be determined by our
compensation committee. Stock bonuses may be issued for past services or may be
awarded upon the completion of stated services or performance goals.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
will become effective on the first day on which price quotations are available
for our common stock on the Nasdaq National Market. We have initially reserved
1,000,000 shares of common stock under this plan. On each January 1, the
aggregate number of shares reserved for issuance under our 2000 Employee Stock
Purchase Plan will increase automatically by a number of shares equal to 1% of
our outstanding shares on December 31 of the preceding year. Our board of
directors or compensation committee may reduce the amount of the increase in
any particular year. The aggregate number of shares reserved for issuance under
our 2000 Employee Stock Purchase Plan may not exceed 10,000,000 shares.
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Our 2000 Employee Stock Purchase Plan will be administered by our
compensation committee. Our compensation committee will have the authority to
construe and interpret the plan, and its decisions will be final and binding.
Employees generally will be eligible to participate in our 2000 Employee
Stock Purchase Plan if they are employed before the beginning of the applicable
offering period and they are customarily employed by us, or our parent or any
subsidiaries that we designate, for more than 20 hours per week and more than
five months in a calendar year and are not, and would not become as a result of
being granted an option under the plan, 5% stockholders of us or our designated
parent or subsidiaries. Participation in our 2000 Employee Stock Purchase Plan
will end automatically upon termination of employment for any reason.
Under our 2000 Employee Stock Purchase Plan, eligible employees will be
permitted to acquire shares of our common stock through payroll deductions.
Eligible employees may select a rate of payroll deduction between 1% and 15% of
their compensation and are subject to maximum purchase limitations.
Except for the first offering period, each offering period under our 2000
Employee Stock Purchase Plan will be for two years and consist of four six-
month purchase periods. Offering periods and purchase periods will begin on
February 1 and August 1 of each year. The first offering period is expected to
begin on the first business day on which price quotations for common stock are
available on the Nasdaq National Market. However, because the first day on
which price quotations for our common stock will be available on the Nasdaq
National Market may not be February 1 or August 1, the length of the first
offering period may be more or less than two years, and the length of the first
purchase period may be more or less than six months.
Our 2000 Employee Stock Purchase Plan provides that, in the event of our
proposed dissolution or liquidation, each offering period that commenced prior
to the closing of the proposed event will continue for the duration of the
offering period, provided that the compensation committee may fix a different
date for termination of the plan. The purchase price for common stock purchased
under the plan will be 85% of the lesser of the fair market value of our common
stock on the first day of the applicable offering period or the last day of the
applicable purchase period. The compensation committee will have the power to
change the offering dates, purchase dates and duration of offering periods
without stockholder approval, if the change is announced prior to the beginning
of the affected date or offering period.
Our 2000 Employee Stock Purchase Plan is intended to qualify as an employee
stock purchase plan under Section 423 of the Internal Revenue Code. The plan
will terminate ten years from the date the plan was adopted by our board of
directors, unless it is terminated earlier under the terms of the plan. The
board of directors will have the authority to amend, terminate or extend the
term of the plan, except that no action may adversely affect any outstanding
options previously granted under the plan.
Except for the automatic annual increase of shares described above,
stockholder approval will be required to increase the number of shares that may
be issued or to change the terms of eligibility under our 2000 Employee Stock
Purchase Plan. The board of directors will be able to make amendments to the
plan as it determines to be advisable if the financial accounting treatment for
the plan is different from the financial accounting treatment in effect on the
date the plan was adopted by the board of directors.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees who
are at least 21 years old are generally eligible to participate. Participants
may make pre-tax contributions to the plan of up to 15% of their
54
<PAGE>
eligible earnings, subject to a statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. There are no matching contributions under the plan. Contributions by
the participants to the plan, and the income earned on these contributions, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Employment-Related Agreements
Hugh C. Martin. In January 1998, we entered into an at-will employment
agreement with Mr. Martin. Mr. Martin initially received a base salary of
$200,000 per year. Mr. Martin's current salary is $280,000 per year. He is also
eligible to receive an annual performance bonus of up to 25% of his salary,
which was guaranteed at $50,000 in 1998. In addition, we granted Mr. Martin a
stock award to purchase 8.5% of our total capital stock, subject to vesting
requirements. We also granted Mr. Martin a stock award to purchase 1.5% of our
total capital stock, which vested according to attainment of 1998 and 1999
milestones. In the event of a change in control of ONI Systems, 50% of the
then-unvested shares subject to Mr. Martin's stock award will become fully
vested.
Terrence J. Schmid. In February 1998, we entered into an at-will employment
agreement with Mr. Schmid. Mr. Schmid resigned as our Chief Financial Officer
and Vice President, Finance and Administration effective April 28, 2000. Mr.
Schmid initially received a base salary of $140,000 per year. He was eligible
to receive an annual performance bonus of up to 15% of his base salary, which
was guaranteed at $20,000 in 1998. In connection with this agreement, Mr.
Schmid purchased 533,332 shares of common stock, subject to vesting
requirements.
In March 2000, we entered into a separation agreement with Mr. Schmid in
connection with his resignation. Under the terms of this agreement, we agreed
to make a severance payment of $90,000 which was equal to six months of Mr.
Schmid's final salary. We also agreed to waive our repurchase rights with
respect to up to 106,662 shares of common stock.
Chris A. Davis. In April 2000, we entered into an at-will employment
agreement with Ms. Davis. Ms. Davis' initial and current salary is $400,000 per
year. She received a signing bonus of $300,000. We also agreed to allow Ms.
Davis to choose any one of these three alternatives:
. an option to purchase 1,100,000 shares of common stock at an exercise
price per share equal to the fair market value of common stock on the
date of grant;
. an option to purchase 1,000,000 shares of common stock at an exercise
price per share of $4.00; or
. an option to purchase 1,000,000 shares of common stock at an exercise
price per share equal to the fair market value of common stock on the
date of grant together with loan forgiveness in an amount up to
$2,125,000 per year for four years if Ms. Davis chooses to exercise this
option immediately with a promissory note.
She has informed us that she has chosen the second alternative. Her option will
be subject to vesting. Ms. Davis will be permitted to pay for the exercise of
these options with a promissory note. In the event of a change of control of
ONI Systems and an involuntary or constructive termination without cause of Ms.
Davis' employment with us or our successor, 50% of the then-unvested shares
subject to Ms. Davis' stock option will become fully vested.
We have also agreed to loan, or guaranty a loan, of up to $3.0 million for
the purchase of a principal residence by Ms. Davis. The loan will be secured by
the residence and have a term of one year at an interest rate equal to the
lowest legal rate. The loan must be repaid within 90 days of the termination of
her employment.
55
<PAGE>
If we terminate Ms. Davis' employment without cause, she will be entitled to
receive six months of her then-current salary, benefits and vesting of options.
She will receive at least six months vesting if her employment is terminated
within the first year of her employment.
Hon Wah Chin. In June 1998, we entered into an at-will employment agreement
with Mr. Chin. Mr. Chin initially received a base salary of $160,000 per year.
Mr. Chin's current salary is $200,000 per year. He is also eligible to receive
an annual performance bonus, which was guaranteed at $40,000 in 1998. In
addition, we granted Mr. Chin a stock award to purchase 674,000 shares of
common stock, subject to vesting requirements. In the event of a change in
control of ONI Systems, 50% of the then-unvested shares subject to Mr. Chin's
stock award and 50% of any other then unvested securities granted to Mr. Chin
by us will become fully vested.
If we terminate Mr. Chin's employment without cause, he will be entitled to
receive six months of his then-current salary, benefits and vesting of options.
William R. Cumpston. In August 1998, we entered into an at-will employment
agreement with Mr. Cumpston. Mr. Cumpston initially received a base salary of
$175,000 per year. Mr. Cumpston's current salary is $225,000 per year. He also
received a signing bonus of $45,000 and is eligible to receive an annual
performance bonus of at least $40,000. In addition, we granted Mr. Cumpston an
option to purchase 500,000 shares of common stock, subject to vesting
requirements.
Michael A. Dillon. In October 1999, we entered into an at-will employment
agreement with Mr. Dillon. Mr. Dillon's initial and current salary is $200,000
per year. In addition, Mr. Dillon received a signing bonus of $50,000 and we
granted Mr. Dillon an option to purchase 300,000 shares of our common stock,
subject to vesting requirements. We also granted Mr. Dillon an option to
purchase an additional 20,000 shares of common stock, which is not subject to
any vesting requirements. In the event of a change in control of ONI Systems,
25% of the then-unvested shares subject to Mr. Dillon's stock option and 25% of
the then-unvested shares of any other securities granted to Mr. Dillon by us
will become fully vested.
If we terminate Mr. Dillon's employment without cause during his first 12
months of employment, he will be entitled to receive six months of his then-
current salary, benefits and vesting of options.
Robert J. Jandro. In February 2000, we entered into an at-will employment
agreement with Mr. Jandro. Mr. Jandro's initial and current salary is $295,000
per year. He is also eligible to receive an incentive bonus of up to $200,000.
We also granted Mr. Jandro an option to purchase 900,000 shares of common
stock, subject to vesting requirements. In the event of a change in control of
ONI Systems, 25% of the then-unvested shares subject to Mr. Jandro's stock
option and 25% of the then-unvested shares of any other securities granted to
Mr. Jandro by us will become fully vested.
If we terminate Mr. Jandro's employment without cause during his first 12
months of employment, he will be entitled to receive six months of his base
salary.
Andrew W. Page. In February 2000, we entered into an at-will employment
agreement with Mr. Page. Mr. Page's initial and current salary is $300,000 per
year. He also received a signing bonus of $30,000, and we granted him an option
to purchase 300,000 shares of common stock, subject to vesting requirements. In
the event of a change in control of ONI Systems, 50% of the then-unvested
shares subject to Mr. Page's stock option and 50% of the then-unvested shares
of any other securities granted to Mr. Page by us will become fully vested.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our certificate of incorporation and bylaws provide that a director shall
not be personally liable for monetary damages resulting from breach of his
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
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<PAGE>
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law;
. we may indemnify our employees and agents as set forth in the Delaware
General Corporation Law, subject to very limited exceptions;
. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding;
. we may advance expenses, as incurred, to our employees and agents in
connection with a legal proceeding; and
. the rights conferred in the bylaws are not exclusive.
In addition to the indemnification required in our certificate of
incorporation and bylaws, before the completion of this offering, we entered
into indemnity agreements with each of our current directors and executive
officers. These agreements provide for the indemnification of our officers and
directors for all expenses and liabilities incurred in connection with any
action or proceeding brought against them by reason of the fact that they are
or were our agents. We also intend to obtain directors' and officers' insurance
to cover our directors, officers and some of our employees for liabilities,
including liabilities under securities laws. We believe that these
indemnification provisions and agreements and this insurance are necessary to
attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against
directors and officers as required by these indemnification provisions. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification by us is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management", and the transactions described below,
since we were formed, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000; and
. in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
Optivision Spin-Out
In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In exchange for assets related
to the optical development business and related liabilities, Optivision
received 11,565,752 shares of our common stock and 8,000,000 shares of our
Series A preferred stock. In addition to the shares of capital stock delivered
to Optivision, we executed and delivered a $90,000 promissory note in favor of
Optivision that was subsequently cancelled by Optivision upon payment.
In December 1997, we were spun out of Optivision and Optivision distributed
some of its holdings of our common stock and preferred stock to Optivision
shareholders. Holders of Optivision common stock and Series A preferred stock
received one share of our common stock for every share of Optivision common
stock or Series A preferred stock held, for an aggregate of 11,565,752 shares.
Holders of Optivision Series B preferred stock received one share of our Series
A preferred stock for every share of Optivision Series B preferred stock held,
for an aggregate of 4,000,000 shares. Optivision also retained 4,000,000 shares
of our Series A preferred stock. In January 1998, all of the shares of our
Series A preferred stock were converted into Series B preferred stock on a one-
for-one basis.
In connection with the spin-out, we have reserved, and are obligated to
issue for no additional consideration, shares of our common stock upon the
exercise of the warrants to purchase capital stock of Optivision. In October
1997, ADC Telecommunications, Inc., a holder of Optivision Series B preferred
stock, entered into an agreement with Optivision that granted ADC registration,
information and other rights related to the Series A preferred stock
distributed to ADC as part of the spin-out. These rights were amended upon
conversion of its Series A preferred stock to Series B preferred stock.
In January 1998, as a condition to the closing of our Series B and C
financings, we entered into agreements with Optivision granting us certain
additional assets, related liabilities and a license to technology and
assigning technology to us. In July 1998, we completed an agreement with
Optivision, under which it transferred contracts between the United States
government and Optivision to us.
In January 1998, Optivision sold 2,666,667 shares of our Series B preferred
stock to Kleiner Perkins Caufield & Byers and its affiliates and Mohr, Davidow
Ventures and its affiliates, for an aggregate purchase price of $2.0 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 $1.0 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 with related parties as follows:
. from December 1997 to March 1998, we sold 18,128,843 shares of Series B
preferred stock for approximately $0.24 per share, issued 8,000,000
shares of Series B preferred stock upon conversion of all outstanding
shares of Series A preferred stock and repurchased 1,333,333 shares of
Series B preferred stock;
. from December 1997 to March 1998, we sold 2,733,332 shares of Series C
preferred stock for approximately $0.75 per share;
. in April 1998, we sold 4,969,148 shares of Series D preferred stock for
approximately $0.88 per share;
. from December 1998 to May 1999, we sold 26,284,024 shares of Series E
preferred stock for approximately $0.91 per share;
. in September 1999, we sold 8,249,468 shares of Series F preferred stock
for approximately $1.82 per share; and
. from December 1999 to March 2000, we sold 12,163,418 shares of Series G
preferred stock for approximately $6.32 per share.
Purchasers of our preferred stock include, among others, the following
executive officers, directors and holders of more than 5% of our outstanding
stock or entities affiliated with them. The following table presents the number
of shares and price per share for each of these purchasers. The number of total
shares on an as-converted basis reflects a one-to-one conversion to common
stock ratio for each share of Series B, Series C, Series D, Series E, Series F
and Series G preferred stock. Mr. Compton, a director of ONI Systems, is also a
general partner of Kleiner Perkins Caufield & Byers. Mr. Compton disclaims
beneficial ownership of shares held by Kleiner Perkins and affiliates except to
the extent of his interest in Kleiner Perkins and affiliates. Mr. Feiber, a
director of ONI Systems, is also a general partner of Mohr, Davidow Ventures.
Mr. Feiber disclaims beneficial ownership of shares held by Mohr, Davidow
Ventures and affiliates except to the extent of his interest in Mohr, Davidow
Ventures and affiliates. The shares held by Williams Communications, Inc.
include 142,460 shares of Series G preferred stock held by Mr. Bross. Mr. Bross
is a director of ONI Systems and serves as Senior Vice President and Chief
Technology Officer of Williams Communications. Mr. Bross disclaims beneficial
ownership of shares held by Williams Communications and Williams Communications
disclaims benefical ownership of the shares held by Mr. Bross.
<TABLE>
<CAPTION>
Total
Series B Series C Series E Series F Series G Common Stock
Purchaser Preferred Preferred Preferred Preferred Preferred Equivalent
--------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield
& Byers and affiliates
(Kevin R. Compton)..... 9,824,680 666,666 1,917,808 1,256,668 -- 13,665,822
Mohr, Davidow Ventures
and affiliates
(Jonathan D. Feiber)... 9,824,680 666,666 1,917,808 1,256,668 1,266,322 14,932,144
Hon Wah Chin............ -- -- 44,000 33,000 8,000 85,000
Michael A. Dillon....... -- -- -- -- 4,000 4,000
Andrew W. Page.......... -- -- -- -- 150,000 150,000
Williams Communications
(Mathew W. Bross)...... -- -- -- -- 1,725,364 1,725,364
James F. Jordan......... -- 1,333,334 -- -- -- 1,333,334
Gregory B. Maffei....... 160,000 160,000
Price per share......... $0.24 $0.75 $0.91 $1.82 $6.32
</TABLE>
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Registration Rights
We have entered into an investors' rights agreement with each of the
purchasers of preferred stock set forth above. Under this agreement, these and
other stockholders are entitled to registration rights with respect to their
shares of common stock issuable upon conversion of their preferred stock upon
the closing of this offering. Following this offering, holders of 81,638,691
shares of our common stock will be entitled to registration rights with respect
to the shares of common stock, based on an assumed private placement price of
$15.00 per share. See "Description of Capital Stock--Registration Rights".
Loans to Executive Officers and Directors in Connection with Exercise of
Options
In connection with the option exercises described under "Management--
Director Compensation" and "Management--Executive Compensation", the following
executive officers and directors delivered promissory notes, each with a five-
year term, in the amounts and bearing interest as indicated below:
In December 1999, we made a loan to Hugh C. Martin, our Chairman, President
and Chief Executive Officer, in connection with his exercise of an option to
acquire 1,215,834 shares of common stock, for an aggregate purchase price of
$1,519,793. The loan is evidenced by a promissory note in the principal amount
of $1,519,793, with interest compounded annually on the unpaid balance at a
rate of 6.20% per year.
In November and December 1999, we made two loans to Terrence J. Schmid, our
former 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
60
<PAGE>
February 2000, we made another loan to Mr. Dillon in connection with his
exercise of an option to acquire 70,000 shares of common stock. The loan is
evidenced by a promissory note in the principal amount of $87,500, with
interest compounded annually at a rate of 6.56% per year.
In March 2000, we made a loan to Robert J. Jandro, our Executive Vice
President, Worldwide Sales and Marketing, in connection with his exercise of an
option to acquire 900,000 shares of common stock, for a purchase price of
$2,880,000. The loan is evidenced by a promissory note in the principal amount
of $2,880,000, with interest compounded annually on the unpaid balance at a
rate of 6.80% per year.
In March 2000, we made a loan to Andrew W. Page, our Vice President,
Corporate Development, in connection with his exercise of an option to acquire
300,000 shares of common stock for a purchase price of $960,000. The loan is
evidenced by a promissory note in the principal amount of $960,000, with
interest compounded annually on the unpaid balance at a rate of 6.80% per year.
Sales of Restricted Common Stock and Any Related Loans to Executive Officers
and Directors
We made the following additional sales of securities to executive officers
and directors. Unless otherwise noted:
. shares vest over a four-year period and we have a repurchase option for
unvested shares;
. in the event of a change of control of ONI Systems, our repurchase
option will lapse as to 50% of the then-unvested shares; and
. the associated promissory notes have five-year terms.
In January 1998, Hugh C. Martin, our Chairman, President and Chief Executive
Officer, purchased 4,066,540 shares of common stock for $0.005 per share. Mr.
Martin paid for the shares with a promissory note in the principal amount of
$19,696 with interest compounded annually on the unpaid balance at a rate of
6.13% per year due on the earlier of ten years from issuance or 180 days
following termination of employment.
In January 1998, Hugh C. Martin purchased 717,624 shares of common stock for
$0.005 per share. Mr. Martin paid for the shares with a promissory note in the
principal amount of $3,476 with interest compounded annually on the unpaid
balance at a rate of 6.13% per year due on the earlier of ten years from
issuance or 180 days following termination of employment. The shares under the
agreement vest based on achievement of 1998 milestones and 1999 milestones. The
milestones were achieved and our repurchase option has lapsed.
In February 1998, Terrence J. Schmid, our former Chief Financial Officer and
Vice President, Finance and Administration, purchased 533,332 shares of our
common stock for $0.08 per share. Mr. Schmid paid for the shares with a
promissory note in the principal amount of $40,000 with interest compounded
annually on the unpaid balance at a rate of 5.93% per year due on the earlier
of ten years from issuance or 210 days following this offering.
In November 1998, Hon Wah Chin, our Chief Technical Officer, purchased
674,000 shares for $0.09 per share. Mr. Chin paid for the shares with a
promissory note in the principal amount of $59,413 with interest compounded
semi-annually on the unpaid balance at a rate of 4.46% per year.
In December 1999, Michael A. Dillon, our Vice President, General Counsel and
Secretary, purchased 20,000 shares for $0.91 per share. Mr. Dillon paid for the
shares with a promissory note in the principal amount of $18,200 with interest
compounded annually on the unpaid balance at a rate of 6.20% per year. We have
no repurchase right for these shares.
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<PAGE>
Persons or Entities Related to Our Officers and Directors
In addition to the sales of securities previously described, we have entered
into agreements with affiliates of our officers and directors.
Williams Communications, Inc. is a stockholder of ONI Systems. Mathew W.
Bross, one of our directors, serves as Senior Vice President and Chief
Technology Officer of Williams Communications, Inc. In March 2000, we entered
into a purchase and license agreement with Williams Communications. In December
1999, we also executed a redemption and repurchase agreement with Williams
Communications, which provides us with the right to repurchase at $6.32 per
share the shares of Series G preferred stock owned by Williams Communications,
which are convertible into 1,582,904 shares of common stock, and provided
Williams Communications with the right to require us to redeem the shares held
by it at $8.50 per share, which right lapsed upon completion of lab trials for
our ONLINE9000 product in March 2000.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
common stock as of March 31, 2000 and as adjusted to reflect the sale of common
stock in this offering by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of March 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address for each listed
stockholder is c/o ONI Systems Corp., 166 Baypointe Parkway, San Jose,
California 95134-1621.
The percentage of common stock outstanding as of March 31, 2000 is based on
114,138,775 shares of common stock outstanding on that date, assuming that all
outstanding preferred stock has been converted into common stock. The
percentage of common stock outstanding following this offering is based on
124,688,270 shares of common stock outstanding assuming an initial public
offering price of $15.00 per share.
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares
Beneficially Owned
---------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------ ------------------ --------- ---------
<S> <C> <C> <C>
Jonathan D. Feiber (1)............ 14,932,144 13.1 12.0
Mohr, Davidow Ventures and
affiliates
Kevin R. Compton (2).............. 13,665,822 12.0 11.0
Kleiner Perkins Caufield & Byers
and affiliates
Hugh C. Martin (3)................ 5,999,998 5.3 4.8
Matthew W. Bross (4).............. 1,905,364 1.7 1.5
Williams Communications, Inc.
James F. Jordan (5)............... 1,873,334 1.6 1.5
William R. Cumpston (6)........... 1,252,000 1.1 1.0
Hon Wah Chin (7).................. 954,000 * *
Terrence J. Schmid (8)............ 277,050 * *
Gregory B. Maffei (9)............. 280,000 * *
All executive officers and
directors
as a group (12 persons) (10)..... 42,606,662 37.3 34.2
</TABLE>
- --------
* Represents beneficial ownership of less than 1%
(1) Represents 12,709,218 shares held by held by Mohr, Davidow Ventures V,
L.P., 1,266,322 shares held by Mohr, Davidow Ventures V-L, L.P. and
956,604 shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. and the shares represented exclude 346,348 shares held
by the Mohr Family Trust UTA dated 8/5/1985, 10,000 shares held by the
Sarah H. Mohr Trust UTA dated 9/19/97, and 10,000 shares held by the Hope
A. Mohr Trust
63
<PAGE>
UTA dated 9/19/97. Mohr, Davidow Ventures disclaims beneficial ownership
of the shares held by the Mohr Family Trust, the Sarah H. Mohr Trust and
the Hope A. Mohr Trust and these trusts disclaim beneficial ownership of
the shares held by the Mohr, Davidow Ventures entities. Jonathan
D. Feiber, a director of ONI Systems, is also a general partner of Mohr,
Davidow Ventures. Mr. Feiber disclaims beneficial ownership of shares held
by Mohr, Davidow Ventures and affiliates except to the extent of his
interest in Mohr, Davidow Ventures and affiliates. The address of Mohr,
Davidow Ventures and Mr. Feiber is 2775 Sand Hill Road, Suite 240,
Menlo Park, California 94025.
(2) Represents 12,709,828 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P., 614,350 shares held by KPCB VIII Founders Fund and 341,644
shares held by KPCB Information Sciences Zaibatsu Fund II. Kevin R.
Compton, a director of ONI Systems, is also a general partner of Kleiner
Perkins Caufield & Byers. Mr. Compton disclaims beneficial ownership of
shares held by KPCB and affiliates except to the extent of his interest
in KPCB and affiliates. The address of Kleiner Perkins Caulfield & Byers
and Mr. Compton is 2750 Sand Hill Road, Menlo Park, California 94025.
(3) Represents 5,886,998 shares held by Mr. Martin, 45,000 shares held by the
Hugh C. Martin 2000 Grantor Retained Annuity Trust under agreement dated
March 23, 2000, 45,000 shares held by the Moira C. Martin 2000 Grantor
Retained Annuity Trust under agreement dated March 23, 2000 and 3,000
shares held by The Martin Family 2000 Irrevocable Trust under agreement
dated March 23, 2000. Includes 1,863,831 shares subject to a repurchase
right that lapses at a rate of 84,719 shares per month until January
2002. Includes 1,139,844 shares subject to a repurchase right that lapses
at a rate of 25,329 shares per month until December 2003.
(4) Represents 142,460 shares held by Matthew W. Bross Revocable Trust and
1,582,904 shares held by Williams Communications, Inc. Mr. Bross serves
as Senior Vice President and Chief Technology Officer of Williams
Communications and disclaims beneficial ownership of shares held by it.
Includes 180,000 shares subject to a repurchase right that lapses as to
45,000 shares in November 2000 and lapses at a rate of 3,750 shares per
month thereafter until November 2003.
(5) Includes 180,000 shares held by Mr. Jordan subject to a repurchase right
that lapses at a rate of 7,500 shares per month until March 2002.
Includes 90,000 shares subject to a repurchase right that lapses at a
rate of 5,000 shares per month until October 2001.
(6) Represents 1,190,000 shares held by Mr. Cumpston, 30,000 shares held by
the William R. Cumpston 2000 Grantor Annuity Trust under agreement dated
February 21, 2000, 30,000 shares held by Christine S. Cumpston 2000
Grantor Annuity Trust under agreement dated February 21, 2000 and 2,000
shares held by The Cumpston Children's 2000 Trust under agreement dated
February 21, 2000. Includes 312,500 shares subject to a repurchase right
that lapses at a rate of 10,416 shares per month until September 2002.
Includes 212,500 shares subject to a repurchase right that lapses at a
rate of 6,250 shares per month until January 2003. Includes 200,000
shares subject to a repurchase right that lapses as to 50,000 shares in
September 2000 and lapses at a rate of 4,166 shares per month until
September 2003. Includes 281,250 shares subject to a repurchase right
that lapses at a rate of 6,250 shares per month until December 2003.
(7) Includes 379,125 shares held by Mr. Chin subject to a repurchase right
that lapses at a rate of 14,041 shares per month until June 2002.
Includes 100,000 shares subject to a repurchase right that lapses as to
25,000 shares in July 2000 and lapses at a rate of 2,083 shares per month
thereafter until July 2003. Includes 93,750 shares subject to a
repurchase right that lapses at a rate of 2,083 shares per month until
December 2003.
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<PAGE>
(8) Reflects our repurchase on April 28, 2000 of all unvested shares of common
stock held by Mr. Schmid.
(9) Includes 120,000 shares held by Mr. Maffei subject to a repurchase right
that lapses as to 40,000 shares in March 2001 and lapses at a rate of
3,333 shares per month thereafter until March 2003.
(10) Includes shares held by entities affiliated with directors as described in
notes 1, 2 and 4 and shares issuable upon exercise of options exercisable
within 60 days of March 31, 2000. Excludes 1,000,000 shares subject to an
option which we have agreed to grant to Chris A. Davis, our Executive Vice
President, Chief Financial and Administrative Officer. See the description
of our employment agreement with her on page 55. Also excludes shares held
by Mr. Schmid, our former Chief Financial Officer and Vice President,
Finance and Administration.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of:
. 700,000,000 shares of common stock, $0.0001 par value per share; and
. 10,000,000 shares of preferred stock, $0.0001 par value per share.
As of March 31, 2000, and assuming the conversion of all outstanding
preferred stock into common stock, there were outstanding:
. 114,138,775 shares of common stock held by approximately 480
stockholders, of which 10,096,968 shares were subject to our right of
repurchase;
. options to purchase 19,343,345 shares of common stock; and
. warrants to purchase 1,434,394 shares of common stock.
The number of shares of common stock outstanding as of March 31, 2000 does
not include:
. 1,616,161 shares of common stock into which the shares of Series H
preferred stock issuable to Sun Microsystems will automatically convert
upon completion of this offering, based on an assumed public offering
price of $15.00 per share;
. 266,667 shares of common stock issuable to Internet Initiative Japan upon
the closing of a private placement, concurrent with this offering, based
on an assumed private placement price of $15.00 per share; and
. 666,667 shares of common stock issuable to CCT Telecom upon the closing
of a private placement, concurrent with this offering, based on an
assumed private placement price of $15.00 per share.
Common Stock
Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts that our board of directors may determine.
Voting rights. Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation. In addition, our certificate of incorporation and
bylaws require the approval of two-thirds, rather than a majority, of the
shares entitled to vote for certain matters. For a description of these
matters, see "--Anti-Takeover Provisions".
Cisco Systems, Inc., a holder of preferred stock that will convert into
4,969,148 shares of common stock upon the closing of this offering, is subject
to voting restrictions that provide that Cisco and its affiliates must vote, in
certain transactions, all shares owned by them in the same proportion as other
shares voted in the same class in a class vote, or in the same proportion as
all shares voted in a vote in which common stock and preferred stock vote
together as a single class. These transactions include mergers,
reorganizations, ONI Systems being acquired, or an underwritten public offering
of our securities. In addition, Cisco may not exercise any dissenter's or
appraisal rights. These restrictions have no termination date.
No preemptive or similar rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of ONI Systems, the holders of our common stock are entitled to
share ratably among themselves in all assets remaining after payment of all
liabilities and the liquidation preferences of any outstanding preferred stock.
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<PAGE>
Preferred Stock
Upon the closing of this offering, each outstanding share of our preferred
stock will be converted into shares of common stock. See notes 9 and 13 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 that series then outstanding,
without any further vote or action by the stockholders. Our board of directors
may authorize the issuance of preferred stock with voting or conversion rights
that could adversely affect the voting power or other rights of the holders of
the common stock. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of ONI Systems and might adversely affect the market price of
our common stock and the voting and other rights of the holders of common
stock. We have no current plan to issue any shares of preferred stock.
Warrants
Warrants to purchase 1,434,394 shares of common stock were outstanding as of
March 31, 2000. All warrants to purchase preferred stock will automatically
convert into warrants to purchase a like number of shares of common stock upon
the closing of this offering.
In December 1999, we issued to a customer a warrant to purchase 500,000
shares of common stock at an exercise price of $0.91 per share. If not sooner
exercised, this warrant will remain outstanding until six years from the date
of the warrant agreement.
In February 1999, we issued to an equipment finance company warrants to
purchase 277,926 shares of Series B preferred stock at an exercise price of
$0.88 per share. If not sooner exercised, these warrants will remain
outstanding for the lesser of five years after the completion of this offering
or ten years from the date of the warrant agreements.
In February 2000, we issued to a customer a warrant to purchase 223,000
shares of common stock at an exercise price of $0.91 per share. If not sooner
exercised, this warrant will remain outstanding until five years from the date
of the warrant agreement.
In March 2000, we issued to our outside counsel a warrant to purchase
200,000 shares of common stock at an exercise price of $15.00 per share. If not
sooner exercised, this warrant will remain outstanding until March 2004.
In connection with our spin-out from Optivision in December 1997, we are
obligated to issue 233,468 shares of common stock to an equipment finance
company upon the exercise by the finance company of its warrants to purchase
capital stock of Optivision. See "Related Party Transactions--Optivision Spin-
out". We will not receive any proceeds from the exercise of these warrants. If
not sooner exercised, 88,890 shares subject to the warrants will remain
outstanding until January 2002 and 144,578 shares subject to the warrants will
remain outstanding until September 2003.
Registration Rights
Following this offering, the holders of 81,638,691 shares of common stock,
based upon an assumed initial public offering price of $15.00 per share, will
be entitled to rights with respect to the registration of these shares under
the Securities Act, as described below.
Demand registration rights. At any time after six months following the
expiration of the lock-up agreements in connection with this offering, the
holders of at least 50% of the shares having registration
67
<PAGE>
rights can request that we register all or a portion of their shares, so long
as such registration covers at least 33% of their shares or the total offering
price of the shares to the public is at least $5.0 million. See "Share Eligible
for Future Sale--Lock-up Agreements". We will only be required to file two
registration statements in response to their demand registration rights if both
registration statements have been declared effective. We may postpone the
filing of a registration statement for up to 120 days if we determine that the
filing would be seriously detrimental to us and our stockholders.
Piggyback registration rights. If we register any securities for public
sale, the stockholders with registration rights will have the right to include
their shares in the registration statement. The managing underwriter of any
underwritten offering will have the right to limit the number of shares
registered by these holders to be included in the registration statement due to
marketing reasons.
Form S-3 registration rights. The holders of the shares having registration
rights can request that we register their shares if we are eligible to file a
registration statement on Form S-3 or any successor form and if the total price
of the shares offered to the public is at least $1.0 million. We may postpone
the filing of a Form S-3 registration statement for up to 120 days once in a 12
month period if we determine that the filing would be seriously detrimental to
us and our stockholders. We may also postpone the filing of a Form S-3
registration statement if within the preceding six months, we have already
effected a registration on Form S-3.
We will pay all expenses incurred in connection with the registrations
described above, except that we will not be required to pay for expenses
incurred under exercise of stockholders' demand registration rights if the
holders of these rights subsequently withdraw their request for registration.
Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.
In addition to these registration rights, holders of warrants exercisable
for 1,156,468 shares of common stock will have registration rights for the
shares of common stock issuable upon the exercise of their warrants. See "--
Warrants".
Anti-Takeover Provisions
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or preventing another person
from acquiring control of ONI Systems.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets with any interested stockholder, meaning a stockholder
who, together with affiliates and associates, owns or, within three years prior
to the determination of interested stockholder status, did own 15% or more of
the corporation's outstanding voting stock, unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.
This section may have an anti-takeover effect with respect to transactions
not approved in advance by the board of directors, including discouraging
attempts to acquire us that might result in a premium over the market price for
the shares of stock held by stockholders.
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<PAGE>
Charter and Bylaw Provisions
Our certificate of incorporation and bylaws provide that:
. following the completion of this offering, no action may be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and stockholders may not act by
written consent;
. following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
will be required to adopt, amend or repeal our bylaws or amend or repeal
the provisions of our certificate of incorporation regarding the election
and removal of directors and ability of stockholders to take action;
. stockholders may not fill vacancies on the board, unless the board of
directors determines by resolution that any of these vacancies will be
filled by the stockholders;
. following the completion of this offering, our board of directors will be
divided into three classes, each serving staggered three-year terms,
which means that only one class of directors will be elected at each
annual meeting of stockholders, with the other classes continuing for the
remainder of their respective terms. For more information on the
classification of our board, please see "Management--Board Composition";
and
. we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.
California Foreign Corporation Law
Section 2115 of the California Corporations Code provides that under some
circumstances several provisions of the California Corporations Code may be
applied to foreign corporations qualified to do business in California
notwithstanding the law of the jurisdiction where the corporation is
incorporated. These corporations are referred to in this prospectus as quasi-
California corporations. Section 2115 applies to foreign corporations that
have more than half of their voting stock held by stockholders residing in
California and more than half of their business deriving from California,
measured on or after the 135th day of the corporation's fiscal year. If we
were determined to be a quasi-California corporation, we would have to comply
with California law with respect to, among other things, elections of
directors and distributions to stockholders. Under the California Corporations
Code, a corporation is prohibited from paying dividends unless:
. the retained earnings of the corporation immediately prior to the
distribution equal or exceed the amount of the proposed distribution; or
. the assets of the corporation, exclusive of specific non-tangible assets,
equal or exceed 1 1/4 times its liabilities, exclusive of specific
liabilities, and the current assets of the corporation at least equal its
current liabilities. If the average pre-tax net earnings of the
corporation before interest expense for the two years preceding the
distribution were less than the average interest expense of the
corporation for those year, however, the current assets of the
corporation must exceed 1 1/4 times its current liabilities.
Following this offering, we will be exempt from the application of Section
2115 if our voting stock is held by more than 800 stockholders of record.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "ONIS".
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<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 124,688,270 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option, no exercise of outstanding options or warrants and an initial
public offering price of $15.00 per share. Of the outstanding shares, all of
the shares sold in this offering will be freely tradable, except that any
shares held by our affiliates, as that term is defined in Rule 144 promulgated
under the Securities Act, may only be sold in compliance with the limitations
described below. The remaining 116,688,270 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>
849,636 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.
101,125,721 After 180 days from the date of this prospectus, the 180-day
lock-up terminates and these shares are saleable under Rule 144
(subject in some cases to volume limitations), Rule 144(k) or
Rule 701 (subject in some cases to a right of repurchase by ONI
Systems).
9,707,206 On December 22, 2000, these shares are saleable under Rule 144.
1,009,180 On December 24, 2000, these shares are saleable under Rule 144.
1,108,032 On December 30, 2000, these shares are saleable under Rule 144.
339,000 On March 9, 2001, these shares are saleable under Rule 144.
1,616,161 On May 8, 2001, these shares are saleable under Rule 144.
933,334 One year after the closing of this offering, these shares are
saleable under Rule 144.
</TABLE>
Some of the shares in the table above, including shares held by executive
officers and directors, listed as not being saleable 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 and holders of approximately 99.1% of our common stock,
including each of our officers and directors, 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".
70
<PAGE>
Except for shares held by executive officers, the 180-day restriction will
expire as to 10% of the shares subject to the restriction, or 8,477,114 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 25,281,430 shares, on the date that is
two days after we have made our financial statements for the fiscal quarter
ending September 30, 2000 publicly available, if the reported last sale price
of our common stock on the Nasdaq National Market for 20 of the 30 trading days
ending on the last trading day preceding that date is at least twice the
initial public offering price per share. We adopted an insider trading policy
under which employees are prohibited from selling shares from the 30th day
prior to the end of each quarter until the second day following the release of
financial results for the quarter. As a result, the release of shares held by
them under lock-up agreements may be delayed until our insider trading policy
permits such sales.
Rule 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, who has beneficially owned
shares that are restricted securities as defined in Rule 144 for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus, a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our common stock,
which will be approximately 1,246,883 shares immediately after this offering,
or the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed. In
addition, a person who is not deemed to have been an affiliate at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of our affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144
would commence on the date of transfer from the affiliate.
Rule 701
In general, under Rule 701 of the Securities Act, any of our employees,
officers, directors, consultants or advisors who purchased shares from us in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell those shares in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period contained in
Rule 144. However, all shares issued under Rule 701 are subject to lock-up
agreements and will only become eligible for sale at the expiration of such
agreements.
Stock Options
As of March 31, 2000, options to purchase a total of 19,343,345 shares of
common stock were outstanding. We intend to file a Form S-8 registration
statement under the Securities Act to register all shares of common stock
subject to outstanding options, all shares of our common stock issued upon
exercise of stock options and all shares of our common stock issuable under our
stock option and employee stock purchase plans. Accordingly, shares of our
common stock issued under these plans will be eligible for sale in the public
markets, subject to vesting restrictions and the lock-up agreement described
above. See "Management--Employee Benefit Plans".
Registration Rights
Following this offering, subject to specified blackout periods, holders of
81,638,691 shares of outstanding common stock, based on an assumed private
placement price of $15.00 per share, will
71
<PAGE>
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".
72
<PAGE>
UNDERWRITING
ONI Systems and the underwriters named below (the "Underwriters") have
entered into an underwriting agreement with respect to the shares being
offered. Subject to some conditions, each Underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs
& Co., Banc of America Securities LLC, Chase Securities Inc. and FleetBoston
Robertson Stephens Inc. are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................
Banc of America Securities LLC.....................................
Chase Securities Inc...............................................
FleetBoston Robertson Stephens Inc. ...............................
---------
Total............................................................ 8,000,000
=========
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
1,200,000 shares from ONI Systems to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
Underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by ONI Systems. Such amounts are
shown assuming both no exercise and full exercise of the Underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by ONI Systems
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the Underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
ONI Systems and its directors, officers, employees and other stockholders
have agreed with the Underwriters not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. and except as described in
"Shares Eligible for Future Sale". This restriction does not apply to any
issuances under ONI Systems' existing employee benefit plans. See "Shares
Eligible for Future Sale" for a discussion of transfer restrictions.
73
<PAGE>
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among ONI Systems and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be ONI Systems' historical performance, estimates of the
business potential and earnings prospects of ONI Systems, an assessment of the
management of ONI Systems and the consideration of the above factors in
relation to market valuation of companies in related businesses.
ONI Systems has applied for approval for quotation of its common stock on
the Nasdaq National Market under the symbol "ONIS".
In connection with this offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The Underwriters may also impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of this Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or affect the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the Underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
At the request of ONI Systems, the Underwriters are reserving up to 960,000
shares of common stock for sale at the initial public offering price to
individuals designated by ONI Systems who have expressed an interest in
purchasing the shares of common stock in the offering through a directed share
program. The number of shares available for sale to the general public in the
pubic offering will be reduced to the extent these persons purchase these
reserved shares. Any shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares
offered hereby.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
ONI Systems estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.5
million.
ONI Systems has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Chase Venture Capital Associates, L.P., an entity affiliated with Chase
Securities Inc., beneficially owns 3,287,672 shares of Series E preferred stock
and 329,978 shares of Series F preferred stock. Paul Johnson, a managing
director of FleetBoston Robertson Stephens Inc., one of the Underwriters,
beneficially owns 54,796 shares of Series E preferred stock and 54,996 shares
of Series F preferred stock.
74
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for ONI Systems by Fenwick & West LLP, Palo
Alto, California. As of the date of this prospectus, Fenwick & West LLP and its
affiliates beneficially own or have the right to purchase an aggregate of
309,996 shares of our common stock. The validity of the issuance of the shares
of common stock offered by this prospectus will be passed upon for the
underwriters by Sullivan & Cromwell, Los Angeles, California.
EXPERTS
The consolidated financial statements and related financial statement
schedule of ONI Systems Corp. as of December 31, 1998 and 1999 and for the
period from October 20, 1997 (inception) to December 31, 1997, and for each of
the years in the two year period ended December 31, 1999 and the financial
statements of Object-Mart, Inc. as of, and for the year ended, December 31,
1998 and for the six month period ended June 29, 1999, have been included in
this registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or
document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. The registration statement, including exhibits and schedules,
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., at the Public Reference Room, 450
Fifth Street, N.W. Washington, D.C. 20549 and copies of all or any part of it
may be obtained from that office after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling 1-800-SEC-0330. The Securities and
Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial data for the first three
quarters of each year.
75
<PAGE>
ONI SYSTEMS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ONI Systems Corp. Consolidated Financial Statements
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Cash Flows................................... F-5
Consolidated Statements of Stockholders' (Deficit) Equity............... F-6
Notes to Consolidated Financial Statements.............................. F-9
Object-Mart, Inc. Financial Statements
Independent Auditors' Report............................................ F-26
Balance Sheet........................................................... F-27
Statements of Operations................................................ F-28
Statements of Cash Flows................................................ F-29
Statements of Shareholders' Equity...................................... F-30
Notes to Financial Statements........................................... F-31
Unaudited Pro Forma Combined Condensed Statement of Operations
Introduction to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-36
Unaudited Pro Forma Combined Condensed Statement of Operations.......... F-37
Notes to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-38
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
ONI Systems Corp.:
We have audited the accompanying consolidated balance sheets of ONI Systems
Corp. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the period
from October 20, 1997 (inception) to December 31, 1997 and for each of the
years in the two-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ONI Systems
Corp. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for the period from October 20, 1997 (inception) to December 31,
1997 and for each of the years in the two-year period ended December 31, 1999
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
March 9, 2000, except for Note 13(c)
which is as of April 25, 2000
F-2
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31, 2000
------------------------- --------------------------
1998 1999 Actual Pro Forma
----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $19,091,688 $ 80,022,591 $ 50,307,041 $ 50,307,041
Accounts receivable... 1,092,853 163,434 3,928,630 3,928,630
Inventory............. -- 9,648,856 20,783,774 20,783,774
Prepaid expenses and
other current
assets............... 110,503 770,979 956,609 956,609
----------- ------------ ------------ ------------
Total current
assets............. 20,295,044 90,605,860 75,976,054 75,976,054
Property and equipment. 1,016,698 5,314,990 15,796,067 15,796,067
Other assets........... 500 24,246 20,678 20,678
Intangibles............ -- 737,500 526,250 526,250
Goodwill............... -- 4,259,879 3,549,899 3,549,899
----------- ------------ ------------ ------------
Total assets........ $21,312,242 $100,942,475 $ 95,868,948 $ 95,868,948
=========== ============ ============ ============
LIABILITIES AND STOCK-
HOLDERS'
EQUITY
----------------------
Current liabilities:
Accounts payable...... $ 201,647 $ 2,594,555 $ 6,014,071 $ 6,014,071
Accrued liabilities... 426,365 6,086,784 10,570,313 10,570,313
Deferred revenue...... -- -- 119,490 119,490
Current portion of
capital lease
obligations.......... 40,002 166,612 170,905 170,905
----------- ------------ ------------ ------------
Total current
liabilities........ 668,014 8,847,951 16,874,779 16,874,779
Capital lease
obligations, less
current portion....... 79,322 366,704 295,378 295,378
----------- ------------ ------------ ------------
Total liabilities... 747,336 9,214,655 17,170,157 17,170,157
----------- ------------ ------------ ------------
Commitments and
contingencies
Stockholders' equity:
Convertible preferred
stock, $0.0001 par
value per share;
61,786,664 shares
authorized at
December 31, 1998
and 80,309,408
shares authorized at
December 31, 1999
and March 31, 2000;
50,580,190,
78,855,900 and
79,194,900 shares
issued and
outstanding at
December 31, 1998
and 1999 and March
31, 2000,
respectively;
aggregate
liquidation
preference of
$28,770,616,
$125,955,511 and
$128,127,590 at
December 31, 1998
and 1999 and March
31, 2000,
respectively; pro
forma--no shares
issued and
outstanding.......... 5,058 7,885 7,919 --
Common stock, $0.0001
par value per share;
112,000,000 shares
authorized at
December 31, 1998
and
159,690,592 shares
authorized at
December 31, 1999
and March 31, 2000;
18,001,248,
31,279,590 and
34,943,875 shares
issued and
outstanding at
December 31, 1998
and 1999 and March
31, 2000,
respectively; pro
forma--700,000,000
shares authorized;
114,138,775 shares
issued and
outstanding.......... 1,800 3,128 3,494 11,413
Additional paid-in
capital.............. 34,955,432 186,781,010 246,194,924 246,194,924
Notes receivable from
stockholders......... (122,585) (3,824,079) (8,429,521) (8,429,521)
Services receivable
from stockholder..... -- (85,164) (48,663) (48,663)
Deferred stock com-
pensation............ (5,223,575) (35,532,165) (72,560,032) (72,560,032)
Accumulated deficit... (9,051,224) (55,622,795) (86,469,330) (86,469,330)
----------- ------------ ------------ ------------
Total stockholders'
equity............. 20,564,906 91,727,820 78,698,791 78,698,791
----------- ------------ ------------ ------------
Total liabilities
and stockholders'
equity........... $21,312,242 $100,942,475 $ 95,868,948 $ 95,868,948
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
October 20,
1997
(inception) to Year ended December 31, Three months ended March 31
December 31, ------------------------- -----------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------ ------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 1,732,730 $ 3,033,995 $ 564,726 $ 3,632,636
Cost of revenue....... -- 1,207,897 1,032,144 424,327 2,849,902
--------- ----------- ------------ ------------- --------------
Gross profit........ -- 524,833 2,001,851 140,399 782,734
--------- ----------- ------------ ------------- --------------
Operating expenses:
Research and
development,
excluding deferred
stock compensation
amortization amounts. 38,865 4,008,489 25,399,728 2,849,849 12,037,295
Sales and marketing,
excluding deferred
stock compensation
amortization
amounts.............. 20,430 649,176 4,557,245 425,939 3,001,883
General and
administrative,
excluding deferred
stock compensation
amortization
amounts.............. 49,060 1,590,847 4,755,582 510,336 2,556,173
Amortization of
deferred stock
compensation*........ 89,249 3,310,368 11,421,739 1,296,281 11,281,366
Common stock warrant
expense.............. -- -- 2,890,500 -- 3,555,013
In-process research
and development...... -- -- 170,000 -- --
--------- ----------- ------------ ------------- --------------
Total operating
expenses........... 197,604 9,558,880 49,194,794 5,082,405 32,431,730
--------- ----------- ------------ ------------- --------------
Operating loss...... (197,604) (9,034,047) (47,192,943) (4,942,006) (31,648,996)
Interest income
(expense), net......... (1,452) 182,705 622,972 180,582 867,653
Other income (expense),
net.................... -- -- -- (13,998) (62,692)
--------- ----------- ------------ ------------- --------------
Loss before income
taxes.............. (199,056) (8,851,342) (46,569,971) (4,775,422) (30,844,035)
Income taxes............ -- 826 1,600 1,600 2,500
--------- ----------- ------------ ------------- --------------
Net loss............ $(199,056) $(8,852,168) $(46,571,571) $ (4,777,022) $ (30,846,535)
========= =========== ============ ============= ==============
Basic and diluted net
loss per share......... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
========= =========== ============ ============= ==============
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257,017 11,918,628 18,043,188 13,541,715 24,218,985
========= =========== ============ ============= ==============
- ------------
* Amortization of
deferred stock
compensation:
Cost of revenue....... $ -- $ -- $ -- $ -- $ 1,349,611
Research and
development.......... 32,012 2,509,473 8,142,230 986,721 6,090,553
Sales and marketing... 16,828 160,179 1,583,211 77,390 2,041,720
General and
administrative....... 40,409 640,716 1,696,298 232,170 1,799,482
--------- ----------- ------------ ------------- --------------
$ 89,249 $ 3,310,368 $ 11,421,739 $ 1,296,281 $ 11,281,366
========= =========== ============ ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 20,
1997 Three months ended March
(inception) to Year ended Year ended 31
December 31, December 31, December 31, -------------------------
1997 1998 1999 1999 2000
-------------- ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(199,056) $(8,852,168) $(46,571,571) $(4,777,022) $(30,846,535)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... -- 289,265 2,806,047 116,502 1,788,101
Amortization of
deferred stock
compensation....... 89,249 3,310,368 11,421,739 1,296,281 11,281,366
Loss on disposal of
property and
equipment.......... -- -- 164,094 -- 33,508
Value of leased
facilities received
in exchange for
preferred stock.... -- -- 97,336 -- 36,501
Purchased in-process
research and
development........ -- -- 170,000 -- --
Amortization of debt
financing costs.... -- -- 54,572 13,997 29,181
Common stock warrant
expense............ -- -- 2,890,500 -- 3,555,013
Stock-based
compensation for
non-employees...... -- -- 73,065 -- 200,773
Changes in operating
assets and
liabilities:
Accounts receivable. (91,162) (1,001,691) 1,569,976 521,649 (3,765,196)
Inventory........... -- -- (9,648,856) -- (11,134,918)
Prepaid expenses and
other current
assets............. -- (111,003) (533,915) (207,681) (211,243)
Accounts payable.... 29,440 172,207 2,392,876 358,306 3,419,516
Other accrued
liabilities........ 43,760 382,605 5,527,511 61,192 4,483,529
Deferred revenue.... -- -- -- -- 119,490
--------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities....... (127,769) (5,810,417) (29,586,626) (2,616,776) (21,010,914)
--------- ----------- ------------ ----------- ------------
Cash flows used in
investing activities:
Purchase of property
and equipment........ -- (1,016,205) (4,858,824) (384,581) (11,381,456)
Acquisition of
Object-Mart, net of
cash acquired........ -- -- (1,744,645) -- --
--------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities....... -- (1,016,205) (6,603,469) (384,581) (11,381,456)
--------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Repayment of short-
term borrowings...... -- (130,000) -- -- --
Proceeds from
issuance of notes.... 130,000 -- -- -- --
Payments under
capital lease
obligations.......... -- (13,651) (52,589) (9,520) (67,033)
Proceeds from
issuance of
preferred stock, net
of issuance costs.... -- 27,015,177 96,889,288 7,220,898 1,960,701
Repurchase of
preferred stock...... -- (1,000,000) -- -- --
Payment on
stockholder notes ... -- -- 12,000 -- --
Proceeds from
issuance of common
stock................ 10,000 34,553 272,299 39,292 783,152
--------- ----------- ------------ ----------- ------------
Net cash provided
by financing
activities....... 140,000 25,906,079 97,120,998 7,250,670 2,676,820
--------- ----------- ------------ ----------- ------------
Net increase in
cash and cash
equivalents...... 12,231 19,079,457 60,930,903 4,249,313 (29,715,550)
Cash and cash
equivalents at
beginning of
year/period........... -- 12,231 19,091,688 19,091,688 80,022,591
--------- ----------- ------------ ----------- ------------
Cash and cash
equivalents at end of
year/period........... $ 12,231 $19,091,688 $ 80,022,591 $23,341,001 $ 50,307,041
========= =========== ============ =========== ============
Supplemental
disclosures of cash
flow information:
Interest paid during
year/period.......... $ -- $ 4,065 $ 15,747 $ -- $ --
========= =========== ============ =========== ============
Noncash investing and
financing
activities:
Equipment recorded
under capital
leases............. $ -- $ 132,975 $ 466,581 $ -- $ --
========= =========== ============ =========== ============
Contribution of
property and
equipment by common
stockholder........ $ 14,716 $ 142,067 $ -- $ -- $ --
========= =========== ============ =========== ============
Issuance of common
stock upon exercise
of options in
exchange for notes
receivable......... $ -- $ 122,585 $ 3,713,494 $ -- $ 4,605,442
========= =========== ============ =========== ============
Issuance of
preferred stock in
exchange for leased
facilities......... $ -- $ -- $ 182,500 $ -- $ --
========= =========== ============ =========== ============
Issuance of common
stock in connection
with Object-Mart,
Inc. acquisition... $ -- $ -- $ 5,874,677 $ -- $ --
========= =========== ============ =========== ============
Issuance of warrants
in connection with
debt financing..... $ -- $ -- $ 203,581 $ 203,581 $ --
========= =========== ============ =========== ============
Issuance of common
stock for future
services........... $ 190,875 $ 8,432,317 $ 41,730,329 $ 2,324,092 $ 46,248,113
========= =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998, 1999 and
(unaudited) three month period ended March 31, 2000
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
------------------ ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ----------- ------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
October 20, 1997
(inception)..... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock.... -- -- 11,565,752 1,157 23,559 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 190,875 -- -- (190,875) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 89,249 --
Issuance of
Series A
preferred stock. 8,000,000 -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (199,056)
---------- ------ ---------- ------ ----------- --------- ---------- ----------- -----------
Balances as of
December 31,
1997............ 8,000,000 -- 11,565,752 1,157 214,434 -- -- (101,626) (199,056)
Issuance of
common stock for
notes
receivable...... -- -- 5,991,496 599 121,986 (122,585) -- -- --
Exercise of
stock purchase
rights for cash. -- -- 440,000 44 27,343 -- -- -- --
Exercise of
options for
cash............ -- -- 4,000 -- 7,166 -- -- -- --
Contribution of
property and
equipment by
common
stockholder..... -- -- -- -- 142,067 -- -- -- --
Exchange of
Series A
preferred stock
for Series B
preferred stock. (8,000,000) -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock,
net of $50,058
in issuance
costs........... 26,128,843 2,613 -- -- 4,206,190 -- -- -- --
Repurchase and
cancellation of
Series B
preferred stock. (1,333,333) (133) -- -- (999,867) -- -- -- --
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 2,733,332 273 -- -- 1,987,904 -- -- -- --
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,969,148 497 -- -- 4,334,300 -- -- -- --
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 18,082,200 1,808 -- -- 16,481,592 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 8,432,317 -- -- (8,432,317) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 3,310,368 --
Net loss........ -- -- -- -- -- -- -- -- (8,852,168)
---------- ------ ---------- ------ ----------- --------- ---------- ----------- -----------
Balances as of
December 31,
1998............ 50,580,190 $5,058 18,001,248 $1,800 $34,955,432 $(122,585) $ -- $(5,223,575) $(9,051,224)
========== ====== ========== ====== =========== ========= ========== =========== ===========
<CAPTION>
Total
stockholders'
(deficit)
equity
-------------
<S> <C>
Balances as of
October 20, 1997
(inception)..... $ --
Issuance of
common stock.... 24,716
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 89,249
Issuance of
Series A
preferred stock. --
Net loss........ (199,056)
-------------
Balances as of
December 31,
1997............ (85,091)
Issuance of
common stock for
notes
receivable...... --
Exercise of
stock purchase
rights for cash. 27,387
Exercise of
options for
cash............ 7,166
Contribution of
property and
equipment by
common
stockholder..... 142,067
Exchange of
Series A
preferred stock
for Series B
preferred stock. --
Issuance of
Series B
preferred stock,
net of $50,058
in issuance
costs........... 4,208,803
Repurchase and
cancellation of
Series B
preferred stock. (1,000,000)
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 1,988,177
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,334,797
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 16,483,400
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 3,310,368
Net loss........ (8,852,168)
-------------
Balances as of
December 31,
1998............ $20,564,906
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ONI SYSTEMS CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998 and 1999 and
(unaudited) three month period ended March 31, 2000
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
----------------- ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for
cash............ -- $ -- 3,023,220 $ 302 $ 271,997 $ -- $ -- $ -- $ --
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 8,001,824 800 -- -- 7,263,393 -- -- -- --
Issuance of
Series E
preferred stock
in exchange for
services........ 200,000 20 -- -- 182,480 -- (182,500) -- --
Performance of
services........ -- -- -- -- -- -- 97,336 -- --
Issuance of
common stock for
acquisition of
Object-Mart..... -- -- 4,569,276 457 5,874,220 -- -- -- --
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 8,249,468 825 -- -- 14,968,576 -- -- -- --
Exercise of
options for
notes
receivable...... -- -- 5,685,846 569 3,712,925 (3,713,494) -- -- --
Payment on
stockholder
notes........... -- -- -- -- -- 12,000 -- -- --
Issuance of
warrants in
connection with
debt financing.. -- -- -- -- 203,581 -- -- -- --
Issuance of
Series G
preferred stock,
net of $44,668
in issuance
costs........... 11,824,418 1,182 -- -- 74,654,512 -- -- -- --
Issuance of
warrants in
connection with
purchase and
license
agreement....... -- -- -- -- 2,890,500 -- -- -- --
Stock-based
compensation to
non-employees... -- -- -- -- 73,065 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 41,730,329 -- -- (41,730,329) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 11,421,739 --
Net loss........ -- -- -- -- -- -- -- -- (46,571,571)
---------- ------ ---------- ------ ------------ ----------- -------- ------------ ------------
Balances as of
December 31,
1999............ 78,855,900 $7,885 31,279,590 $3,128 $186,781,010 $(3,824,079) $(85,164) $(35,532,165) $(55,622,795)
========== ====== ========== ====== ============ =========== ======== ============ ============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
options for
cash............ $ 272,299
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 7,264,193
Issuance of
Series E
preferred stock
in exchange for
services........ --
Performance of
services........ 97,336
Issuance of
common stock for
acquisition of
Object-Mart..... 5,874,677
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 14,969,401
Exercise of
options for
notes
receivable...... --
Payment on
stockholder
notes........... 12,000
Issuance of
warrants in
connection with
debt financing.. 203,581
Issuance of
Series G
preferred stock,
net of $44,668
in issuance
costs........... 74,655,694
Issuance of
warrants in
connection with
purchase and
license
agreement....... 2,890,500
Stock-based
compensation to
non-employees... 73,065
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 11,421,739
Net loss........ (46,571,571)
--------------
Balances as of
December 31,
1999............ $ 91,727,820
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ONI SYSTEMS CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998 and 1999 and
(unaudited) three month period ended March 31, 2000
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
----------------- ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for cash
(unaudited)..... -- $ -- 1,488,283 $ 149 $ 783,003 $ -- $ -- $ -- $ --
Exercise of
options for
notes receivable
(unaudited)..... -- -- 2,162,000 216 4,605,226 (4,605,442) -- -- --
Issuance of
common shares in
exchange for
services
(unaudited)..... -- -- 14,002 1 17,502 -- -- -- --
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 310,000 31 -- -- 3,845,470 -- -- (1,884,800) --
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 29,000 3 -- -- 359,587 -- -- (176,320) --
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... -- -- -- -- -- -- 36,501 -- --
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... -- -- -- -- 2,259,213 -- -- -- --
Issuance of
warrants in
exchange for
services
(unaudited)..... -- -- -- -- 1,295,800 -- -- -- --
Deferred stock
compensation
(unaudited)..... -- -- -- -- 46,248,113 -- -- (46,248,113) --
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- 11,281,366 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (30,846,535)
---------- ------ ---------- ------ ------------ ----------- -------- ------------ ------------
Balance at March
31, 2000
(unaudited)..... 79,194,900 $7,919 34,943,875 $3,494 $246,194,924 $(8,429,521) $(48,663) $(72,560,032) $(86,469,330)
========== ====== ========== ====== ============ =========== ======== ============ ============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
options for cash
(unaudited)..... $ 783,152
Exercise of
options for
notes receivable
(unaudited)..... --
Issuance of
common shares in
exchange for
services
(unaudited)..... 17,503
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 1,960,701
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 183,270
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... 36,501
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... 2,259,213
Issuance of
warrants in
exchange for
services
(unaudited)..... 1,295,800
Deferred stock
compensation
(unaudited)..... --
Amortization of
deferred stock
compensation
(unaudited)..... 11,281,366
Net loss
(unaudited)..... (30,846,535)
--------------
Balance at March
31, 2000
(unaudited)..... $ 78,698,791
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(1) Description of Business and Significant Accounting Policies
(a) Description of Business
ONI Systems Corp. (ONI) develops, markets and sells optical communications
equipment to networking and internet service providers in the regional and
metropolitan area markets.
ONI was incorporated in California, as Optical Networks, Incorporated, on
October 20, 1997, and through November 1999, was considered to be in the
development stage, principally engaged in research and development, raising
capital and building its management team. ONI recognized its first commercial
sale in the fourth quarter of 1999 with the licensing of its network operating
system. Historically, ONI also recognized revenue derived from contracts with
agencies of the United States government. These contracts were completed in
June 1999. ONI changed its name to ONI Systems Corp. in April 2000.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of ONI and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated on consolidation.
(c) Stock Splits
Share information for all periods has been retroactively adjusted to reflect
a one-for-three reverse split of common stock effected in March 1998, a two-
for-three reverse split of Series B and Series C preferred stock effected in
August 1999, a two-for-one split of common stock, Series D and Series E
preferred stock effected in August 1999 and a two-for-one common and preferred
stock split effected in February 2000.
(d) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires ONI to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and to disclose contingent assets and liabilities at the date of
the consolidated financial statements and the reported results of operations
during the reporting period. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
ONI considers all highly liquid investments with remaining maturities of
three months or less at the date of purchase to be cash equivalents. As of
December 31, 1998 and 1999 and March 31, 2000, cash equivalents totaled
$19,091,688, $79,004,976 and $48,235,327, respectively. Cash equivalents
consisted primarily of money market funds.
(f) Inventory
Inventories are stated at the lower of average cost or market.
(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
F-9
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
improvements and assets recorded under capital leases are amortized on a
straight-line basis over the lesser of the related asset's estimated useful
life or the remaining lease term.
(h) Intangibles
ONI has capitalized the cost of identifiable intangibles associated with the
acquisition of Object-Mart, Inc. These intangibles are amortized over their
estimated useful lives, not exceeding two years.
(i) Research and Development Costs
ONI's products are technical in nature and require a significant and
continuing research and development effort. All research and development costs
are expensed as incurred. Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, requires the capitalization of certain software development
costs incurred subsequent to the date technological feasibility is established
and prior to the date the product is generally available for sale. The
capitalized cost is then amortized over the estimated life of the product. To
date, ONI has not capitalized any software development costs because
capitalizable costs meeting the requirements of SFAS No. 86 have not been
significant.
(j) Revenue Recognition
ONI recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. When the arrangement
with the customer includes future obligations or obtaining customer acceptance,
revenue is recognized when those obligations have been met or customer
acceptance has been received.
ONI sells licenses for embedded software and application software. Revenue
from transactions involving ONI's software products is accounted for in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 98-4, Deferral of Effective Date of SOP 97-2, and SOP 98-9, Software
Revenue Recognition with Respect to Certain Arrangements. Accordingly, ONI
recognizes revenue from licenses of software products provided that a purchase
order has been received, the software and related documentation have been
shipped, collection of the resulting receivable is deemed probable, and the fee
is fixed or determinable.
Services revenue consists primarily of training and installation services.
Revenues from training and installation services are recognized as the services
are performed. To date, ONI has not been obligated to provide installation
services to its customers and service revenue has not been significant.
Deferred revenue represents amounts billed in excess of revenue recognized.
In 1998 and 1999 ONI derived most of its revenue from contracts with
agencies of the United States government. These contracts include cost-plus and
fixed price contracts, and revenue is recorded as earned as defined within the
specific agreements. Revenue from cost-plus contracts is billed and recognized
at the time the costs are incurred. Revenue for fixed price contracts is
recognized when milestones are completed and product or reports, if any,
committed for the milestones are shipped, which approximates the percentage-of-
completion method. Amounts designated as withholdings are not recognized until
completion of the contract.
(k) Warranty Reserves
ONI provides a limited warranty for its products. Estimated expenses for
warranty obligations are recorded at the time revenue is recognized.
F-10
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(l) Income Taxes
ONI utilizes the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
(m) Fair Value of Financial Instruments
The fair value of ONI's cash and cash equivalents, accounts receivable,
prepaid expenses and other current assets, accounts payable and accrued
liabilities approximates their carrying values due to the short-term nature of
those instruments.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to ONI for debt instruments
with similar terms, degrees of risk and remaining maturities. The carrying
values of these obligations approximate their respective fair values.
(n) Concentration of Risk
Financial instruments, that potentially subject ONI to concentrations of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. ONI's cash and cash equivalents are maintained with a highly
accredited financial institution. In 1998, accounts receivable were due from
agencies of the United States government, resulting in minimal collection
risks. For the year ended December 31, 1999, there were two customers that
represented 46% and 26% of total revenue.
In 2000, ONI's revenue has primarily been derived from the sale of one
product, the ONLINE9000. For the three month period ended March 31, 2000, four
customers accounted for 33%, 30%, 23% and 14% of revenue and 32%, 32%, 22% and
14% of accounts receivable. For the three month period ended March 31, 2000,
export sales to Europe, which were denominated in United States Dollars,
accounted for 30% of total revenue.
(o) Stock-Based Compensation
ONI accounts for stock-based awards to employees using the intrinsic value
method. Expense associated with stock-based compensation is being amortized on
an accelerated basis over the vesting period of the individual award consistent
with the method described in Financial Accounting Standards Board (FASB)
Interpretation No. 28. Accordingly, approximately 59% of the unearned deferred
compensation is amortized in the first year, 25% in the second year, 12% in the
third year, and 4% in the fourth year following the date of the grant. Pursuant
to SFAS No. 123, Accounting for Stock-Based Compensation, ONI discloses the
pro-forma effect of using the fair value method of accounting for employee
stock-based compensation arrangements.
For non-employees, ONI computes the fair value of stock-based compensation
in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
F-11
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(p) Impairment of Long-Lived Assets
ONI evaluates its long-lived assets, including certain intangibles, for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest charges) expected
to be generated by the asset. If these assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
(q) Comprehensive Loss
Other comprehensive income refers to revenues, expenses, gains and losses
that are not included in net income, but rather are recorded directly in
stockholders' (deficit) equity. To date, ONI has no items of other
comprehensive loss and, accordingly, comprehensive loss is the same as net
loss.
(r) Initial Public Offering and Unaudited Pro Forma Balance Sheet
In February 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission that would
permit ONI to sell shares of ONI's common stock in connection with a proposed
initial public offering (IPO). If the offering is consummated under the terms
presently anticipated, all of the outstanding shares of ONI's convertible
preferred stock will automatically convert into shares of common stock upon the
closing of the IPO. The conversion of the convertible preferred stock has been
reflected in the accompanying unaudited pro forma consolidated balance sheet.
Pro forma basic and diluted net loss per share data assuming conversion of
the shares of Series B, C, D, E, F and G preferred stock into shares of common
stock had occurred at the beginning of the period (or date of issuance if
later) are as follows:
<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, March 31,
------------ ------------
1999 2000
------------ ------------
<S> <C> <C>
Pro forma net loss................................. $(46,571,571) $(30,846,535)
Pro forma basic and diluted net loss per share..... $ (0.60) $ (0.30)
Shares used in computing pro forma basic and
diluted net loss per share........................ 78,025,225 103,153,985
</TABLE>
(s) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares and dilutive
potential common shares outstanding during the period, using the as-if-
converted method for convertible preferred shares and the treasury stock method
for options 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
F-12
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
per share as if they were outstanding for all periods presented. To date, ONI
has not had any issuances of stock, options or warrants for nominal
consideration. Diluted net loss per share does not include the effects of the
following potential common shares:
<TABLE>
<CAPTION>
Period from
October 20 Year ended December Three months ended
(inception) to 31, March 31,
December 31, --------------------- ---------------------
1997 1998 1999 1999 2000
-------------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Shares issuable under
stock options.......... 1,078,220 8,789,776 17,548,724 11,161,028 19,343,345
Shares of unvested stock
subject to repurchase.. -- 5,992,684 8,587,699 4,842,165 10,096,468
Shares issuable pursuant
to warrants to purchase
common stock........... 233,468 233,468 733,468 233,468 1,156,468
Shares issuable pursuant
to warrants to purchase
convertible preferred
stock.................. -- -- 277,926 277,926 277,926
Shares issuable related
to convertible
preferred stock on an
"as-if-converted"
basis.................. 8,000,000 50,580,190 78,855,900 58,582,014 79,194,900
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.005,
$0.08, $0.29 and $0.64 as of December 31, 1997, 1998, 1999 and March 31, 2000
respectively. The weighted-average purchase price of shares of common stock
subject to the Company's right of repurchase was $0.02, $0.44 and $0.87 as of
December 31, 1998, 1999 and March 31, 2000, respectively. The exercise price of
warrants to purchase shares of convertible preferred stock remained $0.88 as of
December 31, 1999 and March 31, 2000. The weighted-average exercise price of
warrants to purchase shares of common stock was $0.62 and $3.16 as of December
31, 1999 and March 31, 2000, respectively. Each share of preferred stock is
convertible into one share of common stock.
(t) Segment Reporting
ONI adopted SFAS No. 131, DIsclosures About Segments of an Enterprise and
Related Information, for the year ended December 31, 1999. SFAS No. 131
establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The method for
determining what information to report is based on the way management organizes
the operating segments within a company for making operating decisions and
assessing financial performances.
ONI's chief executive officer (CEO) is its chief operating decision-maker.
The financial information that the CEO reviews is identical to the information
presented in the accompanying
F-13
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements of operations. ONI has determined that it operates in a single
operating segment: development and sale of optical networking equipment to
communications service providers in the regional and metropolitan area markets.
Through December 31, 1999, ONI's revenue was primarily from government
research and development contracts. These contracts were completed in June
1999, and they will not contribute to ONI's revenue in the future as ONI will
not continue these activities.
Beginning January 1, 2000, ONI's revenue has been derived from sales of its
ONLINE9000 product. ONI expects to continue selling the ONLINE9000 in the
future, and also to develop other lines of products for sale.
(u) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because ONI
does not currently hold any derivative instruments and does not engage in
hedging activities, ONI expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows. ONI will be required to adopt SFAS No. 133 for the year ended December
31, 2001 in accordance with SFAS No. 137, which delayed implementation of SFAS
No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), which summarizes views of the
Commission staff in applying generally accepted accounting principles to
revenue recognition in financial statements. ONI believes that its current
revenue recognition principles comply with this bulletin.
(2) Business Combination
On June 29, 1999, ONI acquired all of the outstanding common shares of
Object-Mart, Inc. (Object-Mart) in exchange for 4,569,276 shares of ONI's
common stock and approximately $3,222,000 in cash for a total purchase price of
approximately $9,096,677. Object-Mart was located in San Jose, California, and
provided software products and services to software development companies,
software providers and equipment manufacturers in the telecommunications
industry. The combination was accounted for using the purchase method and,
accordingly, the results of operations of Object-Mart have been included in
ONI's consolidated financial statements only since June 29, 1999. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $5,679,839 has been recorded as goodwill and is being amortized on a
straight-line basis over two years. Identifiable intangibles are amortized on a
straight-line basis over periods not exceeding two years.
The amount of $170,000 allocated to purchased in-process research and
development was determined through established valuation techniques in the
high-technology communications industry and was expensed upon acquisition
because technological feasibility had not been established and no future
alternative uses existed.
The following unaudited pro forma financial information presents the
combined results of operations of ONI and Object-Mart as if the acquisition had
occurred as of the beginning of 1998 and 1999, after giving effect to certain
adjustments, including amortization of goodwill and other
F-14
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
intangibles, additional depreciation expense and related income tax effects.
The pro forma financial information does not necessarily reflect the results of
operations that would have occurred had ONI and Object-Mart constituted a
single entity during these periods.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Revenue......................................... $ 3,665,811 $ 4,625,795
Net loss........................................ $(11,172,005) $(47,779,504)
Basic and diluted net loss per share............ $ (0.94) $ (2.65)
</TABLE>
(3) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Raw materials....................................... $8,914,321 $ 7,924,748
Work in progress.................................... -- 8,801,088
Finished goods...................................... 734,535 3,154,445
Consignment inventory............................... -- 903,493
---------- -----------
$9,648,856 $20,783,774
========== ===========
</TABLE>
(4) Property and Equipment
Property and equipment is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- -----------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Computers and equipment................... $1,050,541 $5,569,889 $16,424,038
Furniture and fixtures.................... 204,734 714,592 1,032,043
Leasehold improvements.................... 50,688 273,663 412,554
---------- ---------- -----------
1,305,963 6,558,144 17,868,635
Less accumulated depreciation and
amortization............................. 289,265 1,243,154 2,072,568
---------- ---------- -----------
$1,016,698 $5,314,990 $15,796,067
========== ========== ===========
</TABLE>
Equipment recorded under capital leases was $132,975, $541,580 and $439,571
as of December 31, 1998, 1999 and March 31, 2000, respectively, and the related
accumulated amortization was $13,651, $57,976 and $102,009 as of December 31,
1998, 1999 and March 31, 2000, respectively. There was no equipment recorded
under capital leases as of December 31, 1997.
F-15
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Intangibles
A summary of intangibles is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Purchased technology and workforce.................. $ 530,000 $ 530,000
Assembled workforce and non-compete agreements...... 630,000 630,000
---------- ----------
1,160,000 1,160,000
Less accumulated amortization....................... 422,500 633,750
---------- ----------
$ 737,500 $ 526,250
========== ==========
</TABLE>
(6) Accrued Liabilities
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Accrued Employee benefits.......................... $ 671,155 $ 1,364,760
Uninvoiced receipts................................ 4,307,740 7,443,179
Other.............................................. 1,107,889 1,762,374
---------- -----------
$6,086,784 $10,570,313
========== ===========
</TABLE>
(7) Related Party Transactions
On October 20, 1997, ONI was incorporated as a wholly-owned subsidiary of
Optivision, Inc. (Optivision) and in connection therewith issued 11,565,752
shares of common stock, 8,000,000 shares of Series A preferred stock and a
$90,000 promissory note to Optivision in exchange for cash of $100,000,
property and equipment of $14,716, and certain intellectual property and
technology rights. On December 22, 1997, ONI was spun-out from Optivision. In
conjunction with the spin-out, ONI reserved 233,468 shares of common stock
issuable to a third party holding warrants to purchase common shares of
Optivision. In January 1998, a further $142,067 of property and equipment was
provided by Optivision to ONI for no additional consideration.
In 1998, in conjunction with the issuance of the Series B and Series C
preferred stock, 8,000,000 shares of Series A preferred stock were converted to
Series B preferred stock, and the Company repurchased and canceled 1,333,333
shares of Series B preferred stock from Optivision, Inc. in exchange for
$1,000,000 in cash.
During 1998 and 1999, ONI received $122,585 and $3,713,494, respectively, in
promissory notes from certain officers in exchange for common stock. As of
December 31, 1999, $12,000 had been repaid by the stockholders. The notes are
repayable over a period of five to ten years and bear interest at rates ranging
from 4.46% to 6.20%. The notes are secured by the underlying common shares. In
the three month period ended March 31, 2000, ONI received an additional
$4,605,442 in promissory notes in exchange for common stock.
(8) Financing Arrangements
In February 1999, ONI entered into a Loan and Security Agreement with a
financing company that allowed ONI to borrow up to $2,000,000. The loan bears
interest at the prime rate, is repayable
F-16
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in 36 equal monthly installments of principal and interest and is secured by
certain assets of ONI. ONI also entered into a Subordinated Loan and Security
Agreement with the same financing company, which allowed ONI to borrow up to
$1,000,000. The subordinated loan bears interest at 12% per annum, is repayable
in 36 equal monthly installments of principal and interest and is secured by
certain assets of ONI. As of December 31, 1999, ONI had not borrowed any
amounts under these agreements. These agreements expired unutilized on February
10, 2000.
In connection with the loan and security agreement and subordinated loan and
security agreement, ONI issued warrants to purchase 90,750 and 119,116 shares
of Series B convertible preferred stock, respectively, at $0.88 per share. The
warrants expire on the earlier of February 10, 2009, or five years from the
effectiveness of ONI's initial public offering. No warrants had been exercised
as of December 31, 1999. The fair value of the warrants was determined to be
$66,474 and $87,252, respectively, calculated using the Black-Scholes option
pricing model, using the following assumptions: no dividends; contractual term
of ten years; risk-free interest rate of 5.5%; and expected volatility of 70%.
The fair value of the warrants has been recorded as additional capital and was
amortized to interest expense over the term of the loan agreements.
(9) Stockholders' Equity
(a) Preferred Stock
As of December 31, 1999, ONI had 80,309,408 shares of preferred stock
authorized. ONI has designated and issued preferred stock as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------ March 31, 2000
1998 1999 (unaudited)
1999 ----------------------- ------------------------ ------------------------
Designated Shares Liquidation Shares Liquidation Shares Liquidation
shares outstanding preference outstanding preference outstanding preference
---------- ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series B................ 25,073,436 24,795,510 $ 5,840,181 24,795,510 $ 5,840,181 24,795,510 $ 5,840,181
Series C................ 2,733,332 2,733,332 2,049,999 2,733,332 2,049,999 2,733,332 2,049,999
Series D................ 4,969,148 4,969,148 4,380,428 4,969,148 4,380,428 4,969,148 4,380,428
Series E................ 26,284,024 18,082,200 16,500,008 26,284,024 23,984,172 26,284,024 23,984,172
Series F................ 8,249,468 -- -- 8,249,468 15,000,008 8,249,468 15,000,008
Series G................ 13,000,000 -- -- 11,824,418 74,700,723 12,163,418 76,872,802
---------- ---------- ----------- ---------- ------------ ---------- ------------
80,309,408 50,580,190 $28,770,616 78,855,900 $125,955,511 79,194,900 $128,127,590
========== ========== =========== ========== ============ ========== ============
</TABLE>
In January 1998, ONI raised $4,208,803, net of issuance costs of $50,058,
through the sale of 18,128,843 shares of Series B preferred stock for cash of
$0.24 per share. In addition, ONI issued 8,000,000 shares of Series B preferred
stock in exchange for the redemption and cancellation of 8,000,000 shares of
Series A preferred stock and repurchased 1,333,333 shares of Series B preferred
stock for cash consideration of $1,000,000. Concurrently, ONI raised
$1,988,177, net of issuance costs of $61,823, from the sale of 2,733,332 shares
of Series C preferred stock for cash of $0.75 per share.
In April 1998, ONI raised $4,334,797, net of issuance costs of $45,632, from
the sale of 4,969,148 shares of Series D preferred stock for cash of $0.88 per
share.
In December 1998, ONI raised $16,483,400, net of issuance costs of $16,609,
from the sale of 18,082,200 shares of Series E preferred stock for cash of
$0.91 per share. In March 1999, ONI closed a second round of Series E preferred
financing, raising $7,264,193, net of issuance costs of
F-17
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$37,471, from the sale of 8,001,824 shares of Series E preferred stock. In
addition ONI issued 200,000 shares of Series E preferred stock in exchange for
additional lease space at its 166 Baypointe Parkway location. The value of
$182,500 ascribed to the Series E preferred stock was recorded as a reduction
of stockholders' equity and is being amortized to rent expense over the period
of the lease agreement.
In September 1999, ONI raised $14,969,401, net of issuance costs of $20,607,
from the sale of 8,249,468 shares of Series F preferred stock for cash of $1.82
per share.
In December 1999, ONI completed another round of private financing, raising
$74,655,694, net of issuance costs of $44,668, from the sale of 11,824,418
shares of Series G preferred stock for cash of $6.32 per share. In March 2000,
ONI raised an additional $1,960,701, net of issuance costs of $8,207, from the
sale of 310,000 shares of Series G preferred stock for cash of $6.32 per share.
In addition 29,000 shares of Series G preferred stock were issued in exchange
for services. The value of $183,270 ascribed to these services has been
expensed in the period ended March 31, 2000.
The rights, preferences and restrictions of the Series B, C, D, E, F and G
preferred stock are as follows:
. Each share of Series B, C, D, E, F and G preferred stock is convertible
at the option of the holder at any time after the date of issuance on a
one-for-one basis subject to certain antidilution provisions. Conversion
of all Series B, C, D, E, F and G preferred stock is automatic upon the
earlier of (1) the closing of a firm underwritten commitment with respect
to an initial public offering of shares of common stock of ONI, in which
ONI receives cash proceeds of at least $20,000,000 (net of underwriters'
commissions and expenses) or (2) the written consent of the holders of 66
-2/3% of the outstanding shares of preferred stock, voting together as a
single class.
. Holders of Series B, C, D, E, F and G preferred stock are entitled to
receive dividends equal to 10% of their respective liquidation preference
in preference to any dividend on common stock when, as and if declared by
the Board of Directors out of legally available funds. These preferential
dividends are noncumulative. In addition, the holders of Series B, C, D,
E, F and G preferred stock are entitled to receive dividends on a basis
equal to common stockholders out of funds legally available therefor,
when, as and if declared by the Board of Directors. No dividends have
been declared through December 31, 1999.
. Series B, C, D, E, F and G preferred stock have liquidation preferences
of $0.24, $0.75, $0.88, $0.91, $1.82 and $6.32, respectively, plus all
declared but unpaid dividends on such shares.
. Series B, C, D, E, F and G preferred stock have the same voting rights as
the number of shares of common stock issuable upon conversion of such
shares. Four directors are elected by the holders of record of the Series
B, C and E preferred stock voting as a separate class; one director is
elected by the holders of record of the common stock voting as a separate
class; and two directors are elected by the holders of record of the
Series B, C, D, E, F and G preferred stock and common stock voting
together as a single class.
(b) Common Stock
As of December 31, 1999, ONI had 159,690,592 shares of common stock
authorized.
In 1998, ONI issued 6,431,496 shares of restricted common stock at prices
ranging from $0.0016 to $0.0882 per share, 5,991,496 of which were issued in
exchange for notes receivable of
F-18
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$122,585. In 1999, ONI issued an additional 513,332 shares of restricted common
stock at prices ranging from $0.09 to $0.91, 20,000 of which were issued in
exchange for notes receivable of $18,200. In the three month period ended March
31, 2000, ONI issued 2,162,000 shares of restricted common stock at prices
ranging from $0.09 to $3.20, all of which were issued in exchange for notes
receivable of $4,605,442. The restricted shares of common stock vest 25% within
12 months of issuance with the remainder vesting in 36 equal monthly amounts.
On the occurrence of a change in control event, as defined, 50% of the unvested
shares of common stock becomes vested. Upon termination of employment, ONI may
repurchase all unvested shares at an amount equal to the original purchase
price.
ONI maintains a right of first refusal with respect to restricted common
stock. A stockholder must notify ONI prior to selling these shares to a third
party. Upon notification, ONI may purchase the shares from the holder at the
price offered by the third party.
In December 1999, in connection with the signing of a Purchase and License
Agreement with a customer to provide certain ONI products in the future, ONI
issued a warrant to purchase 500,000 shares of common stock at an exercise
price of $0.91 per share. The value of $2,890,500 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and contractual term of six years. The customer is
not obligated to purchase any of ONI's products as a condition to exercising
the warrant. Accordingly, the warrant was expensed in 1999.
In February 2000, in connection with the signing of a Purchase and License
Agreement with a customer to provide certain ONI products in the future, ONI
issued a warrant to purchase 223,000 shares of common stock at an exercise
price of $0.91 per share. The value of $2,259,213 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and contractual term of seven years. The customer
is not obligated to purchase any of ONI's products as a condition to exercising
the warrant. Accordingly, the warrant was expensed in the three-month period
ended March 31, 2000.
In March, 2000, as consideration for professional services rendered, ONI
issued a warrant to purchase 200,000 shares of common stock at an exercise
price of $15.00 per share. The value of $1,295,800 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and a contractual term of four years. The warrant
was expensed in the three month period ended March 31, 2000.
(c) Stock Option Plans
1997 Stock Option Plan
On October 29, 1997, ONI's Board of Directors adopted the 1997 Stock Option
Plan (the 1997 Plan) and reserved a total of 7,638,508 shares of ONI's common
stock for issuance thereunder. ONI did not file a timely notice of Issuance of
Shares pursuant to California securities law and consequently any options to
purchase shares or restricted stock purchase offers issued under the 1997 Plan
did not qualify for an exemption from qualification under California securities
law. As a result, the Board of Directors terminated the 1997 Plan in April 1998
and approved a repurchase offer for any holder of options of shares under the
1997 Plan. The repurchase offer expired without any shares being repurchased.
F-19
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options granted under the 1997 Plan may be designated as "Incentive Stock
Options" or "Nonstatutory Stock Options" at the discretion of ONI, with
exercise prices not less than the fair market value at the date of grant.
Options generally vest 25% on the first anniversary of the vesting start date
and then monthly over the next three years. Options expire ten years from the
date of grant.
1998 Equity Incentive Plan
In 1998, the Board of Directors of ONI adopted the 1998 Equity Incentive
Plan (the 1998 Plan) and reserved a total of 23,407,604 shares of ONI's common
stock for issuance thereunder.
Under the 1998 Plan, the Board of Directors may grant incentive stock
options, nonqualified stock options and restricted stock awards. Options
granted under the 1998 Plan generally vest 25% on the first anniversary of the
vesting start date and then monthly over the next three years. Options granted
under the 1998 Plan expire ten years from the date of grant.
1999 Equity Incentive Plan
In 1999, the Board of Directors of ONI adopted the 1999 Equity Incentive
Plan (the 1999 Plan) and reserved a total of 6,200,000 shares of ONI's common
stock for issuance thereunder. The terms of the 1999 Plan are substantially
similar to those of the 1998 Plan.
A summary of the status of ONI's option plans is as follows:
<TABLE>
<CAPTION>
Outstanding options
-------------------
Weighted Weighted
Shares average average
available Number of exercise grant date
for grant shares price fair value
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Authorized......................... 29,751,768 --
Granted.......................... (1,078,220) 1,078,220 $0.005 $0.19
Exercised........................ -- --
Cancelled........................ -- --
----------- ----------
Balance as of December 31, 1997.... 28,673,548 1,078,220 0.005
Granted.......................... (10,885,796) 10,885,796 0.08 $0.69
Exercised........................ -- (1,651,332) 0.08
Cancelled........................ 1,522,908 (1,522,908) 0.07
----------- ----------
Balance as of December 31, 1998.... 19,310,660 8,789,776 0.08
Granted.......................... (20,178,438) 20,178,438 0.42 $1.90
Exercised........................ -- (8,709,066) 0.46
Cancelled........................ 2,710,424 (2,710,424) 0.08
----------- ---------- ------
Balance as of December 31, 1999.... 1,842,646 17,548,724 $ 0.29
=========== ========== ======
Authorized*...................... 4,994,079 -- --
Granted*......................... (5,630,827) 5,630,827 2.28 $2.95
Exercised*....................... -- (3,664,285) 1.48
Cancelled*....................... 171,921 (171,921) 1.10
----------- ---------- ------
Balance as of March 31, 2000*...... 1,377,819 19,343,345 $ 0.64
=========== ========== ======
</TABLE>
- --------
* Unaudited
F-20
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information with respect to stock options
outstanding as of March 31, 2000:
<TABLE>
<CAPTION>
Exercise Options Contractual Exercisable
price outstanding life (years) Options
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.005 200,876 7.71 80,550
0.075 117,212 7.86 7,322
0.09 11,393,482 8.99 128,506
0.456 20,000 9.33 --
0.91 3,669,450 9.54 --
1.25 2,825,900 9.77 21,375
3.20 829,800 9.91 --
5.25 162,000 9.95 --
7.50 124,625 9.98 --
---------- -------
$0.64 19,343,345 9.24 237,753
========== =======
</TABLE>
Accounting for Stock-Based Compensation
ONI uses the intrinsic value method prescribed by APB No. 25 in accounting
for its stock-based compensation arrangements for employees whereby
compensation cost is recognized to the extent the fair value of the underlying
common stock exceeds the exercise price of the stock options at the date of
grant. Deferred stock compensation of $190,875 for the period from October 20,
1997 (inception) to December 31, 1997, and $8,432,317, and $41,730,329 for the
year ended December 31, 1998 and 1999, respectively, has been recorded for the
excess of the fair value of the common stock underlying the options at the
grant date over the exercise price of the options. An additional $46,248,113 of
deferred stock compensation was recorded for the three months ended March 31,
2000. These amounts are being amortized on an accelerated basis over the
vesting period, generally four years, consistent with the method described in
FASB Interpretation No. 28. Amortization of deferred compensation was $89,249
for the period from October 20, 1997 (inception) to December 31, 1997,
$3,310,368 in 1998 and $11,421,739 in 1999. Amortization of deferred
compensation for the three months ended March 31, 1999 and 2000 was $1,296,281
and $11,281,366, respectively.
In connection with the employment agreement with ONI's Chief Executive
Officer, the value of stock awards of $836,929 was re-measured and recorded as
deferred stock-based compensation in the year ended December 31, 1999, pursuant
to the treatment ascribed under APB 25. Milestones stipulated in the employment
agreement were met as of December 31, 1999. Thus, the entire deferred stock-
based compensation was amortized in the year ended December 31, 1999. Had
compensation cost for ONI's stock-based compensation plan been determined
consistent with the fair value approach set forth in SFAS No. 123, ONI's net
losses would have been as follows:
<TABLE>
<CAPTION>
Period from Year ended December Three months ended
October 20, 1997 31, March 31,
(inception) to ----------------------- -----------------------
December 31, 1997 1998 1999 1999 2000
----------------- ---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss--as reported... $199,056 $8,852,168 $46,571,571 $4,777,022 $30,846,535
Net loss--pro forma..... $199,056 $8,900,007 $46,917,722 $4,809,910 $31,615,232
Basic and diluted net
loss per share--as
reported............... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
Basic and diluted net
loss per share--pro
forma.................. $ (0.77) $ (0.75) $ (2.60) $ (0.36) $ (1.31)
</TABLE>
F-21
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rates of 5.75% and 5.5% in 1998 and 1999,
respectively, and an expected life of five years.
(10) Commitments and Contingencies
(a) Leases
In February 1999, the Company entered into a leasing agreement with a
financing company which allows ONI to draw up to $1,050,000 for the lease of
certain equipment and $450,000 for the lease of software and tenant
improvements. The leases are accounted for as capital leases. The lease
obligations under this agreement are repayable in 42 equal monthly installments
of principal plus interest commencing on the individual lease inception dates
and are secured by the leased assets.
In connection with the equipment leasing agreement, ONI issued to the
financing company warrants to purchase 68,062 shares of Series B preferred
stock at a price of $0.88 per share. The warrants expire on February 10, 2009,
or five years from the effectiveness of the ONI's initial public offering, if
earlier. No warrants had been exercised as of December 31, 1999. The fair value
of the warrants was determined to be $49,855, calculated using the Black-
Scholes option pricing model, using the following assumptions: no dividends;
contractual term of ten years; risk-free interest rate of 5.5%; and expected
volatility of 70%. The fair value of the warrants has been recorded as
additional paid-in capital and is being amortized as interest expense over the
term of the lease agreement.
ONI leases its headquarters facility under a noncancelable operating lease,
and has acquired furniture and other equipment through capital leases. Future
minimum payments for both operating and capital leases as of March 31, 2000 are
as follows:
<TABLE>
<CAPTION>
Year ending
December Capital Operating
31, leases leases
----------- -------- -----------
<S> <C> <C>
9 months ended 2000.................................... $126,423 $ 3,454,229
2001................................................... 186,525 3,550,550
2002................................................... 151,060 2,339,673
2003................................................... 62,941 1,639,124
2004................................................... -- 1,709,660
Thereafter............................................. -- 3,630,925
-------- -----------
Future minimum lease payments.......................... 526,949 $16,324,159
===========
Less amount representing interest...................... 60,666
--------
Present value of future minimum lease payments......... 466,283
Less current portion................................... 170,905
--------
Long-term portion...................................... $295,378
========
</TABLE>
Total rent expense under the operating leases was $494,308, $908,115 and
$714,879 for the years ended December 31, 1998, 1999 and the quarter ended
March 31, 2000, respectively, and $0 for the period from October 20, 1997
(inception) to December 31, 1997.
(b) Contingencies
In March 2000, Nortel Networks (Nortel) filed suit against ONI in the United
States District Court for the Northern District of California. The suit alleges
that ONI's products infringe five patents held by Nortel, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. Nortel is seeking preliminary and permanent
injunctions and
F-22
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
damages against ONI in connection with these claims. In April 2000, ONI filed a
motion to dismiss Nortel's claims, and ONI also filed an answer and
counterclaims asserting unfair business practices, tortious interference,
breach of contract and declarations of invalidity, unenforceability and non-
infringement of the patents against Nortel. ONI expects to incur substantial
legal and other expenses in connection with the Nortel Networks litigation. In
the event of an adverse ruling, ONI also could be required to pay damages to
Nortel Networks. The accompanying consolidated financial statements do not
include any costs, if any, that might result from this uncertainty.
From time-to-time ONI may be subject to other legal proceedings and claims
in the ordinary course of business. ONI is not aware of any legal proceedings
or claims, including the above matter that ONI believes will have, individually
or in the aggregate, a material adverse effect on ONI's business, financial
condition or results of operations.
(11) Income Taxes
Income tax expense is comprised of current state tax of $826 and $1,600 for
the years ended December 31, 1998 and 1999, respectively.
The reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 34% to loss before income tax and the actual provision
for income taxes is a follows:
<TABLE>
<CAPTION>
Period ended December 31,
-----------------------------------
1997 1998 1999
-------- ----------- ------------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate. $(67,679) $(3,009,456) $(15,833,790)
State taxes net of federal income tax
benefit............................... -- 826 1,600
Permanent differences.................. 48 4,039 24,612
Stock Compensation..................... 53 417,762 3,161,650
Goodwill Amortization.................. -- -- 482,780
Current year net operating loss and
temporary differences for which no
benefit is recognized................. 67,578 2,587,655 12,164,748
-------- ----------- ------------
Total income tax expense............... $ -- $ 826 $ 1,600
======== =========== ============
</TABLE>
The effects of temporary differences that give rise to significant portions
of deferred tax assets as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Deferred state taxes........................... $ -- $ 1,000
Fixed assets................................... 39,000 141,000
Capitalized start-up and organizational
expense....................................... 343,000 236,000
Net operating loss carryforwards............... 2,011,000 14,707,000
Deferred stock compensation.................... 930,000 3,502,000
Research and other credit carryforwards........ 394,000 2,047,000
Accrual amounts................................ 12,000 293,000
----------- ------------
Total gross deferred tax assets............ 3,729,000 20,927,000
Valuation allowance.............................. (3,729,000) (20,682,000)
----------- ------------
Total deferred tax assets.................. $ -- $ 245,000
Deferred tax liabilities: Intangibles.......... -- (245,000)
----------- ------------
Net deferred tax assets, net of deferred tax
liabilities................................... -- --
=========== ============
</TABLE>
F-23
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management has established a valuation allowance for the portion of deferred
tax assets for which realization is uncertain. The change in the valuation
allowance for deferred tax assets was an increase of $3,729,000 in 1998 and an
increase of $16,650,000 in 1999.
As of December 31, 1999, ONI has net operating loss carryforwards for
federal and California income tax purposes of approximately $34,000,000
available to reduce future income subject to incomes taxes. The net operating
loss carryforwards for federal income tax purposes expire in various years
beginning in 2012 through 2019. The net operating loss carryforwards for
California purposes expire in 2005.
ONI also has research credit carryforwards as of December 31, 1999 for
federal and California income tax return purposes of approximately $1,125,000
and $864,000, respectively, available to reduce future income taxes. The
federal research credit carryforward will expire in various years from 2012
through 2019. The California research credit carryforward carries forward
indefinitely until realized. ONI also has a California manufacturing investment
credit carryforward of $59,000 which will expire in various years beginning in
2007 through 2008.
ONI's ability to use net operating loss and credit carryforwards may be
subject to limitations pursuant to the ownership change rule of the Internal
Revenue Code, Section 382 and corresponding state tax law.
(12) Employee Benefit Plan
ONI has an Employee Savings and Retirement Plan (the Benefit Plan) under
Section 401(k) of the Internal Revenue Code for its eligible employees. The
Benefit Plan is available to all of ONI's employees who meet minimum age and
service requirements, and provides employees with tax deferred salary
deductions and alternative investment options. Employees may contribute up to
15% of their eligible earnings, subject to certain limitations. There are no
matching contributions under the Benefit Plan.
(13) Subsequent Events
Audited
(a) In April 2000, ONI adopted a 2000 Equity Incentive Plan, under which
7,000,000 shares of ONI's common stock were reserved exclusively for
issuance under the plan. In addition, ONI adopted a 2000 Employee Stock
Purchase Plan, to be effective on the first day on which price quotations
are available for ONI's common stock on the NASDAQ National Market, in
which 1,000,000 shares of common stock were reserved exclusively for
issuance under the plan.
(b) In March 2000, ONI entered into an agreement with Internet Initiative Japan
Inc. to sell to it $4.0 million of common stock, at the initial public
offering price per share, in a private placement that will close
concurrently with ONI's initial public offering.
(c) Effective April 25, 2000, ONI reincorporated as a Delaware corporation.
Share capital information for all periods has been retroactively adjusted
to reflect the par value of common and preferred stock and amounts of paid-
in capital.
Unaudited
(d) In April 2000, ONI entered into an agreement with CCT Telecom Holdings
Limited to sell to it $10.0 million of common stock, at the initial public
offering price per share, in a private placement that will close concurrent
with ONI's initial public offering. (unaudited)
F-24
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) In May 2000, ONI entered into an agreement with Sun Microsystems, Inc. to
sell to it 1,333,333 shares of Series H preferred stock, at a price per
share of $15.00, in a private placement that ONI anticipates will close on
May 8, 2000 or a later date agreed to by Sun Microsystems and ONI. These
shares of preferred stock will convert into common stock upon the
completion of an initial public offering. The number of shares of common
stock to be issued on conversion will be computed on a 17.5% discount of
the initial public offering price. Based on an initial public offering
price of $15.00 per share, these shares will convert into 1,616,161 shares
of common stock. (unaudited)
(f) In May 2000, ONI agreed, subject to board approval, to grant an option to
purchase 1,000,000 shares of common stock outside of the existing stock
option plans with an exercise price of $4.00 per share to Chris A. Davis,
ONI's new Executive Vice President, Chief Financial and Administrative
Officer. This grant will result in additional deferred stock compensation
of $11.0 million, which will be amortized over four years from the date of
the grant. (unaudited)
F-25
<PAGE>
Independent Auditors' Report
The Board of Directors
Object-Mart, Inc.:
We have audited the accompanying balance sheet of Object-Mart, Inc. as of
December 31, 1998, and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1998 and for the six
months ended June 29, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Object-Mart, Inc. as of
December 31, 1998, and the results of operations and cash flows of Object-Mart,
Inc. for the year ended December 31, 1998 and for the six months ended June 29,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
April 10, 2000
F-26
<PAGE>
OBJECT-MART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS December 31, 1998
------ -----------------
<S> <C>
Current assets:
Cash and cash equivalents................................... $ 54,568
Accounts receivable......................................... 383,907
Other current assets........................................ 12,623
---------
Total current assets...................................... 451,098
Property and equipment........................................ 62,428
Other assets.................................................. 1,298
---------
Total assets.............................................. $ 514,824
=========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Accounts payable............................................ 15,869
Accrued expenses............................................ 9,127
Deferred income taxes....................................... 136,863
---------
Total current liabilities................................. 161,859
Shareholders' equity:
Common Stock, no par value; 10,000,000 shares authorized and
2,751,000 shares issued and outstanding at December 31, 1998. 146,060
Notes receivable from shareholder............................. (143,360)
Retained earnings............................................. 350,265
---------
Total shareholders' equity................................ 352,965
---------
Total liabilities and shareholders' equity.............. $ 514,824
=========
</TABLE>
See accompanying notes to financial statements
F-27
<PAGE>
OBJECT-MART, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended
1998 June 29, 1999
------------ -------------
<S> <C> <C>
Revenue.............................................. $1,933,081 $1,744,600
Cost of revenue.................................... 1,023,922 509,013
---------- ----------
Gross profit..................................... 909,159 1,235,587
---------- ----------
Operating expenses:
Research and development........................... 198,526 582,927
Sales and marketing................................ 129,451 52,888
General and administrative......................... 69,237 105,524
Stock compensation................................. -- 466,507
---------- ----------
Total operating expenses......................... 397,214 1,207,846
---------- ----------
Operating income................................. 511,945 27,741
Interest income, net................................. 8,138 14,286
---------- ----------
Income before income taxes......................... 520,083 42,027
Income taxes......................................... 207,140 109,023
---------- ----------
Net income/(loss)................................ $ 312,943 $ (66,996)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
OBJECT-MART, INC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months
ended
Year ended June 29,
December 31, 1998 1999
----------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss)............................... 312,943 $ (66,996)
Deferred tax expense............................ -- 28,543
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 46,521 20,811
Amortization of deferred stock compensation.... -- 466,507
Changes in operating assets and liabilities:
Accounts receivable............................ (349,750) (206,400)
Prepaid expenses and other current assets...... (12,208) (198,000)
Other assets................................... 410 --
Accounts payable............................... 9,536 (15,836)
Accrued liabilities............................ (7,475) 275,838
Deferred income taxes.......................... 136,863 (121,828)
Deferred revenue............................... -- 1,000,000
-------- ----------
Net cash provided by operating activities.... (136,840) 1,182,639
Cash flows used in investing activities:
Purchase of property and equipment.............. (108,948) (58,951)
-------- ----------
Net cash used in investing activities........ (108,948) (58,951)
-------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 2,700 255,638
-------- ----------
Net cash provided by financing activities.... 2,700 255,638
-------- ----------
Net increase in cash and cash equivalents.... 30,592 1,379,326
Cash and cash equivalents at beginning of period. 23,976 54,568
-------- ----------
Cash and cash equivalents at end of period....... 54,568 $1,433,894
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
OBJECT-MART, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31, 1998 and six months ended June 29, 1999
<TABLE>
<CAPTION>
Notes
Common stock receivable Total
------------------ from Retained shareholders'
Shares Amount shareholders earnings equity
--------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1997............... 2,500,000 $ 65,500 $ (65,500) $ 37,322 $ 37,322
Issuance of Common
Stock.................. 251,000 80,560 (77,860) -- 2,700
Net income.............. -- -- -- 312,943 312,943
--------- -------- --------- -------- ----------
Balance as of December
31, 1998............... 2,751,000 $146,060 $(143,360) $350,265 $ 352,965
Exercise of options for
cash................... 877,500 255,638 -- -- 255,638
Stock Compensation...... -- 466,507 -- -- 466,507
Net Loss................ -- -- -- (66,996) (66,996)
--------- -------- --------- -------- ----------
3,628,500 $868,205 $(143,360) $283,269 $1,008,114
========= ======== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS
Year ended December 31, 1998 and six months ended June 29, 1999
(1) Description of Business and Significant Accounting Policies
(a) Description of Business
Object-Mart, Inc. (Object-Mart) was incorporated in California on February
27, 1997. The company provided telecommunications software products and
services to telecommunications software development companies, service
providers and equipment manufacturers.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Object-Mart to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and to disclose contingent assets and liabilities at the date of
the financial statements and the reported results of operations during the
reporting period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
Object-Mart considers highly liquid investments with remaining maturities of
less than three months at the date of purchase to be cash equivalents. As of
December 31, 1998, cash equivalents consisted of a money market account in the
amount of $50,862.
(d) Accounts Receivable
Accounts receivable is comprised of unbilled trade accounts receivable. As
of December 31, 1998, there was no allowance for uncollectible accounts
receivable.
(e) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to three years. Depreciation expense for the year ended
December 31, 1998 was $46,521 and for the six month period ended June 29, 1999
was $20,811.
(f) Software Development Costs
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the date the product
is generally available for sale. The capitalized cost is then amortized over
the estimated life of the product. To date, Object-Mart has not capitalized any
software development costs because capitalizable costs meeting the requirements
SFAS No. 86 have not been significant.
(g) Revenue Recognition
Object-Mart derives its revenue from software license agreements and
consulting services. Software license revenues are recognized upon execution of
the license agreement and delivery of the software. In all cases, however, no
significant post-contract obligations of Object-Mart shall be remaining.
Otherwise, software license fees are deferred until all of the requirements for
revenue
F-31
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(h) Research and Development
All research and development costs are expensed as incurred.
(i) Fair Value of Financial Instruments
The fair value of Object-Mart's cash and cash equivalents, accounts
receivable, prepaid expenses and other current assets, accounts payable and
accrued liabilities approximates their carrying value due to the short-term
nature of those instruments.
(j) Stock-Based Compensation
Object-Mart accounts for stock-based awards to employees using the intrinsic
value method. Expense associated with stock-based compensation is being
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board (FASB) Interpretation No. 28. Consistent with the fair value approach
enumerated in SFAS No. 123, Object-Mart discloses the pro forma effects of
using the fair value method of accounting for stock-based compensation
arrangements.
(k) Comprehensive Income/Loss
Other comprehensive income/loss refers to revenue, expenses, gains and
losses that are not included in net income/loss, but rather are recorded
directly in stockholders' equity. To date, Object-Mart has no items of other
comprehensive income/loss and, accordingly, comprehensive loss is the same as
net loss.
(l) Income Taxes
Object-Mart utilizes the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
F-32
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income tax expense for the year ended December 31, 1998 and the six months
ended June 29, 1999 consisted of:
<TABLE>
<CAPTION>
Year ended
December 31, Six months ended
1998 June 29, 1999
------------ ----------------
<S> <C> <C>
Current:
Federal...................................... $ 54,798 $ 182,007
State........................................ 15,479 48,845
-------- ---------
Total current tax expense.................. $ 70,277 $ 230,852
-------- ---------
Deferred:
Federal...................................... 106,414 (97,429)
State........................................ 30,449 (24,400)
-------- ---------
Total deferred tax expense (credit)........ 136,863 (121,829)
-------- ---------
Total tax expense.......................... $207,140 $ 109,023
======== =========
</TABLE>
The income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax income as a result of the
following:
<TABLE>
<CAPTION>
December 31, 1998 June 29, 1999
----------------- -------------
<S> <C> <C>
Federal tax at statutory rate............... $176,828 $ 14,289
State taxes, net of federal income tax
benefit.................................... 30,312 18,011
Deferred stock compensation................. -- 79,362
Other....................................... -- (2,639)
-------- --------
Total tax expense....................... $207,140 $109,023
======== ========
</TABLE>
The types of temporary differences that give rise to significant portions of
Object-Mart's deferred tax assets and liabilities are set out below.
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax assets:
State income taxes............................................. $ 15,616
Plant and equipment............................................ 1,279
---------
Gross deferred tax assets....................................... 16,895
Deferred tax liabilities:
Accruals and reserves.......................................... (153,758)
---------
Net deferred tax liabilities.................................... $(136,863)
=========
</TABLE>
F-33
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment as of December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Computers...................................................... $ 85,488
Software....................................................... 18,985
Furniture...................................................... 4,476
--------
108,949
Less accumulated depreciation.................................. 46,521
--------
Total.......................................................... $ 62,428
========
</TABLE>
(3) Concentrations of Credit Risk
Financial instruments, which potentially subject Object-Mart to
concentrations of credit risk, consist principally of cash equivalents and
accounts receivable. Cash equivalents are money market funds maintained with a
high quality financial institution. Object-Mart generally does not require
collateral for sales on credit. Object-Mart closely monitors extensions of
credit and has not experienced significant credit losses in the past.
A summary of sales to major customers that exceeded 10% of total sales
during the year ended December 31, 1998 and the six months ended June 29, 1999,
and the amount due from these customers as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Sales
--------------------------- December 31,
Year ended Six months 1998
December 31, ended June 29, Accounts
1998 1999 receivable
------------ -------------- ------------
<S> <C> <C> <C>
Customer A......................... $725,810 $ -- $ 90,000
Customer B......................... $661,521 $ -- $ --
Customer C......................... $277,350 $279,900 $277,350
Customer D......................... $268,400 $788,800 $ 18,400
Customer E......................... $ -- $387,600 $ --
</TABLE>
(4) Shareholders' Equity
(a) Common Stock
In June 1999, in connection with the acquisition by ONI Systems, Corp.
(ONI), all outstanding shares of common stock of Object-Mart were acquired by
ONI in exchange for ONI's common stock and cash consideration. Pursuant to the
acquisition agreement, all shares of Object-Mart's common stock and outstanding
options became vested upon acquisition were exchanged into ONI's common stock.
As a result, Object-Mart recorded $466,507 of stock compensation.
(b) Stock Option Plan
1998 Stock Option Plan
In July 1998, Object-Mart's Board of Directors adopted the 1998 Stock Option
Plan (1998 Plan) and reserved a total of 1,000,000 share of Object-Mart's
common stock for issuance thereunder. Options granted under the 1998 Plan may
be designated as "Incentive Stock Options" or "Nonstatutory Stock Options" at
the discretion of Object-Mart, with exercise prices not less than the
F-34
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
fair market value at the date of grant. Options generally vest 25% on the first
anniversary of the vesting start date and then monthly over the next three
years. Options expire ten years from the date of grant. All options were vested
upon Object-Mart's acquisition by ONI.
A summary of the status of Object-Mart's option plan is as follows:
<TABLE>
<CAPTION>
Outstanding options
------------------------------
Shares Number Weighted Weighted
available of average average grant
for grant shares exercise price date fair value
--------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December
31, 1997............... -- --
Authorized in July,
1998................... 1,000,000
Granted................ (900,000) 900,000 $0.20 $0.20
Exercised.............. -- (75,000) 0.20
Cancelled.............. 200,000 (200,000) 0.20
--------- -------- -----
Balance as of 12/31/98.. 300,000 625,000 $0.20
Granted................ (295,500) 295,500 0.60 $0.60
Exercised.............. -- (917,500) 0.33
Cancelled.............. 3,000 (3,000) 0.20
--------- -------- -----
Balance as of June 29,
1999................... 7,500 -- $ --
--------- -------- -----
</TABLE>
(c) Accounting for Stock-Based Compensation
Object-Mart uses the intrinsic value method in accounting for its employee
stock-based compensation plan. Accordingly, no compensation cost has been
recognized for any of its stock options granted because the exercise price of
each option equaled or exceeded the fair value of the underlying common stock
as of the grant date for each stock option.
Had compensation cost for Object-Mart's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
Object-Mart's net loss applicable to common stockholders for the year ended
December 31, 1998, and the six month ended June 29, 1999, would not have been
materially different from the reported net income/loss.
F-35
<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-36
<PAGE>
ONI SYSTEMS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1999
<TABLE>
<CAPTION>
Historical Pro forma
------------------------ ----------------------------
Object-
ONI Systems Mart Adjustments Combined
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $ 3,033,995 $1,744,600 $ (152,800)(a) $ 4,625,795
Cost of revenues....... 1,032,144 509,013 (64,384)(b) 1,476,773
------------ ---------- ----------- ------------
2,001,851 1,235,587 (88,416) 3,149,022
------------ ---------- ----------- ------------
Operating expenses:
Research and
development........... 25,399,728 582,927 (101,108)(c) 25,881,547
Sales and marketing.... 4,557,245 52,888 12,692 (d) 4,622,825
General and
administrative........ 4,755,582 105,524 1,419,960 (e) 6,281,066
Amortization of
deferred stock
compensation.......... 11,421,739 466,507 -- 11,888,246
Amortization of common
stock warrants........ 2,890,500 -- -- 2,890,500
In-process research and
development........... 170,000 -- (170,000)(f) --
------------ ---------- ----------- ------------
Total operating
expenses........... 49,194,794 1,207,846 1,161,544 51,564,184
------------ ---------- ----------- ------------
Operating loss...... (47,192,943) 27,741 (1,249,960) (48,415,162)
Interest income, net... 622,972 14,286 -- 637,258
------------ ---------- ----------- ------------
Income (loss) before
income taxes....... (46,569,971) 42,027 (1,249,960) (47,777,904)
Income taxes........... 1,600 109,023 (109,023)(g) 1,600
------------ ---------- ----------- ------------
Net income (loss)... $(46,571,571) $ (66,996) $(1,140,937) $(47,779,504)
============ ========== =========== ============
Basic and diluted net
loss per share........ $ (2.58) $ (2.65)
============ ============
Shares used to compute
basic and diluted net
loss per share........ 18,043,188 18,043,188
============ ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-37
<PAGE>
ONI SYSTEMS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) Unaudited Pro Forma Combined Condensed Statements of Operations
The pro forma combined condensed statements of operations give effect to the
acquisition as if it had occurred on January 1,1999.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:
(a) Adjustment to eliminate intercompany revenue
(b) Adjustment to eliminate cost of revenue related to intercompany revenue
(c) Adjustment to eliminate intercompany expense of $152,800 netted against
reclassification of cost of revenue of $51,692
(d) Adjustment to reclassify cost of revenue
(e) The adjustment to record additional amortization of goodwill for the
six month period ended June 29, 1999 is calculated as the six-month
amortization of the $5,679,839 goodwill recorded in relation to the
Object-Mart acquisition, to be amortized over a two-year period.
(f) Adjustment to reverse the value of purchased in-process research and
development as this is a non-recurring charge.
(g) Adjustment to reverse income tax expense for the amount of the combined
company.
F-38
<PAGE>
[LOGO OF ONI SYSTEMS]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Special Note Regarding Forward-Looking Statements......................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 33
Management................................................................ 45
Related Party Transactions................................................ 58
Principal Stockholders.................................................... 63
Description of Capital Stock.............................................. 66
Shares Eligible for Future Sale........................................... 70
Underwriting.............................................................. 73
Validity of Common Stock.................................................. 75
Experts................................................................... 75
Where You Can Find Additional Information................................. 75
Index to Financial Statements............................................. F-1
</TABLE>
---------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,000,000 Shares
ONI Systems Corp.
Common Stock
---------------
[ONI SYSTEMS LOGO]
---------------
Goldman, Sachs & Co.
Banc of America Securities LLC
Chase H&Q
Robertson Stephens
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 38,861
NASD filing fee.................................................. 15,220
Nasdaq National Market initial filing fee........................ 95,000
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 550,000
Road show expenses............................................... 75,000
Printing and engraving expenses.................................. 350,000
Blue Sky qualification fees and expenses......................... 25,000
Transfer agent and registrar fees and expenses................... 30,000
Miscellaneous expenses........................................... 20,919
----------
Total.......................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation and Bylaws eliminate the personal liability of
its directors for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for any breach of the director's duty of loyalty to the Registrant or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Bylaws provide that:
. the Registrant is required to indemnify its directors and officers to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;
. the Registrant may indemnify its other employees and agents as set forth
in the Delaware General Corporation Law;
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;
. we may advance expenses, as incurred, to our employees and agents in
connection with legal proceedings; and
. the rights conferred in the Bylaws are not exclusive.
II-1
<PAGE>
The Registrant has entered into Indemnification Agreements with each of its
current directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Registrant's Certificate of Incorporation and to provide additional
procedural protections. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Registrant
regarding which indemnification is sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification.
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnification
Agreements entered into between the Registrant and each of its directors and
officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the
Securities Act.
The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Form of Underwriting Agreement....................................... 1.01
Registrant's Certificate of Incorporation............................ 3.01
Registrant's Bylaws.................................................. 3.03
Form of Indemnification Agreement.................................... 10.01
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years prior to the effective date of this Registration
Statement, the Registrant has issued and sold the following unregistered
securities:
1. In October 1997, in connection with Registrant's formation as a
subsidiary of Optivision, Inc., Optivision received 11,565,752 shares
of Registrant's common stock and 8,000,000 shares of Registrant's
Series A preferred stock. In December 1997, Registrant was spun out of
Optivision and Optivision distributed its holdings of Registrant's
common stock and 4,000,000 shares of Registrant's Series A preferred
stock to Optivision shareholders. Optivision retained 4,000,000 shares
of Registrant's Series A preferred stock. In January 1998, all of the
shares of Registrant's Series A preferred stock were converted into
Series B preferred stock on a one-for-one basis. In January 1998,
Optivision sold 2,666,666 shares of Registrant's Series B preferred
stock to a group of investors for an aggregate purchase price of $2
million. In March 1998, Registrant repurchased 1,333,333 shares of its
Series B preferred stock from Optivision, for an aggregate purchase
price of $1 million.
2. In connection with Registrant's spin-out from Optivision in December
1997, Registrant is obligated to issue 233,468 shares of common stock,
to Venture Lending & Leasing, Inc. upon the exercise by Venture
Lending & Leasing, Inc. of warrants to purchase capital stock of
Optivision. Registrant will not receive any proceeds from the exercise
of these warrants.
3. From December 1997 through March 1998, the Registrant offered, and in
January 1998 issued and sold, 18,128,843 shares of Series B preferred
stock to a group of founding investors for an aggregate consideration
of $4,269,955.83 in cash and services rendered.
4. From December 1997 to March 1998, the Registrant issued and sold
2,733,332 shares of Series C preferred stock to a group of founding
investors for an aggregate consideration of $2,049,999.00 in cash.
II-2
<PAGE>
5. In April 1998, the Registrant issued and sold 4,969,148 shares of
Series D preferred stock to an investor for aggregate consideration of
$4,380,428.20 in cash.
6. From December 1998 to May 1999, the Registrant issued and sold
26,284,024 shares of Series E preferred stock to a group of investors
for aggregate consideration of $23,984,171.90 in cash and other
consideration.
7. In February 1999, Registrant issued and sold warrants, in connection
with an equipment lease financing, to purchase 277,926 shares of Series
B preferred stock at an exercise price of $0.88 per share.
8. In May 1999, in consideration of its acquisition of Object-Mart, Inc.,
the Registrant issued 4,569,276 shares of common stock to a group of 25
former shareholders of Object-Mart.
9. In September 1999, the Registrant issued and sold 8,249,468 shares of
Series F preferred stock to a group of investors for an aggregate
consideration of $15,000,007.75 in cash.
10. From December 1999 to March 2000, the Registrant issued and sold
12,163,418 shares of Series G preferred stock to a group of investors
for an aggregate consideration of $76,842,393.21 in cash and services
rendered.
11. In December 1999, Registrant issued and sold a warrant to a potential
customer to purchase 500,000 shares of common stock at an exercise
price of $0.91 per share.
12. In February 2000, Registrant issued and sold a warrant to a potential
customer to purchase 223,000 shares of common stock at an exercise
price of $0.91 per share.
13. In March 2000, Registrant issued and sold a warrant to purchase
200,000 shares of common stock at an exercise price of $15.00 per
share to a service provider in exchange for services rendered.
14. From Registrant's inception on October 20, 1997 through March 31, 2000,
the Registrant issued 6,944,628 shares of common stock to its
employees, consultants and other service providers through restricted
stock purchases under its benefit plans or pursuant to stock purchase
agreements.
15. From Registrant's inception on October 20, 1997 through March 31, 2000,
Registrant issued 11,864,019 shares of common stock to its employees
upon exercise of options, and as of March 31, 2000, 19,343,345 shares
of common stock were issuable upon exercise of outstanding options.
16. In March 2000, Registrant entered into an agreement with a customer to
sell a total of 266,667 shares of common stock concurrent with the
closing of this offering, at a price per share equal to the per share
price to the public in this offering, which we have assumed to be
$15.00 per share, for a total purchase price of approximately
$4.0 million.
17. In April 2000, Registrant entered into an agreement with an investor to
sell a total of 666,667 shares of common stock concurrent with the
closing of this offering, at a price per share equal to the per share
price to the public in this offering, which we have assumed to be
$15.00 per share, for a total purchase price of approximately $10.0
million.
18. In May 2000, Registrant entered into an agreement with an investor to
sell it 1,333,333 shares of Series H Preferred Stock, at a price per
share of $15.00 for a total purchase price of $19,999,995.00, in a
private placement that will close on or about May 8, 2000 or a later
date agreed to by the investor and us.
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
II-3
<PAGE>
issuer not involving any public offering or transactions under compensation
benefit plans and contracts relating to compensation as provided under Rule
701. The sales of securities described in paragraphs 16 and 17 above were
determined to be exempt from registration under the Securities Act in reliance
upon Regulation S as a transaction involving an offer and sale of securities
outside the United States. The recipients of securities in each transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution and
appropriate legends were affixed to the share certificates issued in these
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
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 Amended and Restated Certificate of Incorporation.
3.02* Form of Registrant's Second Amended and Restated Certificate of
Incorporation (to be filed immediately after the closing of this
offering).
3.03 Registrant's Amended and Restated Bylaws.
4.01 Form of Specimen Certificate for Registrant's common stock.
4.02 Form of Restated and Amended Investors' Rights Agreement, dated May 1,
2000, by and between the certain investors and Registrant.
4.03* Voting Agreement portion of Series D Preferred Stock Purchase
Agreement, dated April 1, 1998, by and between Cisco Systems, Inc. and
Registrant.
4.04* Warrant to Purchase Capital Stock held by Venture Lending & Leasing,
Inc.
4.05* Warrant to Purchase Capital Stock held by Venture Lending & Leasing,
Inc.
4.06* Warrant Agreement No. 1 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.07* Warrant Agreement No. 2 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.08* Warrant Agreement No. 3 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.09* Warrant Agreement to Purchase Common Stock held by COLT
Telecommunications, Inc.
4.10* Warrant Agreement to Purchase Common Stock held by FMR Corp.
4.11* Redemption and Repurchase Agreement, dated December 22, 1999, by and
between Williams Communications, Inc. and Registrant.
4.12* Warrant to Purchase Common Stock held by Fenwick & West LLP.
4.13* Subscription Agreement, dated March 27, 2000, by and between Internet
Initiative Japan and Registrant and related Regulation S Investor
Representation Letter.
4.14 Subscription Agreement, dated April 27, 2000, by and between CCT
Telecom Holdings Limited and Registrant and related Regulation S
Investor Representation Letter.
5.01* Opinion of Fenwick & West LLP regarding the legality of the securities
being registered.
10.01* Form of Indemnification Agreement entered into between Registrant and
each of its directors and executive officers.
10.02* 1997 Stock Option Plan, as amended.
10.03* 1998 Equity Incentive Plan, as amended.
10.04* 1999 Equity Incentive Plan, as amended.
10.05* 2000 Equity Incentive Plan.
10.06* 2000 Employee Stock Purchase Plan.
10.07* Assignment of Lease, dated June 23, 1998, by and between JTS
Corporation ("JTS") and Registrant.
10.08* Agreement, dated June 23, 1998, by and between JTS and Registrant.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
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.
10.22* Offer Letter, dated April 14, 2000, from Registrant to Chris A. Davis.
10.23* Separation Agreement dated March 29, 2000 between Terrence J. Schmid
and Registrant.
10.24+ Purchase Agreement, dated March 21, 2000, between Registrant and E-TEK
Dynamics, Inc.
10.25 Series H Preferred Stock Purchase Agreement dated as of May 1, 2000.
10.26 Regus Business Centre Service Agreement dated March 29, 2000.
21.01* List of Registrant's Subsidiaries.
23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Report on Financial Statement Schedule and Consent of KPMG LLP,
independent auditors.
23.03 Consent of KPMG LLP, independent auditors.
24.01* Power of Attorney (see signature page hereto).
27.01* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
+ Registrant has requested confidential treatment as to portions of this
exhibit.
(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
II-5
<PAGE>
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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on this 2nd day of May, 2000.
ONI SYSTEMS CORP.
/s/ Hugh C. Martin
By: _________________________________
Hugh C. Martin
President, Chief Executive
Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Hugh C. Martin President, Chief Executive May 2, 2000
______________________________________ Officer and Chairman of
Hugh C. Martin the Board
Principal Financial Officer and
Principal Accounting Officer:
/s/ Chris A. Davis Executive Vice President, May 2, 2000
______________________________________ Chief Financial and
Chris A. Davis Administrative Officer
Additional Directors:
* Director May 2, 2000
______________________________________
Matthew W. Bross
* Director May 2, 2000
______________________________________
Kevin R. Compton
* Director May 2, 2000
______________________________________
Jonathan D. Feiber
* Director May 2, 2000
______________________________________
James F. Jordan
* Director May 2, 2000
______________________________________
Gregory B. Maffei
*By: /s/ Hugh C. Martin Attorney-in-fact May 2, 2000
______________________________________
</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 and the (unaudited) three months ended March
31, 2000
<TABLE>
<CAPTION>
Period from October
20, Year Ended Year Ended Three months
1997 (inception) to December 31, December 31, ended
December 31, 1997 1998 1999 March 31, 2000
------------------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Reserve for obsolete and
excess inventory:
Balance, beginning of
period................. -- -- $ -- $1,366,905
Additions charged to
expense................ -- -- 1,366,905 383,624
Reductions.............. -- -- -- 388,500
Balance, end of period.. -- -- $1,366,905 $1,362,029
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
3.01 Registrant's Amended and Restated Certificate of Incorporation.
3.03 Registrant's Amended and Restated Bylaws.
4.01 Form of Specimen Certificate for Registrant's Common Stock.
4.02 Form of Restated and Amended Investors' Rights Agreement, dated May 1,
2000, by and between the certain investors and Registrant.
4.14 Subscription Agreement, dated April 27, 2000, by and between CCT
Telecom Holdings Limited and Registrant and related Regulation S
Investor Representation Letter.
10.24+ Purchase Agreement, dated March 21, 2000, between Registrant and E-TEK
Dynamics, Inc.
10.25 Series H Preferred Stock Purchase Agreement dated as of May 1, 2000.
10.26 Regus Business Centre Service Agreement dated March 29, 2000.
23.02 Report on Financial Statement Schedule and consent of KPMG LLP,
independent auditors.
23.03 Consent of KPMG LLP, independent auditors.
</TABLE>
- --------
+ Registrant has requested confidential treatment as to portions of this
exhibit.
<PAGE>
EXHIBIT 3.01
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ONI SYSTEMS CORP.
ARTICLE I
The name of the corporation is ONI Systems Corp.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 15 East North Street, City of Dover, County of Kent. The name of
its registered agent at that address is Incorporating Services, Ltd.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
(A) Classes of Stock. The corporation is authorized to issue two classes
of shares to be designated respectively Common Stock ("Common Stock") and
Preferred Stock ("Preferred Stock"). The total number of shares of Common Stock
the corporation shall have authority to issue is 185,000,000 shares, $0.0001 par
value per share, and the total number of shares of Preferred Stock the
corporation shall have authority to issue is 82,139,826 shares, $0.0001 par
value per share.
(B) Series of Preferred Stock. The Preferred Stock authorized in Article
IV, Section A above shall be divided into five series as follows: Twenty-Five
Million Seventy-Three Thousand Four Hundred Thirty-Six (25,073,436) shares shall
be designated as "Series B Preferred Stock," Two Million Seven Hundred Thirty-
Three Thousand Three Hundred and Thirty-Two (2,733,332) shares shall be
designated as "Series C Preferred Stock," Four Million Nine Hundred Sixty-Nine
Thousand One Hundred Forty-Eight (4,969,148) shares shall be designated as
"Series D Preferred Stock," Twenty-Six Million Two Hundred Eighty-Four Thousand
Twenty-Four (26,284,024) shares shall be designated as "Series E Preferred
Stock," Eight Million Two Hundred Forty-Nine Thousand Four Hundred Sixty-Eight
(8,249,468) shares shall be designated as "Series F Preferred Stock," Twelve
Million One Hundred Sixty-Three Thousand Four Hundred Eighteen (12,163,418))
shares shall be designated as "Series G Preferred Stock," and Two Million Six
Hundred Sixty-Seven Thousand (2,667,000) shares shall
-1-
<PAGE>
be designated as "Series H Preferred Stock." The rights, preferences, privileges
and restrictions granted to and imposed upon the respective classes and series
of the corporation's capital stock are set forth under Article IV, Section C.
(C) Rights, Preferences and Privileges of Capital Stock. The rights,
preferences, privileges and restrictions granted to or imposed on the respective
classes of the shares of capital stock or the holders thereof are as follows:
i. Dividends. The holders of record of Common Stock (the "Common
Holders") and the holders of record of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock and Series H Preferred Stock (the
"Preferred Holders") shall be entitled to receive, on a pari passu and an as-
converted to Common Stock basis, dividends out of funds legally available
therefor, when, as, and if declared by the Board of Directors, provided that the
Preferred Holders shall be entitled to receive a non-cumulative, preferential
dividend, the amount of which is equal to ten percent (10%) of their respective
Preferred Liquidation Preference (as defined herein). Such preferential
dividends shall be non-cumulative and no rights shall accrue to the Preferred
Holders by reason of the fact that such dividends are not declared in any
period.
ii. Liquidation Preferences.
(a) In the event of any Liquidation Event (as defined herein), the
holders of record of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock and Series H Preferred Stock will be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the Corporation to the holders of Common Stock, $0.2355338295 per share of
Series B Preferred Stock, $0.75 per share of Series C Preferred Stock, $0.881525
per share of Series D Preferred Stock, $0.9125 per share of Series E Preferred
Stock, $1.8183 per share of Series F Preferred Stock, $6.3175 per share of
Series G Preferred Stock and $15.00 per share of Series H Preferred Stock,
respectively, plus any declared but unpaid dividends (the "Preferred Liquidation
Preference"). If upon the occurrence of a Liquidation Event, the assets and
funds to be distributed among the Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock shall be
insufficient to permit the payment of the full Preferred Liquidation Preference,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G and Series H Preferred Stock
in proportion to the full preferential amount each such holder is entitled to
receive pursuant to the Preferred Liquidation Preference.
(b) A "Liquidation Event" shall mean: (i) any liquidation,
dissolution or winding up of the Corporation, whether voluntarily or
involuntarily; (ii) the merger, consolidation or reorganization of the
Corporation with or into any other corporation or corporations, in a transaction
in which more than 50% of the voting power of the Corporation is transferred by
the existing shareholders of the Corporation; or (iii) a sale of all or
substantially all
-2-
<PAGE>
of the assets of the Corporation, provided that this Section IV(C)(ii)(b) shall
not apply to a merger effected exclusively for the purpose of changing the
domicile of the Corporation.
(c) Solely in the event of a Liquidation Event which occurs prior to
December 21, 2000 (a "Participating Liquidation Event"), then, after the full
Preferred Liquidation Preference has been paid on all outstanding shares of
Preferred Stock, any remaining funds and assets of the Corporation legally
available for distribution to shareholders shall be distributed ratably among
the holders of record of Common Stock, Series F Preferred Stock, Series G
Preferred Stock and Series H Preferred Stock pro rata according to the number of
shares of Common Stock held by such holders, (where, for this purpose, holders
of shares of Preferred Stock will be deemed to hold (in lieu of their Preferred
Stock) the greatest whole number of shares of Common Stock then issuable upon
conversion in full of such shares of Preferred Stock pursuant to Section
IV(C)(v)) until such time (with respect to each series of Preferred Stock) as
each holder of the shares of such Series F Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock shall have received (in addition to
distributions under Section IV(C)(ii)(a)), in distributions made under this
Section IV(C)(ii)(c), the Participation Amount (as defined below) for each then
outstanding share of such series of Preferred Stock. The "Participation Amount"
shall be equal to $1.8183 per share with respect to Series F Preferred Stock,
$6.3175 per share with respect to Series G Preferred Stock and $15.00 per share
with respect to the Series H Preferred Stock.
(d) After the full Preferred Liquidation Preference has been paid on
all outstanding shares of Preferred Stock pursuant to Section IV(C)(ii)(a) and,
if applicable, the holders of Preferred Stock shall have received their full
Participation Amount pursuant to Section IV(C)(ii)(c), any remaining funds and
assets of the Corporation legally available for distribution to shareholders
shall be distributed ratably among the holders of Common Stock.
(e) Notwithstanding anything in this Article IV to the contrary, as
authorized by Section 151 of the Delaware General Corporation Law, the
Corporation may make distributions in connection with repurchases by the
Corporation of shares of Common Stock issued to or held by employees, directors
or consultants of or to the Corporation or any of its subsidiaries upon
termination of their employment or services pursuant to agreements providing for
the right of such repurchase at cost between the Corporation and such persons.
iii. Voting Rights. Except as otherwise required by law, the holder of
each share of Preferred Stock shall be entitled to the number of votes equal to
the number of shares of Common Stock into which such share of Preferred Stock
could be converted on the record date for the determination of the shareholders
entitled to vote on such matters, or if no such record date is established, at
the date such vote is taken or written consent of shareholders is solicited and
shall have voting rights and powers corresponding to the voting rights and
powers of Common Stock. Except as otherwise required by law or as otherwise set
forth herein, the holder of each share of Preferred Stock shall vote together
with the holders of Common Stock as a single class on all matters and shall be
entitled to notice of any shareholders meeting in accordance with the Bylaws of
the Corporation. The holders of Common Stock shall be entitled to the number of
votes equal to the number of shares held. Fractional shares shall not, however,
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be permitted any fractional voting rights resulting from the above formulas.
Such fractional shares shall be rounded to the nearest whole number (with one-
half being rounded down). The number of members of the Board of Directors shall
be six. Four directors shall be elected by the holders of record of the Series B
Preferred Stock, Series C Preferred Stock and Series E Preferred Stock voting as
a separate class, one director shall be elected by the holders of record of the
Common Stock voting as a separate class, and one director shall be elected by
the holders of record of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock, Series H Preferred Stock and Common Stock voting
together as a single class. A director may be removed only by the holders of the
class or classes of capital stock, as the case may be, who elected such
director, and a successor to fill any position on the Board of Directors shall
be filled exclusively by a vote of such class or classes of capital stock, as
the case may be, that elected the director that previously filled that position.
iv. Certain Taxes. The Corporation shall pay any and all issuance and
other taxes (excluding any federal or state income taxes) that may be payable in
respect of any issuance or delivery of shares of Common Stock on conversion of
the Preferred Stock. The Corporation shall not, however, be required to pay any
tax that may be payable in respect of any transfer involved in the issuance and
delivery of shares of Common Stock in a name other than that in which the shares
of Preferred Stock to which such issuance relates were registered, and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the Corporation the amount of any such tax, or it is
established to the satisfaction of the Corporation that such tax has been paid.
v. Conversion. The Preferred Holders shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert; Automatic Conversion.
(i) Subject to Section IV(C)(v)(c), each share of Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share, at the office of the Corporation or
any transfer agent for such shares, into such number of fully paid and
nonassessable shares of Common Stock determined as set forth below; provided
that for so long as the Corporation has not withdrawn its Registration Statement
(File No. 333-32104) under the Securities Act of 1933, as amended, the Series H
Preferred Stock shall not be convertible to Common Stock (except as provided in
Section IV(C)(v)(a)(ii), below) until the earlier of (A) immediately prior to
any Liquidation Event and (B) August 1, 2000.
Each share of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock and, subject to the foregoing Series H Preferred
Stock shall be convertible into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing their respective Preferred
Liquidation Preference by the applicable Conversion Price, determined as
hereafter provided, in effect at the time of conversion. The initial "Conversion
Price" for a series shall be the per share Preferred Liquidation Preference for
such series; provided, however,
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that such Conversion Price shall be subject to other adjustments as set forth
below.
(ii) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the applicable Conversion Price
immediately upon the occurrence of the first of the following:
(A) Upon the closing of the sale of the Corporation's Common
Stock in an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation to the public in which
the Corporation receives not less than $40,000,000 (a "Qualified IPO").
(B) The approval of such conversion by the written consent
of the holders of 66-2/3% of the then-outstanding shares of Preferred Stock,
voting together as a single class.
(b) Mechanics of Conversion. Before any holder of shares of
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such shares, and shall give written notice by mail, postage prepaid, to the
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such office to such
holder of shares of Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as provided above. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the certificate or certificates representing the
shares of Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock as of such date.
(c) Conversion Price Adjustments. The Conversion Price of each
series of the Preferred Stock shall be subject to adjustment from time to time
as follows:
(i) (A) If at any time after the date on which the Corporation
first issues each series of Preferred Stock, the Corporation shall issue any
Additional Stock (as defined herein) without consideration or for a
consideration per share less than the Conversion Price for a given series of
Preferred Stock in effect immediately prior to the issuance of such Additional
Stock, then such Conversion Price in effect immediately prior to each such
issuance shall (except as otherwise provided in this clause (i)) be adjusted to:
the Conversion Price determined by dividing (X) an amount equal
to the sum of (a) the product derived by multiplying the Conversion Price in
effect immediately prior to such issue times the number of shares of Common
Stock (including shares of Common Stock deemed to have been issued upon
conversion of the outstanding Preferred Stock or otherwise
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under Section IV(C)(v)(c)(i)(E)), outstanding immediately prior to such issue,
plus (b) the consideration, if any, received by or deemed to have been received
by the Corporation upon such issue, by (Y) an amount equal to the sum of (c) the
number of shares of Common Stock (including shares of Common Stock deemed to
have been issued upon conversion of the outstanding Preferred Stock or otherwise
under Section IV(C)(v)(c)(i)(E)), outstanding immediately prior to such issue,
plus (d) the number of shares of Common Stock issued or deemed to have been
issued in such issue.
(B) No adjustment of the Conversion Price for Preferred
Stock shall be made in an amount less than one cent per share, provided that any
adjustment that is not required to be made by reason of this sentence shall be
carried forward and taken into account in any subsequent adjustment (at such
time as an adjustment otherwise required by this Section IV(C)(v)(c), together
with all prior carried forward adjustments, would cause an adjustment to the
Conversion Price that is greater than or equal to one cent per share). Except to
the limited extent provided for in Sections IV(C)(v)(c)(i)(E)(3),
IV(C)(v)(c)(i)(E)(4), IV(C)(v)(c)(iv) and IV(C)(v)(c)(i)(F), no adjustment of
such Conversion Price shall have the effect of increasing the Conversion Price
above the Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined in good faith by
the Board of Directors.
(E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities (where the shares of Common
Stock issuable upon exercise of such options or rights or upon conversion or
exchange of such securities are not excluded from the definition of Additional
Stock), the following provisions shall apply:
(1) the aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in Sections IV(C)(v)(c)(i)(C) and
IV(C)(v)(c)(i)(D)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum purchase price provided in such options
or rights for the Common Stock covered thereby;
(2) the aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such
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convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any such securities
and related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in Sections IV(C)(v)(c)(i)(C) and
IV(C)(v)(c)(i)(D));
(3) In the event of any change in the number of shares
of Common Stock deliverable upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the antidilution
provisions thereof, the Conversion Price in effect at the time for Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H
Preferred Stock shall forthwith be readjusted to such Conversion Price as would
have obtained had the adjustment that was made upon the issuance of such
options, rights or securities not converted prior to such change or the options
or rights related to such securities not converted prior to such change been
made upon the basis of such change, but no further adjustment shall be made for
the actual issuance of Common Stock upon the exercise of any such options or
rights or the conversion or exchange of such securities;
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price for Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock shall forthwith be
readjusted to such Conversion Price as would have obtained had the adjustment
which was made upon the issuance of such options, rights or securities or
options or rights related to such securities been made upon the basis of the
issuance of only the number of shares of Common Stock actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
(F) Notwithstanding anything to the contrary in this Section
IV(C)(v), in the event of a Qualified IPO, the Conversion Price of the Series H
Preferred stock shall automatically be adjusted to equal eighty-two and one-half
percent (82.5%) of the per share price to the public in such Qualified IPO (as
of immediately prior to such Qualified IPO and the effectiveness of the
automatic conversion to be effected by virtue of Section IV(C)(v)(ii)(A)).
(ii) "Effective Date" means the date on which these Amended and
Restated Certificate of Incorporation are effective.
"Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to Section IV(C)(v)(c)(i)(E)) by the
Corporation after the
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Effective Date other than:
(A) Common Stock issued pursuant to a transaction described
in Section IV(C)(v)(c)(iii);
(B) Common Stock issued or issuable to employees, officers,
or directors of, or consultants to, the Corporation, pursuant to an arrangement
approved by the Board of Directors;
(C) securities issued upon exercise of warrants issued to
parties providing the Corporation with equipment leases, real property leases,
loans, credit lines, or guarantees of indebtedness in connection with commercial
credit arrangements, equipment financings or other similar transactions, and
approved by the Board of Directors;
(D) securities issued pursuant to the acquisition of another
corporation by merger, purchase of all or substantially all of the assets, or
other reorganization by the Corporation;
(E) Common Stock issued or issuable upon conversion of the
shares of Preferred Stock; or
(F) securities issued to a customer, strategic corporate
partner or potential strategic corporate partner and approved by the Board of
Directors in a transaction or series of related transactions not primarily for
financing purposes.
(iii) In the event the Corporation should at any time or from
time to time subsequent to the effective date of this amendment fix a record
date for the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Preferred Stock shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each such
share shall be increased in proportion to such increase of outstanding shares
determined by taking Section IV(C)(v)(c)(i)(E) into account.
(iv) If the number of shares of Common Stock outstanding at any
time after the Effective Date is decreased by a combination of the outstanding
shares of Common Stock, then, as of the record date of such combination, the
Conversion Price of the Preferred Stock shall be appropriately increased so that
the number of shares of Common Stock issuable on conversion of each such share
shall be decreased in proportion to such decrease in outstanding shares.
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(d) Other Distributions. In the event the Corporation shall declare
a distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section IV(C)(v)(c)(iii), then, in each
such case for the purpose of this Section (d), the holders of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred
Stock shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
(e) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section), provision shall be made (in form and substance satisfactory to
the holders of a majority of the Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock then outstanding)
so that the holders of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock shall thereafter be
entitled to receive, upon conversion of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock and Series H Preferred Stock such
shares or other securities or property of the Corporation or otherwise, to which
a holder of Common Stock deliverable upon conversion would have been entitled on
such recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section with respect to the rights of
the holders of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock and Series H Preferred Stock after the recapitalization to the
end that the provisions of this Section (including adjustment of the Conversion
Prices then in effect and the number of shares purchasable upon conversion of
shares of Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(f) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon conversion of
shares of Preferred Stock. In lieu of fractional shares, the number of shares of
Common Stock to be issued to a Preferred Holder upon conversion of all of the
shares being converted of Preferred Stock held by such holder shall be rounded
to the nearest whole number.
(ii) Upon the occurrence of each adjustment of the Conversion
Price of any series of Preferred Stock, the Corporation, at its expense, shall
promptly compute such adjustment in accordance with the terms hereof and prepare
and furnish to each Preferred Holder with respect to which the Conversion Price
is being adjusted a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based.
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(g) Notices of Record Date. In the event of any taking by the
Corporation of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend (other than a
cash dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of
shares of Preferred Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution, or right.
(h) Reservation of Shares Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
(i) Notices. Any notice required by the provisions of this Section
to be given to Preferred Holders shall be deemed to be delivered when deposited
in the United States mail, postage prepaid, registered or certified, and
addressed to each holder of record at his address appearing on the stock
transfer books of the Corporation.
vi. Protective Provisions. Until (i) the consummation of a Qualified IPO,
or (ii) at least 35% of each of the Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock (appropriately
adjusted for stock splits, stock dividends, recapitalizations and similar events
subsequent to the effective date of this amendment) shall have been converted
into Common Stock,
(a) the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock and Series H Preferred Stock, voting
together as a class:
(1) amend or repeal any provision of or add any provision to the
Corporation's Certificate of Incorporation;
(2) effect a transaction described in Section IV(C)(ii)(b)
above;
(3) declare any dividends on or make any distribution on account
of the Common Stock;
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(4) redeem, repurchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purposes) any share or shares
of Preferred Stock or Common Stock, except for repurchases of
Common Stock issued to and held by employees, directors,
consultants or other persons performing services for the
Corporation or any of its subsidiaries pursuant to agreements
providing for the right of such repurchase at cost between the
Corporation and such persons upon the occurrence of certain
events, such as termination of their employment or services;
(5) amend any stock option or equity incentive plan to modify the
number of shares of the Corporation's stock issuable thereunder;
or
(6) sell or grant any exclusive license to the Corporation's
intellectual property without the unanimous approval of the Board
of Directors; and
(b) the Corporation shall not without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock, voting
separately as a class, the holders of at least a majority of the then
outstanding shares of Series C Preferred Stock, voting separately as a class,
the holders of at least a majority of the then outstanding shares of Series D
Preferred Stock, voting separately as a class, the holders of at least a
majority of the then outstanding shares of Series E Preferred Stock, voting
separately as a class, the holders of at least a majority of the then
outstanding shares of Series F Preferred Stock, voting separately as a class,
the holders of at least a majority of the then outstanding shares of Series G
Preferred Stock, and the holders of at least a majority of the then outstanding
shares of Series H Preferred Stock, voting separately as a class, authorize or
issue, or obligate itself to issue, any other equity security which is, or is
convertible into or exercisable for any equity security senior to the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H
Preferred Stock, respectively with respect to voting, dividends, conversion or
upon liquidation.
(D) For so long as the Corporation is not a reporting company under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), neither the
Common Stock or Preferred Stock of the Corporation (or any shares of Common
Stock or Preferred Stock issued as a result of any stock splits or the like) may
be transferred except for transfers:
(i) which would be exempt from the registration requirements of Section 5
of the Securities Act of 1933, as amended (the "Securities Act"); provided that
any shares of such stock in the hands of any such transferee remain subject to
the same restrictions on transfer as they were when held by the transferor;
(ii) pursuant to an effective registration statement under the Securities
Act simultaneously with a registration of such stock of the Corporation under
Section 12 of the Exchange Act;
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(iii) to the Corporation;
(iv) to existing stockholders of the Corporation; provided that any shares
of such stock in the hands of any such transferee remain subject to the same
restrictions on transfer as they were when held by the transferor;
(v) by gift, bequest or operation of the laws of descent or distribution,
provided that any shares of such stock in the hands of the transferee remain
subject to the same restrictions on transfer as they were when held by the
transferor;
(vi) to an entity unaffiliated with the Corporation pursuant to the merger,
consolidation, stock for stock exchange, tender offer or similar transaction
involving the Corporation;
(vii) to a trust for employees of the Corporation established under a
qualified employee benefit plan
(viii) by a trust to such trust's beneficiaries; provided that any shares
of such stock in the hands of any such transferee remain subject to the same
restrictions on transfer as they were when held by the transferor; or
(ix) to an "affiliate" (as defined in the Securities Act) of such
stockholder, provided that such affiliate is an "accredited investor" (as
defined in Regulation D promulgated under the Securities Act).
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal the Bylaws of the corporation.
ARTICLE VI
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(A) The conduct of the affairs of the corporation shall be managed under
the direction of the Board of Directors. The number of directors shall be fixed
from time to time exclusively by resolution of the Board of Directors.
(B) Notwithstanding the foregoing provision of this Article VI, each
director shall hold office until such director's successor is elected and
qualified, or until such director's earlier death, resignation or removal. No
decrease in the authorized number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
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(C) Following the closing of the corporation's initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock to the public (the
"Initial Public Offering"), no action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws of the corporation, and no action shall be taken by
the stockholders by written consent.
(D) Advance notice of stockholder nominations for the election of
directors of the corporation and of business to be brought by stockholders
before any meeting of stockholders of the corporation shall be given in the
manner provided in the Bylaws of the corporation. Business transacted at special
meetings of stockholders shall be confined to the purpose or purposes stated in
the notice of meeting.
(E) Subject to Section 6.5 of the Bylaws of the corporation, following the
closing of the Initial Public Offering, stockholders of the corporation holding
at least sixty-six and two-thirds percent (66-2/3%) of the corporation's
outstanding voting stock then entitled to vote at an election of directors shall
have the power to adopt, amend or repeal Bylaws of the corporation.
Following the closing of the Initial Public Offering, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
corporation's outstanding voting stock then entitled to vote at an election of
directors, voting together as a single class, shall be required to alter,
change, amend, repeal or adopt any provision inconsistent with this Article VI.
ARTICLE VII
To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Neither any amendment nor repeal of this Article VII, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article VII, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such amendment, repeal or adoption of such an inconsistent
provision.
Following the closing of the Initial Public Offering, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
corporation's outstanding voting stock then entitled to vote at an election of
directors, voting together as a single class, shall be required to alter,
change, amend, repeal or adopt any provision inconsistent with this Article VII.
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EXHIBIT 3.03
RESTATED BYLAWS
OF
ONI SYSTEMS CORP.
(a Delaware corporation)
as restated April 25, 2000
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Chairman of the Board, the
Chief Executive Officer, the holders of shares of the Corporation that are
entitled to cast not less than a ten percent (10%) of the total number of votes
entitled to be cast by all stockholders at such meeting (the "Ten Percent
Stockholders"), or by a majority of the members of the Board of Directors.
Special meetings may not be called by any other person or persons. If a special
meeting of stockholders is called by any person or persons other than by a
majority of the members of the Board of Directors, then such person or persons
shall call such meeting by delivering a written request to call such meeting to
each member of the Board of Directors, and the Board of Directors shall then
determine the time, date and place of such special meeting, which shall be held
not more than one hundred twenty (120) nor less than thirty-five (35) days after
the written request to call such special meeting was delivered to each member of
the Board of Directors. Following the closing of the corporation's initial
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
to the public (the "Initial Public Offering"), Ten Percent Stockholders may no
longer call a Special Meeting of Stockholders.
Section 1.3: Notice of Meetings. Written notice of all meetings of
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
time to time to reconvene at the same or another place, and notice need not be
given of any such
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adjourned meeting if the time, date and place thereof are announced at the
meeting at which the adjournment is taken; provided, however, that if the
adjournment is for more than thirty (30) days, or if after the adjournment, a
new record date is fixed for the adjourned meeting, then a notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at the meeting. At the adjourned meeting, the Corporation may transact any
business that might have been transacted at the original meeting.
Section 1.5: Quorum. At each meeting of stockholders, the holders of a
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. If a quorum shall fail
to attend any meeting, the chairman of the meeting or the holders of a majority
of the shares entitled to vote who are present, in person or by proxy, at the
meeting may adjourn the meeting. Shares of the Corporation's stock belonging to
the Corporation (or to another corporation, if a majority of the shares entitled
to vote in the election of directors of such other corporation are held,
directly or indirectly, by the Corporation), shall neither be entitled to vote
nor be counted for quorum purposes; provided, however, that the foregoing shall
not limit the right of the Corporation or any other corporation to vote any
shares of the Corporation's stock held by it in a fiduciary capacity.
Section 1.6: Organization. Meetings of stockholders shall be presided
over by such person as the Board of Directors may designate, or, in the absence
of such a person, the Chairman of the Board, or, in the absence of such person,
the President of the Corporation, or, in the absence of such person, such person
as may be chosen by the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, at the meeting. Such person shall be
chairman of the meeting and, subject to Section 1.12 hereof, shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seems to him or her to be
in order. The Secretary of the Corporation shall act as secretary of the
meeting, but in his or her absence, the chairman of the meeting may appoint any
person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or the
Certificate of Incorporation of the Corporation, and subject to the provisions
of Section 1.8 of these Bylaws, each stockholder shall be entitled to one (1)
vote for each share of stock held by such stockholder. Each stockholder entitled
to vote at a meeting of stockholders, or to express consent or dissent to
corporate action in writing without a meeting, may authorize another person or
persons to act for such stockholder by proxy. Such a proxy may be prepared,
transmitted and delivered in any manner permitted by applicable law. Voting at
meetings of stockholders need not be by written ballot unless such is demanded
at the meeting before voting begins by a stockholder or stockholders holding
shares representing at least one percent (1%) of the votes entitled to vote at
such meeting, or by such stockholder's or stockholders' proxy; provided,
however, that an election of directors shall be by written ballot if demand is
so made by any stockholder at the meeting before voting begins. If a vote is to
be taken by written ballot, then each such ballot shall state the name of the
stockholder or proxy voting and such other information as the chairman of the
meeting deems appropriate. Directors shall be elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
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entitled to vote on the election of directors. Unless otherwise provided by
applicable law, the Certificate of Incorporation of the Corporation or these
Bylaws, every matter other than the election of directors shall be decided by
the affirmative vote of the holders of a majority of the shares of stock
entitled to vote thereon that are present in person or represented by proxy at
the meeting and are voted for or against the matter.
Section 1.8: Fixing Date for Determination of Stockholders of Record.
(a) Generally. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors and which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. If no record date is fixed by the
Board of Directors, then the record date shall be as provided by applicable law.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
(b) Stockholder Request for Action by Written Consent. For such period of
time as stockholders are authorized to act by written consent pursuant to the
provisions of the Certificate of Incorporation of the Corporation and Section
1.10 hereof, any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent without a meeting shall,
by written notice to the Secretary of the Corporation, request the Board of
Directors to fix a record date for such consent. Such request shall include a
brief description of the action proposed to be taken. The Board of Directors
shall, within ten (10) days after the date on which such a request is received,
adopt a resolution fixing the record date. Such record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and shall not be more than ten (10) days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors within ten
(10) days after the date on which such a request is received, then the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in the State of Delaware,
to its principal place of business or to any officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by applicable law, then the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting
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shall be at the close of business on the date on which the Board of Directors
adopts the resolution taking such prior action.
Section 1.9: List of Stockholders Entitled to Vote. A complete list of
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present at the meeting.
Section 1.10: Action by Written Consent of Stockholders.
(a) Procedure. Unless otherwise provided by the Certificate of
Incorporation of the Corporation, and except as set forth in Section 1.8(b)
above, any action required or permitted to be taken at any annual or special
meeting of the stockholders may be taken without a meeting, without prior notice
and without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted; provided, however, that effective immediately after the closing of an
underwritten public offering of shares of the Corporation's Common Stock
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission, any action required or permitted to be taken
by the Corporation's stockholders shall be taken only at a duly called annual or
special meeting of such stockholders, and the Corporation's stockholders shall
not be able to act by written consent. For such period of time as written
stockholder consents are permitted, such consents shall bear the date of
signature of each stockholder who signs the consent and shall be delivered to
the Corporation by delivery to its registered office in the State of Delaware,
to its principal place of business or to any officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. No written
consent shall be effective to take the action set forth therein unless, within
sixty (60) days of the earliest dated consent delivered to the Corporation in
the manner provided above, written consents signed by a sufficient number of
stockholders to take the action set forth therein are delivered to the
Corporation in the manner provided above.
(b) Notice of Consent. Prompt notice of the taking of corporate action by
stockholders without a meeting by less than unanimous written consent of the
stockholders shall be given to those stockholders who have not consented thereto
in writing and, in the case of a Certificate Action (as defined below), if the
Delaware General Corporation Law so requires, such notice shall be given prior
to filing of the certificate in question. If the action which is consented to
requires the filing of a certificate under the Delaware General Corporation Law
(a "Certificate Action"), then if the Delaware General Corporation Law so
requires, the
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certificate so filed shall state that written stockholder consent has been given
in accordance with Section 228 of the Delaware General Corporation Law and that
written notice of the taking of corporate action by stockholders without a
meeting as described herein has been given as provided in such section.
Section 1.11: Inspectors of Elections.
(a) Applicability. Unless otherwise provided in the Corporation's
Certificate of Incorporation or required by the Delaware General Corporation
Law, the following provisions of this Section 1.11 shall apply only if and when
the Corporation has a class of voting stock that is: (i) listed on a national
securities exchange; (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association; or (iii) held of record
by more than 2,000 stockholders; in all other cases, observance of the
provisions of this Section 1.11 shall be optional and at the discretion of the
Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting of
stockholders, appoint one or more inspectors of election to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting.
(c) Inspector's Oath. Each inspector of election, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability.
(d) Duties of Inspectors. At a meeting of stockholders, the inspectors of
election shall (i) ascertain the number of shares outstanding and the voting
power of each share, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period of time a record of the disposition
of any challenges made to any determination by the inspectors and (v) certify
their determination of the number of shares represented at the meeting and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening and
the closing of the polls for each matter upon which the stockholders will vote
at a meeting shall be announced by the inspectors at the meeting. No ballot,
proxies or votes, nor any revocations thereof or changes thereto, shall be
accepted by the inspectors after the closing of the polls unless the Court of
Chancery upon application by a stockholder shall determine otherwise.
(f) Determinations. In determining the validity and counting of proxies
and ballots, the inspectors shall be limited to an examination of the proxies,
any envelopes submitted with those proxies, any information provided in
connection with proxies in accordance with Section 212(c)(2) of the Delaware
General Corporation Law, the ballots and the regular books and
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records of the Corporation, except that the inspectors may consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
that represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for the limited purpose permitted
herein, the inspectors at the time they make their certification of their
determinations pursuant to this Section 1.11 shall specify the precise
information considered by them, including the person or persons from whom they
obtained the information, when the information was obtained, the means by which
the information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 1.12: Notice of Stockholder Business; Nominations.
(a) Annual Meeting of Stockholders.
(i) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders shall be made
at an annual meeting of stockholders (A) pursuant to the Corporation's notice of
such meeting, (B) by or at the direction of the Board of Directors or (C) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of the notice provided for in this Section 1.12, who is entitled to vote
at such meeting and who complies with the notice procedures set forth in this
Section 1.12.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i)
of this Section 1.12, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
sixtieth (60th) day nor earlier than the close of business on the ninetieth
(90th) day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is more than thirty (30) days before or more than sixty (60) days after
such anniversary date, notice by the stockholder, to be timely, must be so
delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the Corporation. Such
stockholder's notice shall set forth: (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected; (b) as
to any other business that the stockholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (c) as to
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the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (2) the class and number of shares of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of subparagraph
(a)(ii) of this Section 1.12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 1.12 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary of the Corporation at the principal executive office
of the Corporation not later than the close of business on the tenth (10th) day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of such meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of such meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 1.12. In the
event the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by subparagraph (a)(ii) of this Section 1.12 shall
be delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such special meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(c) General.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.12. Except as otherwise provided by law or these
Bylaws, the chairman of the meeting shall have the power and duty to determine
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whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 1.12 and, if any proposed nomination or business is not in
compliance herewith, to declare that such defective proposal or nomination shall
be disregarded.
(ii) For purposes of this Section 1.12, the term "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to sections 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 1.12,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 1.12 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall consist
of one or more members. The initial number of directors shall be six (6), and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Directors
need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. Effective
immediately on such date that the Corporation meets the requirements under
Section 2115(c) of the California Corporations Code, the directors shall be
divided, with respect to the time for which they severally hold office, into
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors, with the number of directors in
each class to be divided as equally as reasonably possible. The term of Class I
will expire at the annual meeting of stockholders to be held in 2001, the term
of Class II will expire at the annual meeting of stockholders to be held in
2002, and the term of Class III will expire at the annual meeting of
stockholders to be held in 2003. At each annual meeting of stockholders
commencing with the first annual meeting of stockholders following the closing
of the Initial Public Offering, directors elected to succeed those directors of
the class whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election. Prior to the closing of the Initial Public Offering, each director
shall hold office until the next annual meeting of stockholders and until such
director's successor is elected and qualified, or until such director's earlier
death, resignation or removal. Any director may resign at any time upon written
notice to the Corporation. Subject to the rights of the holders of any series
of Preferred Stock, any vacancy occurring in the Board of Directors for any
cause, and any newly created directorship
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resulting from any increase in the authorized number of directors, shall, unless
(i) the Board of Directors determines by resolution that any such vacancies or
newly created directorships shall be filled by the stockholders, or (ii) as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director, and not by the stockholders. Notwithstanding the preceding
sentence, in any election of directors, the stockholders of the corporation
shall have the rights set forth in subdivisions (a), (b) and (c) of Section 708
of the California Corporations Code; provided, however, that the rights set
forth in this sentence shall terminate to the extent permitted by applicable law
immediately on such date, if ever, that the Corporation becomes a listed
corporation within the meaning of Section 301.5 of the California Corporations
Code. Any director elected in accordance with the two preceding sentences shall
hold office for the remainder of the full term of the director for which the
vacancy was created or occurred. Subject to the rights of any holders of
Preferred Stock, any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors; provided, however, that a director may not
be removed without cause if the votes cast against removal of the director, or
not consenting in writing to the removal, would be sufficient to elect the
director if voted cumulatively (without regard to whether shares may otherwise
be voted cumulatively) at an election at which the same total number of votes
were cast (or, if the action is taken by written consent, all shares entitled to
vote were voted) and either the number of directors elected at the most recent
annual meeting of stockholders, or if greater, the number of directors for whom
removal is being sought, were then being elected.
Section 2.3: Regular Meetings. Regular meetings of the Board of Directors
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or a majority of the
members of the Board of Directors then in office and may be held at any time,
date or place, within or without the State of Delaware, as the person or persons
calling the meeting shall fix. Notice of the time, date and place of such
meeting shall be given, orally or in writing, by the person or persons calling
the meeting to all directors at least four (4) days before the meeting if the
notice is mailed, or at least twenty-four (24) hours before the meeting if such
notice is given by telephone, hand-delivery, telegram, telex, mailgram,
facsimile or similar communication method. Unless otherwise indicated in the
notice, any and all business may be transacted at a special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee of the Board of Directors, may participate in a
meeting of the Board or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
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Section 2.6: Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation of the Corporation, or
required by law, the vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
Section 2.7: Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or in his or her absence by the
President, or in his or her absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence, the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8: Written Action by Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or such committee, as the case may be, consent thereto in writing and
the writing or writings are filed with the minutes of proceedings of the Board
or committee, respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
required by law or the Certificate of Incorporation of the Corporation, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may receive,
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including without limitation their services as
members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting of such
committee who are not disqualified from voting, whether or not he, she or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in a resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation of the
Corporation, except that a committee may, to the extent
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authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in subsection (a) of
Section 151 of the Delaware General Corporation Law, fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation, or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series, adopting an
agreement of merger or consolidation under Sections 251 or 252 of the Delaware
General Corporation Law, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending these Bylaws; and unless the resolution
of the Board of Directors expressly so provides, no such committee shall have
the power or authority to declare a dividend, authorize the issuance of stock or
adopt a certificate of ownership and merger pursuant to section 253 of the
Delaware General Corporation Law.
Section 3.2: Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such rules,
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall consist of
a Chief Executive Officer and/or a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers, including a Chairman of the
Board of Directors and/or Chief Financial Officer, as may from time to time be
appointed by the Board of Directors. All officers shall be elected by the Board
of Directors; provided, however, that the Board of Directors may empower the
Chief Executive Officer of the Corporation to appoint officers other than the
Chairman of the Board, the Chief Executive Officer, the President, the Chief
Financial Officer or the Treasurer. Each officer shall hold office until his or
her successor is elected and qualified or until his or her earlier death,
resignation or removal. Any number of offices may be held by the same person.
Any officer may resign at any time upon written notice to the Corporation. Any
vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise may be filled by the Board of Directors.
Section 4.2: Chief Executive Officer. Subject to the control of the Board
of Directors and such supervisory powers, if any, as may be given by the Board
of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
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(a) To act as the general manager and, subject to the control of the Board
of Directors, to have general supervision, direction and control of the business
and affairs of the Corporation;
(b) To preside at all meetings of the stockholders;
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these Bylaws, at such places
as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds, conveyances,
mortgages, guarantees, leases, obligations, bonds, certificates and other papers
and instruments in writing which have been authorized by the Board of Directors
or which, in the judgment of the Chief Executive Officer, should be executed on
behalf of the Corporation; to sign certificates for shares of stock of the
Corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of the Corporation and to supervise and control
all officers, agents and employees of the Corporation.
The President shall be the Chief Executive Officer of the Corporation unless the
Board of Directors shall designate another officer to be the Chief Executive
Officer. If there is no President, and the Board of Directors has not
designated any other officer to be the Chief Executive Officer, then the
Chairman of the Board shall be the Chief Executive Officer.
Section 4.3: Chairman of the Board. The Chairman of the Board shall have
the power to preside at all meetings of the Board of Directors and shall have
such other powers and duties as provided in these Bylaws and as the Board of
Directors may from time to time prescribe.
Section 4.4: President. The President shall be the Chief Executive
Officer of the Corporation unless the Board of Directors shall have designated
another officer as the Chief Executive Officer of the Corporation. Subject to
the provisions of these Bylaws and to the direction of the Board of Directors,
and subject to the supervisory powers of the Chief Executive Officer (if the
Chief Executive Officer is an officer other than the President), and subject to
such supervisory powers and authority as may be given by the Board of Directors
to the Chairman of the Board and/or to any other officer, the President shall
have the responsibility for the general management and control of the business
and affairs of the Corporation and the general supervision and direction of all
of the officers, employees and agents of the Corporation (other than the Chief
Executive Officer, if the Chief Executive Officer is an officer other than the
President) and shall perform all duties and have all powers that are commonly
incident to the office of president or that are delegated to the President by
the Board of Directors.
Section 4.5: Vice President. Each Vice President shall have all such
powers and duties as are commonly incident to the office of Vice President or
that are delegated to him or her by the Board of Directors or the Chief
Executive Officer. A Vice President may be designated by the Board to perform
the duties and exercise the powers of the Chief Executive Officer in the event
of the Chief Executive Officer's absence or disability.
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Section 4.6: Chief Financial Officer. Subject to the direction of the
Board of Directors and the President, the Chief Financial Officer shall perform
all duties and have all powers that are commonly incident to the office of chief
financial officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all monies
and securities of the Corporation. The Treasurer shall make such disbursements
of the funds of the Corporation as are authorized and shall render from time to
time an account of all such transactions. The Treasurer shall also perform such
other duties and have such other powers as are commonly incident to the office
of a treasurer or as the Board of Directors or the President may from time to
time prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be issued
all authorized notices for, and shall keep or cause to be kept, minutes of all
meetings of the stockholders and the Board of Directors. The Secretary shall
have charge of the corporate minute books and similar records and shall perform
such other duties and have such other powers as are commonly incident to the
office of secretary or as the Board of Directors or the President may from time
to time prescribe.
Section 4.9: Delegation of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.10: Removal. Any officer of the Corporation shall serve at the
pleasure of the Board of Directors and may be removed at any time, with or
without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled to
have a certificate signed by or in the name of the Corporation by the Chairman
or Vice-Chairman of the Board of Directors, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by such stockholder in the Corporation. Any or all of the signatures on
the certificate may be a facsimile.
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate previously issued by it that is alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or such owner's legal representative, to agree
to indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify
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it against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 5.3: Other Regulations. The issue, transfer, conversion and
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1: Indemnification of Officers and Directors. Each person who
was or is made a party to, or is threatened to be made a party to, or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he
or she (or a person of whom he or she is the legal representative) is or was a
director or officer of the Corporation or a Reincorporated Predecessor (as
defined below) or is or was serving at the request of the Corporation or a
Reincorporated Predecessor (as defined below) as a director or officer of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by the Delaware General Corporation Law against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes and penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith, and such indemnification shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that the Corporation shall indemnify any such person seeking indemnity in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation; provided, further, that the Corporation shall not be required
to indemnify a person for amounts paid in settlement of a proceeding unless the
Corporation consents in writing to such a settlement (such consent not to be
unreasonably withheld). As used herein, the term "Reincorporated Predecessor"
means a corporation that is merged with and into the Corporation in a statutory
merger where (a) the Corporation is the surviving corporation of such merger and
(b) the primary purpose of such merger is to change the corporate domicile of
the Reincorporated Predecessor, and shall include ONI Systems Corp., a
California corporation.
Section 6.2: Advance of Expenses. The Corporation shall pay all expenses
(including attorneys' fees) incurred by such a director or officer in defending
any such proceeding as such expenses are incurred in advance of its final
disposition; provided, however, that if the Delaware General Corporation Law
then so requires, the payment of such expenses incurred by such a director or
officer in advance of the final disposition of such proceeding shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
not be required to advance any expenses to a person against whom the
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Corporation directly brings a claim, in a proceeding, alleging that such person
has breached his or her duty of loyalty to the Corporation, committed an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of law, or derived an improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any
person in this Article VI shall not be exclusive of any other right that such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation of the Corporation, these Bylaws, agreement, vote
or consent of stockholders or disinterested directors, or otherwise.
Additionally, nothing in this Article VI shall limit the ability of the
Corporation, in its discretion, to indemnify or advance expenses to persons whom
the Corporation is not obligated to indemnify or advance expenses pursuant to
this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, providing indemnification and
related rights to such person. Such rights may be greater than those provided
in this Article VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided herein or
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a delivery service) by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, overnight
express courier, mailgram or facsimile. Any such notice shall be addressed to
the person to whom notice is to be given at such person's address as it appears
on the records of the Corporation. The notice shall be deemed given (i) in the
case of hand delivery, when received by the person to whom notice is to be given
or by any person accepting such notice on behalf of such person, (ii) in the
case of delivery by mail, upon deposit in the mail, (iii) in the case of
delivery by overnight express courier, on the first business day after such
notice is dispatched, and (iv) in the case of delivery via telegram, telex,
mailgram or facsimile, when dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be given
under any provision of these Bylaws, a written waiver of notice, signed by the
person entitled to notice,
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whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, directors or members of a committee of directors need be
specified in any written waiver of notice.
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof that
authorizes the contract or transaction, or solely because his, her or their
votes are counted for such purpose, if: (i) the material facts as to his, her or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; (ii) the material
facts as to his, her or their relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a corporate
seal, which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
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Section 9.3: Form of Records. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account and minute books, may be kept on, or be in the form of, magnetic tape,
diskettes, photographs, microphotographs or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 9.4: Reliance Upon Books and Records. A member of the Board of
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of his or her duties, be fully protected in relying in
good faith upon records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of the Corporation's
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 9.5: Certificate of Incorporation Governs. In the event of any
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Corporation's Certificate of
Incorporation shall govern.
Section 9.6: Severability. If any provision of these Bylaws shall be held
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including, without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Corporation's Certificate of Incorporation that are not themselves invalid,
illegal, unenforceable or in conflict with the Corporation's Certificate of
Incorporation) shall remain in full force and effect.
Section 9.7: Right of First Offer
(a) If at any time prior to a Qualified IPO (as defined herein) any
stockholder wishes to sell any or all of its shares in accordance with
applicable law, the conditions specified herein, and in the corporation's
Amended and Restated Certificate of Incorporation, to any person other than a
person that is a Permitted Transferee (as defined herein), such stockholder
shall deliver to the Company written notice of its desire to make such sale (for
purposes of this Section 9.7, an "Offer Notice"). The Offer Notice shall
specify such stockholder's desire to make such sale (which shall be for cash
only), the number of shares such stockholder wishes to sell (for purposes of
this Section 9.7, the "Offered Shares") and the cash price per share at which
such stockholder proposes to sell the Offered Shares (for purposes of this
Section 9.7, the "Offer Terms").
(b) The receipt of an Offer Notice by the corporation from such
stockholder shall constitute an offer by such stockholder to sell to the
corporation (or its assignee or assignees)
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the Offered Shares at the cash price set forth in the Offer Terms. Such offer
shall be irrevocable for 20 days after actual receipt of such Offer Notice by
the corporation. During such 20-day period, the corporation (or its assignee or
assignees) shall have the right to accept such offer as to all, but not less
than all, of the Offered Shares by giving a written notice of acceptance (for
purposes of this Section 9.7, the "Notice of Acceptance") to such stockholder
prior to the expiration of such 20-day period.
If the corporation (or its assignee or assignees) so accepts such
stockholder's offer (for purposes of this Section 9.7, an "Accepting Party"),
such person will purchase the Offered Shares for cash from such stockholder, and
the Notice of Acceptance shall specify such Accepting Party's acceptance of such
stockholder's offer at the price set forth in the Offer Terms.
(c) Within ten days of delivery of the Notice of Acceptance, the Accepting
Party shall tender, subject to delivery of the certificates representing the
Offered Shares, duly endorsed for transfer or with duly executed assignments
separate from certificates, and such selling stockholder shall (i) deliver to
the Accepting Party certificates evidencing the Offered Shares duly endorsed in
blank accompanied by assignment separate from certificates duly executed by such
stockholder, and (ii) shall, pursuant to an instrument of assignment reasonably
satisfactory to the Company and its counsel, assign all its rights with respect
to the Offered Shares under the agreement pursuant to which such stockholder
purchased such shares.
(d) In the event that (i) the corporation shall have received an Offer
Notice from such stockholder but such stockholder shall not have received a
Notice of Acceptance as to all of the Offered Shares prior to the expiration of
the thirty-day period following receipt of such Offer Notice or (ii) the
Accepting Party shall have given a Notice of Acceptance to such stockholder but
shall have failed to consummate such purchase, other than as a result of the
fault of such stockholder, then such stockholder may make a sale of such Offered
Shares so long as all the Offered Shares are sold or otherwise disposed of for
cash (A) within 120 days after the date of receipt of such Offer Notice by the
corporation, and (B) at, or in excess of, the price and otherwise on terms no
less favorable to the purchaser thereof than the Offer Terms.
(e) In the event that (i) the corporation shall have received an Offer
Notice from such stockholder, (ii) such stockholder shall not have received from
the corporation (or its assignee) a Notice of Acceptance for all the Offered
Shares prior to the expiration of the thirty-day period following receipt of
such Offer Notice and (iii) such stockholder shall not have sold the remaining
Offered Shares before the expiration of the 120-day period in accordance with
paragraph (d) above, then such stockholder shall thereafter again be subject to
the restrictions of this Section 9.7.
(f) Certain Definitions. As used in this Section 9.7, the following terms
have the following meanings:
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(i) "Permitted Transferee" means, (i) with respect to institutional
stockholders, (a) any entity in control of, controlled by, or in
common control with, the stockholder, where "control" is represented
by ownership of 50% or more of the voting securities of the
controlled entity, or (b) a pro rata distribution to any stockholders
or partners (including limited partners) of such entity, or (ii) with
respect to a non-institutional stockholder, (a) the spouse, parents or
issue of such stockholder, (b) a trust, the beneficiaries of which
include such stockholder and his or her spouse, parents or issue, and
(c) upon such stockholder's death, his or her executors,
administrators, testamentary trustees, legatees or beneficiaries.
(ii) "Qualified IPO" means the closing of the sale of the
corporation's Common Stock in an underwritten public offering pursuant
to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock for the
account of the corporation to the public.
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Following the Initial Public Offering,
stockholders of the Corporation holding at least sixty-six and two-thirds
percent (66-2/3%) of the Corporation's outstanding voting stock then entitled to
vote at an election of directors shall have the power to adopt, amend or repeal
these Bylaws. Prior to the Initial Public Offering, stockholders of the
Corporation holding a majority of the Corporation's outstanding voting stock
then entitled to vote at an election of directors shall have the power to adopt,
amend or repeal these Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal these Bylaws.
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EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
ONI ONI Systems (Logo)
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE
CUSIP 68273F 10 3
This Certifies that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $0.0001 PAR VALUE, OF
==============================ONI Systems Corp.=================================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF the Corporation has caused this certificate to be
signed in facsimile by its duly authorized officers and a facsimile of its
corporate seal.
Dated:
/s/ Michael A. Dillon /s/ Hugh C. Martin
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
[CORPORATE SEAL OF ONI SYSTEMS CORP.]
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
ONI Systems Corp.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT-_______________________Custodian________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act_____________________________________________
(State)
UNIF TRF MIN ACT-________________Custodian (until age_____________)
(Cust)
____________________under Uniform Transfers
(Minor)
to Minors Act____________________________________.
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,________________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated____________________________
X________________________________________
X________________________________________
NOTICE:THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE
CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
<PAGE>
EXHIBIT 4.02
INVESTORS' RIGHTS AGREEMENT
This Investors' Rights Agreement (this "Agreement") is made and entered
into as of May 1, 2000 by and among ONI Systems Corp., a Delaware
corporation (the "Company"), which succeeded its California predecessor, Optical
Networks, Incorporated, upon reincorporation in Delaware, and assumed the
Investors' Rights Agreement of Optical Networks, Incorporated, dated December
22, 1999 (the "Prior Rights Agreement"), with its principal office at 166
Baypointe Parkway, San Jose, California 95134, the persons and entities listed
on Exhibit A attached hereto (the "Investors"), Venture Lending & Leasing, Inc.
("VLLI"), COLT Telecom plc ("COLT"), Fenwick & West LLP ("F&W"), FMR Corp.
("FMR") and Internet Initiative Japan Inc. ("IIJ").
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 the Prior Rights
Agreement of the Company.
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 233,468 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
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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.
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.
G. COLT holds a warrant to purchase up to an aggregate of 500,000 shares
of Common Stock of the Company, pursuant to the Warrant to Purchase Common Stock
of Optical Networks, Incorporated, dated December 8, 1999, between COLT and the
Company (the "COLT Warrant"). Under Section 4.5 of the COLT Warrant, the Company
agreed to grant to COLT the registration rights granted to it under this
Agreement. The common stock issuable to COLT under the COLT Warrant are
hereinafter referred to as the "COLT Common Shares."
H. Certain Investors (the "Series G Investors") are holders of
outstanding shares of the Company's Series G Preferred Stock ("Series G Stock")
issued by the Company pursuant to that certain Series G Preferred Stock Purchase
Agreement by and among the Company and the Series G Investors dated December 22,
1999 (the "Series G Agreement") and have also been granted certain information
rights, registration rights and rights of first refusal under the Prior Rights
Agreement.
I. FMR holds a warrant to acquire up to an aggregate of 200,000 shares of
Common Stock of the Company, pursuant to the Warrant to Purchase Common Stock of
Optical Networks, Incorporated, dated February 15, 2000, between FMR and the
Company (the "FMR Warrant"). The common stock issuable to FMR under the FMR
Warrant are hereinafter referred to as the "FMR Common Shares."
J. F&W holds a warrant to acquire up to an aggregate of 200,000 shares of
Common Stock of the Company, pursuant to the Warrant to Purchase Common Stock of
Optical Networks, Incorporated, dated March 9, 2000, between F&W and the Company
(the "F&W Warrant"). Under Section 7 of the F&W Warrant, the Company agreed to
grant to F&W the registration rights granted to it under this Agreement. The
common stock issuable to F&W under the F&W Warrant are hereinafter referred to
as the "F&W Common Shares."
K. Pursuant to the Subscription Agreement, dated March 27, 2000, between
IIJ and the Company (the "Subscription Agreement"), IIJ has agreed to purchase
concurrently with the Company's initial public offering, the number of shares
Common Stock of the Company equal to $4,000,000 divided by the per share price
to the public in the Company's initial public offering. Pursuant to Section 3 of
the Subscription Agreement, the Company agreed to grant to IIJ the registration
rights granted to it under this Agreement. The Series B and C Investors,
Additional Series C Investors, Series
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D Investor, Series E Investors, Series F Investors Series G Investors and VLLI
are collectively referred to herein as the "Prior Investors."
L. Certain Investors (the "Series H Investors") have agreed to purchase
shares of the Company's Series H Preferred Stock ("Series H Stock") pursuant to
a certain Series H Preferred Stock Purchase Agreement dated of even date
herewith (the "Series H Agreement"). The Series H Agreement provides that, as a
condition to the Series H Investors purchase of Series H Stock thereunder, the
Series H Investors will be granted the rights set forth herein.
N. 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.
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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
stockholder's equity as of the end of such fiscal year, and 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, Series G Agreement or Series H Agreement, as
applicable, such financial reports of the Company as are provided to the
Company's Board of Directors (the
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"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 Certificate of Incorporation (the
"Restated Certificate").
2. REGISTRATION RIGHTS.
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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 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, or securities exercisable for Registrable Securities, 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-
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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, (iii) the COLT Common Shares, (iv) the FMR Common Shares, (v) the
F&W Common Shares, (vi) the Common Stock issuable under the Subscription
Agreement and (vii) any shares of Common Stock of the Company issued or
issuable, directly or indirectly, in respect of such stock described in either
(i), (ii), (iii), (iv) or (iv) 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, Series G Stock and Series
H Stock issued under the Series B and C Agreement, Additional Series C
Agreement, Series D Agreement, Series E Agreement, Series F Agreement, Series G
Agreement or Series H 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 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
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(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 stockholders for such
registration statement to be filed on or before the date filing 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
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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 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
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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.
(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:
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<PAGE>
(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 stockholders 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 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.
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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 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.
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(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 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,
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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 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
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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.
3. RIGHT OF FIRST OFFER.
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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
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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 customer, 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
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
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(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,
Series G Stock and/or Series H Stock originally purchased under the Series B and
C Agreement, Additional Series C Agreement, Series D Agreement, Series E
Agreement, Series F Agreement, Series G Agreement or Series H 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
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
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Agreement, Series F Stock, Series G Stock, Series H 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, Series H 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 H Agreement, additional parties may
purchase shares of Series H 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 H Stock under the Series H
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 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.
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<PAGE>
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 with the intent and
effect that the Prior Rights Agreement shall be hereby terminated and entirely
replaced and superseded by this Agreement. Internet Initiative Japan, COLT, FMR
and F&W hereby agree that any prior registration rights with respect to
securities of the Company held by them shall hereby be 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,
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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]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
COMPANY:
- -------
ONI Systems Corp.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
INVESTORS:
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<PAGE>
EXHIBIT 4.14
SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement") is made as of April 27, 2000
between Optical Networks, Incorporated, a California corporation, with its
principal office at 166 Baypointe Parkway, San Jose, California 95134 and CCT
Telcom Holdings Limited, a company incorporated in the Cayman Islands, with
its principal office at 32/F. China Merchants Tower, Shun Tak Centre, 168-200
Connaught Road Central, Hong Kong (the "Purchaser").
1. SUBSCRIPTION
The Purchaser hereby irrevocably subscribes for and agrees to purchase, on
and subject to the terms and conditions set forth herein, from Optical Networks,
Incorporated, a California corporation, or its successor corporation upon a
reincorporation into Delaware (hereinafter, collectively referred to as the
"Company"), and the Company agrees to sell to the Purchaser, a number of shares
of its Common Stock (the "Shares") equal to $10,000,000 divided by the per share
price to the public in the Company's initial public offering (the "IPO")
(rounded down to the nearest whole share) at a price per share equal to the per
share price to the public in the IPO. Purchaser hereby acknowledges that the
Company is currently incorporated in California and may undertake a
reincorporation in Delaware and in conjunction therewith may change its name.
2. PAYMENT
At the Closing, as defined below, the aggregate purchase price for the
Shares (the "Subscription Price"), shall be paid by wire transfer to the account
of the Company pursuant to instructions and account information to be provided.
3. DOCUMENTS TO BE PROVIDED BY PURCHASER
Contemporaneously herewith, the Purchaser and the Company are entering the
Restated and Amended Investors' Rights Agreement attached hereto as Exhibit A
(the "Rights Agreement") to be effective as of the Closing (defined below), and
the Regulation S Investor Representation Letter attached hereto as Exhibit B
(the "Regulation S Letter").
4. CLOSING AND DELIVERY OF SHARE CERTIFICATES
Delivery and payment for the Shares will be completed in one closing (the
"Closing") at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo
Alto, California at 9:00 a.m. Pacific Time (the "Closing Time") on the closing
date of the IPO or at such earlier date and time as the Company and the
Purchaser may agree in writing (the "Closing Date").
A certificate representing the Shares (the "Certificate") will be delivered
at Closing against payment to the Company of the Subscription Price in the
manner specified in Section 2 above.
<PAGE>
5. CONDITIONS TO CLOSING BY THE PURCHASER
The Purchaser's obligation to purchase the Shares at the Closing is subject
to fulfillment on or prior to the Closing Date of each of the following
conditions (any of which may be waived by the Purchaser in its sole discretion):
5.1 Rights Agreement. The Company shall have executed and delivered the
Rights Agreement to the Purchaser.
5.2 Registration Statement. The registration statement filed with the
Securities and Exchange Commission in connection with the Company's initial
public offering of its common stock to the public shall have been declared
effective.
5.3 Representations and Warranties. The representations and warranties
made by the Company in Section 7 hereof shall be true and correct when made, and
shall be true and correct on the Closing Date (unless provided otherwise in
Section 7) with the same force and effect as if such representations had been
made on and as of said date. The representation in Section 7.3, other than as
updated by the Registration Statement referred to in Section 5.2 as of the
Closing Date, shall also be true and correct on the Closing Date with the same
force and effect as if such representations had been made on and as of said date
5.4 Opinion as to Shares. The Purchaser shall have received a customary
opinion of Fenwick & West as to the validity of the Shares being purchased.
6. CONDITIONS TO CLOSING BY THE COMPANY
The Company's obligation to issue and sell the Shares to the Purchaser at
the Closing is subject to the fulfillment of the following conditions (any of
which, other than Section 6.3, may be waived by the Company in its sole
discretion):
6.1 Representations and Warranties. The representations and warranties
made by the Purchaser in Section 9 hereof and in the Regulation S Letter shall
be true and correct when made, and shall be true and correct on the Closing Date
with the same force and effect as if such representations had been made on and
as of said date.
6.2 Payment. The Company shall have received from the Purchaser payment
in full for the Subscription Price.
6.3 Board Approval. The Company's Board of Directors shall have
authorized or ratified and approved this Agreement and the transactions
contemplated hereby.
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that, except as
otherwise set forth on the Schedule of Exceptions attached as Exhibit C hereto,
the following will be true and correct as of the Closing Date (except for the
representations contained in Section 7.1 and 7.3, which are true only as of the
date hereof):
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7.1 Organization and Standing. The Company is a corporation duly
organized and validly existing under the laws of the State of California and is
in good standing under such laws. The Company has all requisite corporate power
to own and operate its properties and assets, and to carry on its business as
presently conducted and as proposed to be conducted.
7.2 Corporate Power. The Company has all requisite power to execute and
deliver this Agreement and the Rights Agreement, to sell and issue the Shares
hereunder and to carry out and perform its obligations under the terms of this
Agreement and the Rights Agreement.
7.3 Financial Statements. The Company has delivered to the Purchaser the
audited financial statements of the Company as of December 31, 1999 (the
"Financial Statements"). The Financial Statements, together with the notes
thereto, are complete and correct in all material respects, have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods covered thereby, and present fairly the financial
position of the Company as of their respective dates. The Company has no
liabilities which are, individually or in the aggregate, material to the
business or financial condition of the Company (of the type required to be
included in a balance sheet prepared in accordance with generally accepted
accounting principles), except for (i) liabilities disclosed in the Financial
Statements, (ii) liabilities that have been incurred by the Company since
December 31, 1999 in the ordinary course of business, and (iii) liabilities that
have not had a material adverse effect on the Company's business or financial
condition.
7.4 Authorization. All corporate action on the part of the Company, its
directors, and its shareholders that is necessary for the authorization,
execution, delivery, and performance of this Agreement and the Rights Agreement
by the Company, for the authorization, sale, issuance, and delivery of the
Shares, and for the performance by the Company of all of its obligations
hereunder (except for the performance of its covenants to be performed after
Closing) will have been taken prior to the Closing. This Agreement and the
Rights Agreement, when executed and delivered by the Company, will constitute
valid and legally binding obligations of the Company, enforceable in accordance
with their respective terms, subject to (i) laws of general application relating
to bankruptcy, insolvency, and the relief of debtors, (ii) rules of law
governing specific performance, injunctive relief, or other equitable remedies,
and (iii) the extent that the indemnification provisions of Section 2.9 of the
Rights Agreement may be limited by principles of public policy. The Shares,
when issued in accordance with this Agreement, will be duly authorized, validly
issued, fully paid, and nonassessable; provided, however, that the Shares may be
subject to certain restrictions on transfer under applicable state and Federal
securities laws.
7.5 Governmental Consents, etc. No consent, approval, or authorization
of, or designation, declaration, or filing with, any governmental authority on
the part of the Company is required in connection with the valid execution and
delivery of this Agreement, or for the offer, sale, or issuance of the Shares,
or for the consummation of any other transaction contemplated hereby, except
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Shares under the
California Corporate Securities Law of 1968, as amended, and other applicable
blue sky laws, which filing and qualification, if required, will be accomplished
in a timely manner prior to or promptly after the Closing.
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7.6 Brokers or Finders. The Company has not incurred, and will not incur,
directly or indirectly, as a result of any action taken by the Company, any
liability for brokerage or finders' fees or agents' commissions, or any similar
charges, in connection with this Agreement or any transaction contemplated
hereby.
7.7 No Conflict. The execution, delivery, and performance of, and
compliance with, this Agreement and the Rights Agreement, and the issuance of
the Shares, (i) have not resulted in and will not result in any violation of, or
conflict with, or constitute a default under, any term of its Articles or
Certificate of Incorporation or Bylaws, or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company, and (ii) will not result in the suspension, revocation,
impairment, forfeiture, or non-renewal of any material permit, license,
authorization, or approval applicable to the Company, its business, or any of
its properties or assets.
8. MATTERS RELATING TO THE OFFER AND SALE OF THE SHARES
The Purchaser acknowledges and agrees that: (i) it has received no
registration statement, prospectus or any similar document in connection with
its purchase of the Shares, (ii) its decision to execute this Agreement and the
Rights Agreement and to purchase the Shares has not been based upon any verbal
or written representations made by or on behalf of the Company, and (iii) its
decision to purchase the Shares is based upon the information, representations
and covenants of the Company contained in this Agreement, its own review of
Company documents and records, and publicly available information concerning the
Company.
9. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents, warrants, and covenants to the Company
(which representations, warranties, and covenants shall survive the Closing) as
of the date hereof and as of the Closing Date, as follows:
9.1 Purchaser Qualifications. The Purchaser is an "accredited investor"
within the meaning of Rule 501(a) of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), and has substantial
experience in evaluating and investing in private placement transactions, and as
such is capable of evaluating the merits and risks of its investment in the
Company. The Purchaser, by reason of its business or financial experience or
the business or financial experience of its professional advisors who are not
directly or indirectly affiliated with the Company or any affiliate or selling
agent of the Company, has the capacity to protect its own interests in
connection with its purchase of the Shares.
9.2 Investment. The Purchaser is acquiring the Shares for investment for
the Purchaser's own account, not as a nominee or agent, and not with the view to
or for resale in connection with any distribution thereof. The Purchaser
understands that the offer and sale of the Shares have not been, and will not
be, registered under the Securities Act by reason of a specific exemption from
the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations as expressed herein.
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9.3 Rule 144. The Purchaser acknowledges that the Shares must be held
indefinitely unless the resale of the Shares is subsequently registered under
the Securities Act or an exemption from such registration is available. The
Purchaser is aware of the provisions of Rule 144 promulgated under the
Securities Act which permit limited resales of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, (i) the existence of a public market for the shares, (ii) the
availability of certain current public information about the Company, (iii) the
resale occurring not less than one year after a party has purchased and fully
paid for the shares to be sold, (iv) the sale being effected through a "broker's
transaction" or in transactions directly with a "market maker" and (v) the
number of shares being sold during any three-month period not exceeding
specified limitations.
9.4 No Public Market. The Purchaser understands that no public market now
exists for any of the securities issued by the Company and that there is no
assurance that a public market will ever exist for the Shares.
9.5 Access to Data. The Purchaser and its representatives, if any, has
had an opportunity to ask questions of, and receive answers from,
representatives of the Company concerning the Company and the terms and the
conditions of this transaction, as well as to obtain any information requested
by the Purchaser or its representatives. Any questions raised by the Purchaser
or its representatives were answered to the satisfaction of the Purchaser or its
representatives. The Purchaser understands that such discussions, as well as
any written information issued by the Company, were intended to describe certain
aspects of the Company's business and prospects but were not a thorough or
exhaustive description. The Purchaser's decision to enter into the transaction
contemplated hereby is based in part on the answers to such questions as the
Purchaser and its representatives have raised and on the Purchaser's own
evaluation of the risks and merits of the transaction and the Company's proposed
business activities. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 7 of this Agreement or
the right of the Purchaser to rely thereon.
9.6 Authorization. This Agreement and the Rights Agreement, when executed
and delivered by the Purchaser, will constitute valid and legally binding
obligations of the Purchaser, enforceable in accordance with their respective
terms, subject to laws of general application relating to bankruptcy,
insolvency, and the relief of debtors, and rules of law governing specific
performance, injunctive relief, or other equitable remedies, and except to the
extent that the indemnification provisions of Section 2.9 of the Rights
Agreement may be limited by principles of public policy.
9.7 Brokers or Finders. The Company has not incurred, and will not incur,
directly or indirectly, as a result of any action taken by the Purchaser, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this agreement or any transaction contemplated
hereby.
9.8 Tax Consequences. The Purchaser has reviewed with its own tax
advisors the federal, state, local and, if necessary, foreign tax consequences
of this investment and the transactions contemplated by this Agreement. The
Purchaser is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents and understands that the
Purchaser (and not the Company) shall be responsible for its own tax
-5-
<PAGE>
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement.
10. RESTRICTIONS ON TRANSFER
10.1 Restrictions on Transfer. The Shares shall not be sold, assigned,
transferred, or pledged except upon the conditions specified in this Section,
the Regulation S Letter, the Restated Articles, and the Bylaws, which conditions
are intended, among other things, to ensure compliance with the provisions of
the Securities Act. Any proposed transferee of the Shares held by the Purchaser
must agree (prior to transfer) to take and hold such securities subject to the
provisions and upon the conditions specified in this Article.
10.2 Restrictive Legend. Each stock certificate representing the Shares
and any other securities issued in respect of the Shares upon any stock split,
stock dividend, merger, consolidation, recapitalization, or similar event, shall
be stamped or otherwise imprinted with legends in substantially the following
form (in addition to any legend required under the Regulation S Letter and
applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION
WITH, THE DISTRIBUTION THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD,
PLEDGED, OR TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT
IS IN EFFECT AS TO THESE SECURITIES OR (II) THERE IS AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT AN EXEMPTION THEREFROM IS AVAILABLE.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND
RESTRICTING THEIR TRANSFER, THE CERTIFICATE OF INCORPORATION OF THE COMPANY
CONTAINING SUCH RESTRICTIONS, AND THE COMPANY'S BYLAWS, MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE
TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY.
The Purchaser of Shares and any permitted transferees consent to the
Company making a notation on its records and giving instructions to any transfer
agent of the Shares in order to implement the restrictions on transfer described
in this Section.
10.3 Notice of Proposed Transfers. Prior to any proposed transfer of any
Shares, unless there is in effect a registration statement under the Securities
Act covering the proposed transfer, the holder thereof shall give written notice
(the "Notice") to the Company of such holder's intention to make such transfer.
The Notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail. If reasonably requested by the Company prior to the
transfer being effected, the holder shall provide to the Company a written
opinion of legal counsel who shall be reasonably satisfactory to the Company,
addressed to the
-6-
<PAGE>
Company and reasonably satisfactory in form and substance to the Company's
counsel, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act. Each stock
certificate evidencing the Restricted Securities so transferred shall bear the
appropriate restrictive legends set forth in Section 10.2 and in the Regulation
S Letter.
11. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS
The Purchaser acknowledges that the representations, warranties and
covenants contained in this Agreement are made with the intent that they may be
relied upon by the Company to, among other things, determine its eligibility to
purchase the Shares. The Purchaser further agrees that by accepting the Shares,
the Purchaser shall be representing and warranting that the foregoing
representations and warranties are true as of the Closing with the same force
and effect as if they had been made by the Purchaser at the Closing.
The Company acknowledges that the representations, warranties and covenants
contained in this Agreement are made with the intent that they may be relied
upon by the Purchaser. The Company further agrees that by selling the Shares,
the Company shall be representing and warranting that the foregoing
representations and warranties are true as of the Closing with the same force
and effect as if they had been made by the Company at the Closing.
12. TERMINATION
This Agreement shall terminate and be of no further force and effect, and
the rights of the Purchaser and the Company hereunder shall terminate if the
registration statement filed in connection with the Company's IPO shall not have
been declared effective by the Securities and Exchange Commission on or before
July 31, 2000.
Further, the Company shall have the right to terminate this Agreement and
the rights of the Purchaser hereunder, if the U.S. Securities and Exchange
Commission should determine that the sale of the Company securities hereunder
should be integrated with the IPO.
13. GENERAL PROVISIONS
13.1 Governing Law. This Agreement shall be governed by and construed
exclusively in accordance with the internal laws of the State of California as
applied to agreements among California residents entered into and to be
performed entirely within California, excluding that body of law relating to
conflict of laws and choice of law.
13.2 Survival. The representations, warranties, and covenants of the
parties made herein shall survive the Closing and shall in no way be affected by
any investigation of the subject matter thereof made by or on behalf of the
parties.
13.3 Successors and Assigns. Except as otherwise expressly limited
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto, provided, however, that the rights of the Purchaser to purchase
Shares shall not be assignable without the written consent of the Company.
-7-
<PAGE>
13.4 Entire Agreement; Amendment and Waiver. This agreement and the other
documents delivered herewith constitute the full and entire understanding and
agreement between the parties with regard to the subject matters hereof and
thereof. Any term of this agreement may be amended and the observance of any
term hereof may be waived (either prospectively or retroactively and either
generally or in a particular instance) only with the written consent of the
Purchaser and the Company.
13.5 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (i) if to the Purchaser, at its address set forth on Exhibit A, or at
such other address as the Purchaser shall have furnished to the Company in
writing, or (ii) if to any other holder of the Shares, at such address as such
holder shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such Shares who has so furnished an address to the Company, or (iii)
if to the Company, one copy to its address set forth on the first page of this
Agreement and addressed to the attention of the President, or at such other
address as the Company shall have furnished to the Purchaser, and another copy
to the Company's legal counsel to the attention of Michael Dillon, General
Counsel, 166 Baypointe Parkway, San Jose, CA 95134.
13.6 Delays or Omissions. No delay or omission to exercise any right,
power, or remedy accruing to any party upon any breach or default under this
Agreement, shall be deemed a waiver of any other breach or default theretofore
or thereafter occurring. Any waiver, permit, consent, or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any of the parties, shall be
cumulative and not alternative.
13.7 Severability. If any provision of this Agreement is held to be
unenforceable under applicable law, then such provision shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms. The court in its discretion may substitute for the excluded provision an
enforceable provision, which in economic substance reasonably approximates the
excluded provision.
13.8 California Corporate Securities Law. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE 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.
-8-
<PAGE>
13.9 Headings. The headings and captions used in this Agreement are used
for convenience only and are not to be considered in construing or interpreting
this Agreement. All references in this Agreement to articles, sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
articles, sections and paragraphs hereof and exhibits and schedules attached
hereto, all of which exhibits and schedules are incorporated herein by this
reference.
13.10 Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.11 Costs. The Purchaser acknowledges and agrees that all costs and
expenses incurred by the Purchaser (including any fees and disbursements of any
counsel retained by the Purchaser) relating to the offer and sale of the Shares
to the Purchaser shall be paid by the Purchaser.
-9-
<PAGE>
13.12 Counterparts. This agreement may be executed in any number of
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one and the same instrument.
Effective as of the date first set forth above.
OPTICAL NETWORKS, INCORPORATED
By: /s/ Hugh C. Martin
-------------------------------
Name: Hugh C. Martin
-----------------------------
Title: President and CEO
----------------------------
CCT TELCOM HOLDINGS LIMITED
By: /s/ Flora Cheng Yuk Ching
-------------------------------
Name: Flora Cheng Yuk Ching
-----------------------------
Title: Director
----------------------------
[Signature Page to Subscription Agreement]
-10-
<PAGE>
Regulation S Investor Representation Letter
-------------------------------------------
To: Optical Networks, Incorporated, a California corporation, or its
successor corporation upon a reincorporation into Delaware (the "Company")
The undersigned (the "Purchaser") proposes to acquire securities
issued by the Company. United States federal and state securities laws require
that the Company issue its securities only to purchasers that meet certain
qualifications. Purchaser agrees that the representations and agreements made
by it in this Representation Letter will be used and relied upon by the Company
in issuing the Company's securities to Purchaser without registration under
federal and state securities laws.
Purchaser has agreed to purchase shares of the Company's Common Stock
(the "Shares") under that certain Subscription Agreement dated as of April ___,
2000 (the "Agreement"). In addition to the agreements, representations and
warranties made by Purchaser under the Agreement, Purchaser hereby agrees,
represents and warrants as follows:
1. Business or Financial Experience. By reason of Purchaser's
business or financial experience or the business or financial experience of
Purchaser's professional advisors who are unaffiliated with and who are not
compensated, directly or indirectly, by the Company or any affiliate or selling
agent of the Company, Purchaser has the capacity to protect its own interests in
connection with its investment in the Shares.
2. Offshore Transaction. The offer to Purchaser to acquire the
Shares was not made to any person within the United States (which, for purposes
of this Representation Letter, includes the territories and possessions of the
United States, any State of the United States and the District of Columbia),
and, at the time Purchaser initiated its order to buy the Shares, Purchaser was
outside the United States. Purchaser certifies that it is not a U.S. person and
that it is not acquiring the Shares for the account or benefit of any U.S.
person.
3. Offering Restrictions. Purchaser acknowledges and agrees that
the Shares (i) have not been registered under the U.S. Securities Act of 1933,
as amended (the "Securities Act"), will be issued under an exemption from
registration under the Securities Act provided for in Regulation S promulgated
under the Securities Act ("Regulation S") and (ii) in addition to any other
restrictions set forth herein, may not be offered or sold in the United States
or to any U.S. person (other then distributors) unless the Shares are registered
under the Securities Act or an exemption from the registration requirements of
the Securities Act is available.
4. Resale Restrictions. Purchaser acknowledges and agrees that
hedging transactions involving the Shares may not be conducted unless in
compliance with the Securities Act. Purchaser acknowledges and agrees that
during the one year period beginning on the date of Purchaser's acquisition of
the Shares (the "Restriction Period"): (i) Purchaser may resell the Shares only
in accordance with the provisions of Regulation S, pursuant to registration
under the Securities Act or pursuant to an available exemption from the
registration requirements of the Securities Act; (ii) Purchaser may not engage
in hedging transactions with regard to the Shares prior to the end of the
Restriction Period; and (iii) (A) any offer or sale of the Shares shall not be
to a U.S. person or
-1-
<PAGE>
for the account or benefit of a U.S. person; (B) prior to such purchase, the
purchaser of such Shares shall certify that (1) it not a U.S. person and is not
acquiring such Shares for the account or benefit of any U.S. person or (2) it is
a U.S. person who purchased such Shares in a transaction that did not require
registration under the Securities Act; (C) prior to such purchase, the purchaser
of such Shares shall agree to resell during the Restrictive Period such Shares
only in accordance with the provisions of Regulation S, pursuant to registration
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; and (D) prior to such purchase, the
purchaser of such Shares shall agree that hedging transactions including such
Shares may not be conducted unless in compliance with the Securities Act.
5. No Directed Selling Efforts. Purchaser acknowledges and agrees
that it is not aware of any activity initiated for the purpose or with the
effect of conditioning the market in the United States for the Shares offered to
it.
6. Stop Transfer Instructions and Legends. Purchaser understands
that the Company will issue, and Purchaser consents to the issuing of, stop
transfer instructions to the Company's transfer agent with respect to the Shares
to assure compliance with the Securities Act. Purchaser consents to the
placement of the following legend, in substantially the form below, on each
certificate representing the Shares, in addition to any legends described in the
Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE COMPANY DOES
NOT INTEND TO REGISTER THEM. THE SHARES MAY NOT BE OFFERED, TRANSFERRED OR SOLD
EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED UNDER THE
SECURITIES ACT, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
HEDGING TRANSACTIONS INVOLVING THE SHARES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT."
6. Definition of U.S. Person. A "U.S. person", as used in this
Representation Letter, means (i) any natural person resident in the United
States; (ii) any partnership or corporation organized or incorporated under the
laws of the United States; (iii) any estate of which any executor or
administrator is a U.S. person; (iv) any trust of which any trustee is a U.S.
person; (v) any agency or branch of a foreign entity located in the United
States; (vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or account
of a U.S. person; (vii) any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary organized, incorporated
or (if an individual) resident in the United States; and (viii) any partnership
or corporation if: (A) organized or incorporated under the laws of any foreign
jurisdiction; and (B) formed by a U.S. person principally for the purpose of
investing in securities not registered under the Securities Act, unless it is
organized or incorporated, and owned, by accredited investors (as defined in
Rule 501(a) under the Securities Act) who are not natural persons, estates or
trusts.
7. Conflict with Agreement. To the extent that any provision herein
conflicts with any provision of the Agreement, Purchaser agrees that the
provision herein will govern and control.
-2-
<PAGE>
In Witness Whereof, the undersigned Purchaser has executed this Investor
Representation Letter as of the date set forth below.
Dated as of April 27, 2000 Purchaser:
CCT Telcom Holdings Limited
By: /s/ Flora Cheng Yuk Ching
--------------------------
Name: Flora Cheng Yuk Ching
------------------------
Title: Director
-----------------------
Agreed to and Accepted:
Optical Networks, Incorporated
By: /s/ Hugh C. Martin
--------------------------
Name: Hugh C. Martin
------------------------
Title: President and CEO
-----------------------
-3-
<PAGE>
EXHIBIT 10.24
[CONFIDENTIAL TREATMENT REQUESTED]
PURCHASE AGREEMENT
-------------------
This Purchase Agreement ("Agreement") is made between ONI Systems Corp.
("ONI") and E-TEK Dynamics, Inc. and its affiliates ("E-TEK"), as of the latest
date signed below.
ONI Systems Corp. E-TEK Dynamics, Inc.
By: /s/ Martin Desroches By: /s/ Sanjay Subheder
------------------------------- --------------------------------
Name: Martin Desroches Name: Sanjay Subheder
------------------------------- --------------------------------
Title: V.P. Operations Title: CFO
------------------------------- --------------------------------
Date: 03/24/00 Date: 3/24/00
------------------------------- --------------------------------
================================================================================
1. Supply Orders.
1.1. "Supply" or "Supplies" means the E-TEK Optical Components and Module
Integration Services listed in Exhibit B, as may be amended from time to time by
mutual written agreement. Sales of E-TEK products not listed in that exhibit
will also be subject to the terms of trade herein.
1.2. "Specifications" means the specifications for the Supplies as agreed
by the parties.
1.3. ONI will submit purchase orders ("Orders") to E-TEK for Supplies from
time to time, specifying the type and quantity of Supplies and the proposed
delivery dates and shipping instructions. In the event the terms of any Order,
acknowledgement, invoice, confirmation or similar document conflict with or are
additional to the terms of this Agreement, the terms of this Agreement alone
shall apply and shall govern regardless of execution of such document by one or
both parties.
1.4. E-TEK will accept and acknowledge in writing all Orders submitted by
ONI within * * days after receipt thereof, subject to a *
* lead time and E-TEK's available manufacturing capacity. Each acknowledgement
shall include a firm shipping schedule for the Supplies ordered. E-TEK shall
give prompt notice to ONI of any anticipated delay in meeting the shipping
schedule. Such notice will include the reasons for the delay.
1.5. Subject to ONI's purchase commitments in Exhibit A, ONI may (i)
cancel delivery of Supplies under an Order, in whole or in part, subject to
payment of a cancellation fee based on the purchase price applicable to the
cancelled portion of the Order, in accordance with the following:
//
//
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
If E-TEK receives the cancellation notice this many ....then ONI will pay a cancellation
weeks before the delivery date fee equal to:
- ------------------------------------------------------------------------------------------------
<S> <C>
0 - 4 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
>4 - 8 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
>8 - 12 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
>12 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
and, (ii) reschedule delivery of Supplies under an Order one time as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
If E-TEK receives the rescheduling notice this many . . . then ONI may postpone delivery
weeks before the delivery date... by this time
- ------------------------------------------------------------------------------------------------
<S> <C>
0 - 4 weeks * * weeks
- ------------------------------------------------------------------------------------------------
>4 - 8 weeks * * weeks
- ------------------------------------------------------------------------------------------------
>8 - 12 weeks * * weeks
- ------------------------------------------------------------------------------------------------
</TABLE>
1.6 ONI may cancel delivery of Supplies, without penalty, when the
delivery of such Supplies is more than 30 days late. ONI must provide 7 days
written notice on late delivery order cancellation, no less than 30 days after
the then-current delivery date. E-TEK will have 7 days after notification to
deliver late material or renegotiate delivery dates.
2. Sales Forecasts.
2.1. ONI will give E-TEK monthly rolling * *week forecasts ("Forecasts")
for the proposed purchase and sale of Supplies, broken down by weeks. ONI shall
use commercially reasonable efforts to provide 52-week forecasts.
2.2. Subject to Sections 1.5 and Exhibit A of this Agreement, the * *
weeks and only the * * weeks of the rolling forecast are binding forecasts
("Binding Forecasts"). ONI will purchase and issue Orders for all Supplies
covered under Binding Forecasts, in the amounts, and for delivery at the times,
provided in such Binding Forecasts. (Higher quantities of Supplies in earlier
Forecasts will prevail over lower quantities in subsequent Forecasts.)
3. Volumes.
3.1. Notwithstanding any Forecast, ONI will purchase and issue Orders for
Supplies in accordance with the Purchase Commitment in Exhibit A.
4. Purchase Price.
4.1. The prices set forth on Exhibit B apply to all Supplies purchased by
ONI through * *. Prices for Supplies will be reviewed in good
faith by the parties * * months ("Price Review").
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
4.2. Prices exclude taxes, shipping, handling, transportation and
insurance. Taxes and costs may be added to the invoice as a separate charge or
invoiced separately.
5. Payment. E-TEK will invoice ONI upon shipment of Supplies. ONI will
pay the invoiced amount within thirty days from the date of delivery of the
Supplies. Such payments will be in U.S. currency. Any invoice not paid in full
by the due date will have a late payment charge of one and one-half percent per
month (or the maximum rate permitted by law, whichever is less) assessed against
any unpaid balance from the due date of the invoice until the date of payment.
E-TEK may hold shipment when payments are past due.
6. Delivery; Acceptance.
6.1 Delivery of Supplies from E-TEK to ONI will be FCA/FOB (Incoterms) E-
TEK's facility.
6.2. Subject to the quarterly loss allowance described in Exhibit C, risk
of loss, but not title, to ONI components consigned to E-TEK shall pass to E-TEK
upon delivery of such components to E-TEK's carrier. All other shipment terms
for ONI components supplied on consignment to E-TEK will be governed by FCA/FOB
(Incoterms) ONI's facility.
6.3. ONI accepts delivery of all Supplies, requested on any given Order or
any Binding Forecasts, from E-TEK unless it notifies E-TEK in writing within
fifteen days of receipt that it rejects certain Supplies. Any notice of
rejection will include the reasons for the rejection.
6.4 E-TEK shall use commercially reasonable efforts to timely manufacture
sufficient Supplies pursuant to any accepted Orders. In the event that Supplies
are delivered more than thirty days after the scheduled delivery date ("Delayed
Delivery"), ONI will have the right to recover damages equal to the difference
between the purchase price and the market price of the subject Supplies on the
scheduled delivery date. In addition, ONI may procure substitute products from
other suppliers at the cost or expense of ONI. Any substitute products
purchased by ONI from other suppliers as a result of Delayed Delivery shall be
credited against ONI's Purchase Commitment to E-TEK set forth in Exhibit A.
7. Configuration Control.
7.1. ONI may ask E-TEK to change the Specifications of any Supply custom-
designed to ONI's Specifications. E-TEK will use commercially reasonable
efforts to evaluate and make a requested change. If the affected Supply is in
production and E-TEK determines to change the Specification as requested, ONI
will purchase any custom-designed work in process rendered non-conforming by
ONI's requested change. If ONI's requested change alters E-TEK's cost of a
Supply, or requires additional time or resources for E-TEK to implement, then
the parties will negotiate a reasonable price adjustment and lead time for the
affected Supply and the parties will modify the Orders and forecasts
accordingly.
<PAGE>
7.2. E-TEK may change any Supply if the change does not render the Supply
non-conforming to the Specifications; provided that E-TEK notifies ONI in
writing promptly (as is reasonable under the circumstances) prior to
implementing such change in the Supply. Such notice shall include a detailed
description of the changes to be made to the Supply and a written assurance that
such changes will not render the Supply non-conforming to the Specification.
8. Term and Termination.
8.1 This Agreement will remain in effect until December 31, 2001 ("Initial
Term") and will automatically renew for successive * * year periods. Either
party can terminate the Agreement at the end of the Initial Term or at the end
of a subsequent renewal term by giving written notice to the other party at
least ninety days before the end of such term.
8.2. Either party may also terminate this Agreement upon written notice
if:
8.2.1. the other party breaches a material term of this Agreement and
fails to cure it within ninety days of receiving written notice of such breach.
8.2.2. the other party ceases to do business (excluding mergers,
acquisitions, consolidations or reorganizations) because of election to
dissolve, dissolution, insolvency, inability to pay debts as they become due,
general assignment for the benefit of creditors, or, upon the other party's
filing of any bankruptcy petition, whether voluntary or involuntary.
9. Intellectual Property Warranty and Indemnity.
9.1. E-TEK agrees to indemnify, defend and hold harmless ONI and its
officers, directors, successors and assigns from and against any and all loss,
damage, settlement or expense (including reasonable legal expenses), as
incurred, resulting from or arising out of any claims that any Supply or the use
or sale thereof infringe upon, misappropriate or violate any patents,
copyrights, or trade secret rights or proprietary rights (collectively,
"Intellectual Property Rights") of persons, firms or entities who are not
parties to this Agreement; provided that ONI (i) immediately notifies E-TEK, in
writing, of any notice or claim of such alleged infringement, violation or
misappropriation involving the Supplies of which it becomes aware, and (ii)
permits E-TEK to control the defense, settlement, adjustment or compromise of
any such claim using counsel of E-TEK's own choosing; and, (iii) fully
cooperates with the defense. ONI may employ counsel, at its own expense, to
assist it with respect to any such claim.
9.2. E-TEK's obligation to indemnify will not cover any claim that asserts
that a Supply infringes any third party's rights only when used in combination
with any other technology or device not supplied by E-TEK under this Agreement,
and not as a standalone product.
9.3. If by reason of such infringement claim, ONI shall be prevented or
are likely to be prevented by injunction or other legal means from selling or
using any Supplies, or if, in E-TEK's opinion, such claim is likely to occur, E-
TEK will have the right, but not the obligation, to (i) obtain all rights
required to permit the sale or use of the Supplies by ONI, or (ii) modify or
replace such Supplies to make them non-infringing (and extend this
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
indemnity thereto), provided that any such replacement or modified Supplies are
reasonably satisfactory to ONI. If E-TEK is unable to achieve either of the
options set forth above within a reasonable period of time after issuance of the
injunction, but in no event longer than ninety days after E-TEK's receipt of
notice thereof, then (i) ONI will immediately cease any further use and
distribution of the Supplies, (ii) any further supply obligations for those
Supplies will be terminated without any liability to E-TEK, and (iii) E-TEK will
promptly return the fees for those Supplies which are paid by ONI hereunder and
returned promptly to E-TEK (plus related shipping costs), less the amortized
portion of the purchase price amortized on a straight line basis over five years
from the date of purchase.
9.4. In no event will E-TEK's aggregate liability under this section ever
exceed the total purchase price received from ONI for the alleged infringing
Supply.
9.5. THE FOREGOING IS E-TEK'S SOLE OBLIGATION AND LIABILITY WITH RESPECT
TO ANY CLAIMS RELATING TO E-TEK'S ACTUAL OR ALLEGED INFRINGEMENT OR
MISAPPROPRIATION OF ANY THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. EXCEPT FOR
THE WARRANTY STATED IN SECTION 9.1, E-TEK DISCLAIMS ALL OTHER WARRANTIES,
EXPRESS AND IMPLIED, RELATING TO CLAIMS THAT THE SUPPLIES INFRINGE, OR ARE
DERIVED FROM, ANY THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS.
10. Product Warranties.
10.1. E-TEK warrants to ONI that for a period of * *
from the date of delivery of a Supply (the "Warranty Period") that such Supply
will be free from defects in materials and workmanship, and will conform to the
agreed-upon Specifications. This warranty shall not apply in any instance where
any such defect or nonconformity is a result, in whole or in part, of a non-E-
TEK-sourced defective or nonconforming component, material or product supplied
by or through ONI. This warranty is subject to proper installation, operation
and maintenance of the subject Supply in accordance with reasonable industry
standards and/or documentation (if any) to be provided by E-TEK. E-TEK's sole
obligation under this warranty is, at E-TEK's option, to either repair, replace
or correct any defect, or to refund the purchase price upon 30 days from the
return of the defective Supply. Prior to returning any defective Supply, ONI
will request a Return Material Authorization "RMA" number which will be provided
by E-TEK within 48 working hours. All returned Supplies will be shipped to E-
TEK's principal offices with freight and insurance prepaid by ONI; provided,
that the cost will be reimbursed to ONI if the subject Supplies are
nonconforming or defective within the Warranty Period. Supplies that are
repaired or serviced by E-TEK will be warranted as provided in this section for
either the remainder of the original Warranty Period or ninety days after the
Supplies are re-delivered to ONI, whichever is later. E-TEK will provide in
writing a Preliminary Root Cause Analysis within 30 days of E-TEK's receipt of
defective Supplies, and a full Root Cause Analysis and Corrective Action plan
within 60 days of E-TEK's receipt of defective Supplies. Further grace periods
might be granted per E-TEK's request.
10.2. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 10, E-TEK DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
11. Limitation of Liability. EXCEPT FOR E-TEK'S INDEMNITY OBLIGATIONS SET
FORTH IN SECTION 9 (BUT SUBJECT TO THE LIMITS SET FORTH IN SECTION 9.4), IN NO
EVENT WILL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY FOR ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS
OF PROFITS OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS) THAT RELATE IN ANY WAY
TO THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF ANY DAMAGES.
12. Confidential Information. Paragraphs 1-11, 13 and 15 of the parties'
February 3, 1999 Mutual Non-Disclosure Agreement ("NDA") are hereby incorporated
by reference into this Agreement. All other sections of the NDA are terminated
by consent. In addition, the parties acknowledge that: (i) this Agreement, its
terms and conditions, the Supplies, and the business relationship between the
parties, are all deemed to be "Confidential Information" (as defined in the
NDA); (ii) the NDA's term shall now extend to the date of expiration or
termination of this Agreement; and, (iii) Recipient's duty to protect
Confidential Information will expire five (5) years from its receipt of that
information. Notwithstanding the foregoing, the parties may issue a joint press
release commenting generally on the existence of a business relationship and
purchase agreement between them, provided specific terms and conditions are not
disclosed.
13. Notices. Any notice will be in writing, delivered either by overnight
mail or courier, and will be addressed as follows:
If to ONI: If to E-TEK:
ONI Systems Corp. E-TEK Dynamics, Inc.
166 Baypointe Parkway 1865 Lundy Avenue
San Jose, CA 9513 San Jose, CA 95131, U.S.A.
Attn: General Counsel Attn: General Counsel
Notices will be deemed to have been effectively given and received on the
date of delivery.
14. Relationship of Parties. E-TEK and ONI are separate and distinct
entities, and this Agreement does not create a partnership, joint venture, or
any common undertaking.
15. Force Majeure. Neither party shall be responsible or liable for any
delay or failure to deliver or perform, due to any causes beyond the reasonable
control of the delayed party (a "Force Majeure Condition"). In the event of a
Force Majeure Condition, the delayed party shall notify the other party of the
delay in delivery or other performance, and such time will be extended for a
period of time equal to the duration of such Force Majeure Condition; provided
that if a Force Majeure Condition continues beyond ninety days, the non-delayed
party may terminate this Agreement upon notice to the delayed party.
16. Governing Law; Attorneys' Fees. This Agreement will be governed by and
construed in accordance with the laws of California (excluding laws and
principles relating to the conflict of laws). Each party agrees that in any
action to enforce this
<PAGE>
Agreement, the prevailing party will be entitled to recover reasonable
attorneys' fees and other costs incurred therein, in addition to any other
appropriate relief.
17. Severability. If any term or provision of this Agreement is held
invalid or unenforceable to any extent, the remainder of this Agreement will not
be affected and each other term and provision will be valid to the fullest
extent permitted by law.
18. Entire Agreement; Modification; Waiver. This Agreement constitutes
the entire agreement between the parties with respect to its subject matter and
supersedes all prior and contemporaneous agreements, representations and
understandings of the parties. No modification of this Agreement will be binding
unless executed in writing by the parties. No waiver of any provision will be
deemed a waiver of any other provision, nor will any waiver constitute a
continuing waiver. No waiver will be binding unless executed in writing.
19. Binding Effect; Assignment. This Agreement will be binding on and
will inure to the benefit of the parties and their respective agents, successors
and permitted assigns; provided, however, that no party will have the right to
transfer or assign any rights or obligations under this Agreement without first
obtaining the other party's written consent, except no consent will be required
for assignments in connection with a merger, corporate reorganization, or sale
of all, or substantially all, of a party's stock or assets. Any attempted
assignment in violation of this provision will be void.
20. Trade Restrictions. ONI will procure all import and export licenses
and permits, pay all customs charges, duty fees, value added tax (VAT), or any
similar tariffs and fees, and take all other actions required to accomplish the
lawful import and export of the Supplies. ONI warrants that it will comply in
all respects with the export and re-export restrictions of U.S. law and
regulations for each of the Supplies shipped.
21. Survival Of Provisions. Sections 9-22, inclusive, will survive any
expiration or termination of this Agreement.
22. Intellectual Property Ownership. Nothing in this Agreement shall be
construed as a sale, transfer, license or assignment of the Intellectual
Property Rights of any party in and to the Supplies, Specifications, related
information and documentation, it being understood and agreed that each party
retains all rights in and to the parts of the Supplies, Specifications, related
information and documentation that it supplies.
23. Compliance With Laws. E-TEK will comply with all applicable laws,
ordinances, regulations and codes in the performance and execution of this
Agreement.
- - END OF TEXT -
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT A
---------
ONI will purchase Module Integration Services and Optical Components from E-TEK.
Each Module will be comprised of components, broken down into two groups:
Optical Components ("OC") and Other Components.
Purchase Commitment:
For each quarter during this Agreement beginning July 1, 2000, ONI will purchase
from E-TEK at least * * of its requirements of
Module Integration Services listed in Exhibit B, and functionally similar
products. E-TEK will have reasonable audit rights, exercised not more than once
in any six-month period, to confirm that this purchase commitment is being met.
If, at the end of any quarter, E-TEK has accumulated more than two-weeks of
back-schedule versus ONI's demand, indicating their inability to supply to ONI's
required volume of Module Integrated Services, E-TEK will not have audit rights
for that quarter and ONI will not be obligated to purchase the above mentioned
volume in that quarter.
For each quarter during this Agreement beginning July 1, 2000, ONI will purchase
from E-TEK at least * * of its requirements of OCs listed in
Exhibit B, and functionally similar products. These E-TEK OCs will be purchased
from E-TEK and supplied by ONI on consignment. All non-E-TEK OCs and all Other
Components will also be supplied by ONI on consignment. E-TEK will have
reasonable audit rights, exercised not more than once in any six-month period,
to confirm that this purchase commitment is being met. If, at the end of any
quarter, E-TEK has accumulated more than two-weeks of back-schedule versus ONI's
demand, indicating their inability to supply to ONI's required volume of OCs, E-
TEK will not have audit rights for that quarter and ONI will not be obligated to
purchase the above mentioned volume in that quarter.
These purchase commitments will be evaluated in U.S. dollars valued at E-TEK's
prices. The audits contemplated in the two preceding paragraphs will be
conducted by third parties. Those third parties will be appointed by E-TEK,
subject to ONI's consent, which will not be unreasonably withheld.
Once E-TEK's OCs supply situation and product portfolio improves and E-TEK feels
they can offer price competitive "turn-key" modules, ONI will consider
converting existing consignment business into "turn-key" business where E-TEK
directly procures all the required components and sub-assemblies and sales the
modules as products.
The terms of consignment are described in Exhibit C.
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
Exhibit B
---------
Module Integration Services Pricing
- --------------------------------------------------------------------------------
Module Type Assembly Connectors Vert. Integr. Total
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Optical Component Pricing
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
Long-term Price Reduction.
Notwithstanding the terms in section 4 of the Agreement, E-TEK will decrease the
prices in this Exhibit B by at * * each year, beginning January 1,
2002. This * * price decrease will be based, for each Module type, on the
average unit price of that type of Module sold by E-TEK to ONI in the then-
preceding * *month period.
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
Exhibit C
---------
Supply of Components by ONI:
All ONI-supplied components will be timely delivered to E-TEK on consignment,
will meet agreed-upon specifications, and will be free from defects in materials
and workmanship. E-TEK will have no liability to ONI as a result of any ONI-
supplied components that are delivered late, defective or out of spec to E-TEK.
For each quarter beginning April 1, 2000 through September 30, 2000, E-TEK will
be allowed a quarterly loss allowance of an amount equal to the greater *
* of total revenues received by E-TEK in that quarter. For each quarter
beginning October 1, 2000, that quarterly loss allowance will be an amount equal
to the greater of * * of total revenues received by E-TEK in
that quarter. This loss allowance is in addition to the value of ONI-components
that are delivered damaged or defective to E-TEK. If E-TEK loses or destroys
ONI-supplied components in excess of this loss allowance, E-TEK will pay or
credit ONI for such lost or destroyed components in a per unit amount to be
decided by the parties in good faith.
Physical Inventory Audit:
Physical Inventory for ONI-components consigned at E-TEK's facilities will be
performed by E-TEK and audited by ONI ("PI"), once a quarter, or more frequently
if otherwise mutually agreed upon by the parties. On a weekly basis, ONI will
provide to E-TEK the computed book value of ONI's consignment inventory then
located at E-TEK facilities based on the last PI results, adjusted by the
transactions of the then-preceding week. Within 5 working days of E-TEK's
receipt of ONI's computed book value, E-TEK must either agree or disagree in
writing with ONI's computed book value, including details and justifications in
case of disagreement. In order to keep the consignment inventory as accurate as
possible, both parties will act in good faith and report any discrepancies to
the other party as soon as discovered.
In the event that ONI's computed book value differs from E-TEK's estimate of
ONI's consigned inventory by more than $25,000, PI will be performed as soon as
possible, but no later than a week from such event.
- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 10.25
ONI SYSTEMS CORP.
SERIES H PREFERRED STOCK PURCHASE AGREEMENT
This Series H Preferred Stock Purchase Agreement (the "Agreement") is made
effective as of May 1, 2000, between ONI Systems Corp., a Delaware corporation
(the "Company"), with its principal office at 166 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 2,667,000 shares of the
Company's Series H Preferred Stock (the "Series H Preferred"), having the
rights, preferences, privileges, and restrictions as set forth in the Company's
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit B (the "Restated Certificate").
1.2 Sale of the Series H 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 $15.00, the number of shares of Series H Preferred set forth
beside such Investor's name on Exhibit A. The shares of Series H 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 H 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 May ___, 2000, 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 May 18, 2000 (the "Additional Closing Period"), the
Company may, at one or
1
<PAGE>
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 $15.00 per share, up to that
number of shares of Series H Stock that is equal to 2,667,000 shares of Series H
Stock less the number of shares of Series H 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
H 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 H Stock hereunder and the number of shares
of Series H 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 Capitalization. The capitalization of the Company will, upon the
filing of the Restated Certificate, consist of the following:
(a) Preferred Stock. A total of 82,139,826 authorized shares of
preferred stock (the "Preferred Stock"), consisting of 25,073,436 shares
designated as Series B Preferred Stock ("Series B Preferred"), of which
24,795,510 shares will be issued and outstanding, 2,733,332 shares designated as
Series C Preferred Stock ("Series C Preferred"), of which 2,733,332 shares will
be issued and outstanding, 4,969,148 shares designated Series D Preferred
2
<PAGE>
Stock ("Series D Preferred"), of which 4,969,148 shares will be issued and
outstanding, 26,284,024 shares designated as Series E Preferred Stock ("Series E
Preferred"), of which 26,284,024 shares will be issued and outstanding,
8,249,468 shares designated Series F Preferred ("Series F Preferred"), 8,249,468
of which will be issued and outstanding, 12,163,418 shares designated Series G
Preferred ("Series G Preferred"), 12,163,418 of which will be issued and
outstanding and 2,667,000 shares designated Series H 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, the Series G
Preferred and the Series H Preferred will be as stated in the Restated
Certificate 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 Certificate. The Series H Preferred will be
convertible into Common Stock as provided in the Restated Certificate.
(b) Common Stock. A total of 185,000,000 authorized shares of Common
Stock, of which 35,254,875 shares will be issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except (i) the options,
stock plans and warrants described in the Registration Statement under the
headings "Management--Employee Benefit Plans," "Capitalization," and
"Description of Capital Stock--Warrants," (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, the Series G Preferred and the Series H
Preferred, (iii) 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 (iv) 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.
3.2 Authorization. All corporate action on the part of the Company, its
directors, and its stockholders 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.
3
<PAGE>
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 2,667,000 shares of Series H Preferred for issuance hereunder and
the shares of Common Stock issuable 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 Certificate. 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 Certificate,
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
restrictions on transfer under federal and state securities laws and as set
forth in the Restated Certificate, 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.
3.3 SEC Filings; Financial Statements. (a) A registration statement on
Form S-1 (File No. 333-32104) (the "Registration Statement") in respect of the
Shares has been filed with the Securities and Exchange Commission (the
"Commission"); the Registration Statement has not been declared effective by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"); and no stop order regarding the Registration Statement has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Prospectus".
3.4 No Stop Order. No order preventing or suspending the use of any
Prospectus has been issued by the Commission, and each Prospectus, at the time
of filing thereof, conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder, and did not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Investor expressly for use therein.
3.5 Securities Compliance. The Registration Statement and the Prospectus
conform in all material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and do not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Investor expressly for use therein.
4
<PAGE>
3.6 No Material Loss. Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements included in
the Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any material adverse change,
or any development that may cause a prospective material adverse change, in or
affecting the general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus.
3.7 No Real Estate. The Company and its subsidiaries own no real property
and have good and marketable title to all personal property owned by them, in
each case free and clear of all liens, encumbrances and defects except as are
described in the documents filed with the Registration Statement or such as do
not materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
3.8 Due Incorporation. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and corporate authority to own its properties
and conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification,
except where failure to be so qualified would not have a Material Adverse
Effect. 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.
3.9 Subsidiary Shares. All of the issued shares of capital stock of each
"significant subsidiary" of the Company (as defined in Rule 1-02(w) of
Regulation S-X under the Act) have been duly and validly authorized and issued,
are fully paid and non-assessable and (except for directors' qualifying shares)
are owned directly or indirectly by the Company, free and clear of all liens,
encumbrances, equitable interests or claims.
3.10 The term "Material Adverse Effect" means, for purposes of this
Agreement, any change, event or effect that is materially adverse to the general
affairs, management, consolidated financial position, business prospects,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole.
3.11 No Conflict. The issue and sale of the Series H Preferred Stock by
the Company and the compliance by the Company with all of the provisions of this
Agreement and the
5
<PAGE>
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except such consents,
approvals, authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the shares of Series H Preferred Stock by the Investors.
3.12 No Default. Neither the Company nor any of its significant
subsidiaries is (i) in violation of its Certificate of Incorporation or By-laws
or (ii) in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound, except, with respect
to subclause (ii), where such default would not have a Material Adverse Effect.
3.13 Legal Proceedings. Other than as set forth in the Prospectus under
the headings "Risk Factors--We are involved in an intellectual property dispute
and in the future we may become involved in similar disputes, which could
subject us to significant liability, divert the time and attention of our
management and prevent us from selling our products" and "Business--Legal
Proceedings," there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property of
the Company or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually or in
the aggregate have a Material Adverse Effect; and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
3.14 Investment Company. The Company is not and, after giving effect to
the offering and sale of the shares of Series H Preferred Stock to the
Investors, will not be an "investment company", as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act").
3.15 Public Accountants. KPMG LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
3.16 Intellectual Property. The Company and its subsidiaries own or
possess valid licenses or other rights to use all patents, trademarks, service
marks, trade names, copyrights, know-how, trade secrets and other intellectual
property necessary to conduct the business of the Company and its significant
subsidiaries in the manner in which it has been and is being conducted, and
except as set forth in the Prospectus under the headings "Risk Factors--We are
6
<PAGE>
involved in an intellectual property dispute and in the future we may become
involved in similar disputes, which could subject us to significant liability,
divert the time and attention of our management and prevent us from selling our
products" and "Business--Legal Proceedings," the Company and its subsidiaries
have not received any notice of infringement or of conflict with (and the
Company knows of no such infringement or conflict with) asserted rights of
others with respect to any patents, trademarks, service marks, trade names,
copyrights, know-how, trade secrets or other intellectual property which, if
determined adversely to the Company or its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect; and the inventions, products or
processes referred to in the Prospectus do not, to the knowledge of the Company,
infringe or conflict with any right or patent, or any invention, product or
process which is the subject of a patent application known to the Company, which
if determined adversely would have a Material Adverse Effect.
3.17 Insurance. The Company and its subsidiaries, taken as a whole, are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the business in
which they are engaged; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.
3.18 Exempt Transaction. 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").
3.19 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.
3.20 Registration Rights. Except as set forth in the Rights Agreement and
in the Prospectus under the heading "Description of Capital Stock--Registration
Rights," 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.
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.
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4.2 Investor Qualifications. Such Investor is an "accredited investor"
within the meaning of paragraph (a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) of Rule
501 of Regulation D promulgated pursuant to the Securities Act or a qualified
institutional buyer, within the meaning of Rule 144A of 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 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.
8
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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 Investor has not incurred, and will not incur
or cause the Company to 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 Certificate, 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
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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 CERTIFICATE 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
stockholders in accordance with their interest in the corporation, or (C) a
limited liability company to its members or former members in accordance with
their interest in the limited liability company 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.
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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 in all
material respects when made, provided that, to the extent that each such
representation or warranty contains its own materiality standard, such standard
shall be the sole measure of "material" for the purposes hereof.
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 Certificate. The Restated Certificate shall have been filed
with and accepted by the Delaware Secretary of State.
6.7 Proceedings and Documents. The following corporate proceedings and
documents (in connection with the transactions contemplated at the Closing)
shall be substantially in the form provided to the Investors and their counsel:
(a) Certified Charter Documents. A copy of the Restated Certificate
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 stockholders of the Company evidencing the
approval of the Restated Certificate, the approval of this Agreement and the
Rights Agreement and the issuance of the Shares and the other matters
contemplated hereby.
<PAGE>
(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, in the form attached as Exhibit F.
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, Series F Preferred, Series G 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 G (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 in all
material respects when made, and shall be true and correct as of the Closing
Date, provided that, to the extent that each such representation or warranty
contains its own materiality standard, such standard shall be the sole measure
of "material" for the purposes hereof.
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 Certificate. The Restated Certificate shall have been filed
with and accepted by the Delaware Secretary of State.
7.4 Proceedings and Documents. The following corporate proceedings and
documents (in connection with the transactions contemplated at the Closing)
shall be substantially in the form provided to the Investors and their counsel:
(a) Certified Charter Documents. A copy of the Restated Certificate
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.
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<PAGE>
(b) Corporate Actions. A copy of the resolutions of the Board of
Directors and, if required, the stockholders of the Company evidencing the
approval of the Restated Certificate, 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, in the form attached as Exhibit F.
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, Series G 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.
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.
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.
13
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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, 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.
14
<PAGE>
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.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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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.
ONI Systems Corp.
By: /s/ Hugh C. Martin
--------------------------------
Name: Hugh C. Martin
------------------------------
Title: President and CEO
-----------------------------
INVESTOR:
Sun Microsystems, Inc.
By: /s/ Jonathan Schwartz
--------------------------------
Name: Jonathan Schwartz
------------------------------
Title: VP, Investments
-----------------------------
<PAGE>
EXHIBIT 10.26
REGUS BUSINESS CENTRE SERVICE AGREEMENT
Agreement number: Opt-16 Agreement date: March 29, 2000
The address of the business centre
- --------------------------------------------------------------------------------
Address: 2530 Meridian Parkway 2nd & 3rd Floors City Durham
- --------------------------------------------------------------------------------
State: NC Zip Code 27713
- --------------------------------------------------------------------------------
Your details - Client
- --------------------------------------------------------------------------------
Company Name Optical Networks Contact Name/Title Troy Ward
- --------------------------------------------------------------------------------
Address 166 Baypointe Parkway City San Jose
- --------------------------------------------------------------------------------
State CA Zip Code 95134
- --------------------------------------------------------------------------------
Telephone 408-965-2859 Fax 408-965-2660
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The nature of your business for the purpose of this Agreement
- --------------------------------------------------------------------------------
Software
- --------------------------------------------------------------------------------
The number of workstations you are paying for and the room numbers allocated to
you
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<C> <S>
Number of workstations 25 Room numbers initially allocated to you 3086, 3087, 3088, 3089, 3090, 3091, 3092, 3093
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The standard fee per calendar month The service retainer you have paid
- --------------------------------------------------------------------------------
$11,150.00 plus local taxes of $ 107.10 $19,400
- --------------------------------------------------------------------------------
The initial period for which the agreement lasts
- --------------------------------------------------------------------------------
Start date: 04-01-00 End date: 08-31-00
- --------------------------------------------------------------------------------
COMMENTS
- --------------------------------------------------------------------------------
T1 Costs: First 10 users $75.00/user/month, 11th plus user $50.00/user/month.
Regus agrees to a one and a half month's retainer of $19,400. Per accounting
details, an adjustment of $750.00 has been taken off of the monthly investment
of $11,900 (for the adjusted rate amounts for the offset charges of the
handsets). Given a new total of $11,150 per month. The invoice will show a
charge of $125/per handset/month. The charges have been offset in the monthly
investment. All Parties Agree.
Clients have access to the building and their officers 24/7. Heating and A/C is
supplied throughout the building. After client fulfills agreement, they may
extend the agreement on a month to month basis. Client may give sixty days
notice to terminate their agreement. Client may enter into a 30-day link
agreement after their agreement comes to an end. We will not need to allocate
different rooms to Optical Networks during their stay. Client will not need to
take occupancy or need to pay the monthly investment on office #3093 at this
time. Rent will commence when occupancy does.
- --------------------------------------------------------------------------------
We are REGUS BUSINESS CENTRE CORP. of 100 Manhattanville Road, Purchase, NY
10577. This Agreement incorporates our Terms of Business attached to this
Agreement USING REGUS BUSINESS CENTRES which you confirm you have read and
understood. We both agree to comply with those terms and our obligations as set
out in them. Note that the agreement does not come to an end automatically. See
"Brining your agreement to an end" in the Terms of Business.
<TABLE>
<S> <C>
Name Rusty Cumpston (printed) Name S. Noel Coak (printed)
-------------------------------------------- -----------------
Title Sr. Vice President Engineering & Operations (printed) Title Sales Manager (printed)
-------------------------------------------- -----------------
Date March 29, 2000 (printed) Date March 29, 2000 (printed)
-------------------------------------------- -----------------
SIGNED on your behalf - Client SIGNED on our behalf - Regus
/s/ signature illegible /s/ Noel Coak
-------------------------------------------- -----------------
</TABLE>
<PAGE>
USING REGUS BUSINESS CENTRES
We are Regus Business Centre Corp. These are our terms of business. They apply
to the service agreement which you the client have signed (which we refer to
simply as your agreement). If two or more of you have signed the agreement your
liabilities are joint and several. Your agreement supersedes any previous
agreement you may have had with us for the same services and contains all the
terms we have agreed.
STANDARD SERVICES INCLUDED IN YOUR STANDARD FEE
Furnished office accommodation: We are to provide the number of serviced and
fully furnished office rooms for which you have agreed to pay in the business
centre stated in your agreement. Your agreement lists the rooms we have
initially allocated for your use. We may need to allocate different rooms from
time to time, but these will be of equivalent size and we will attempt to obtain
your approval with respect to such different rooms in advance.
Office services: We are to provide the following office services during normal
opening hours Monday to Friday
. access to your accommodation
. personalized telephone answering by our operators
. reception of your visitors by our receptionist
. heating and (where available) air conditioning
. lighting and electrical power
. cleaning
. servicing, maintenance and repair of our equipment
. use of a kitchen, sanitary facilities and photocopying areas
We are happy to discuss special arrangements for use of these facilities outside
our normal opening hours.
Loyalty bonus: During each calendar month while this agreement lasts you are
entitled (subject to availability) to 4 hours free use of a standard 1-4 person
meeting or board room in the business centre and 3 days' free use of a 1-2
person office at any other Regus business centre world wide.
ADDITIONAL SERVICES
The following services are available for an extra charge in accordance with our
published rates which are subject to change from time to time.
. Secretarial services . Photocopying
. Telephone sets, line and usage . Messaging
. Courier services . Facsimile
. Travel arrangements . Office supplies
. Translations . Meeting and conference rooms
. Food and beverage services . Mail handling
. Voicemail* . Video conferencing*
. Car parking* . High speed internet access*
* not available at all centres
USING THE ACCOMMODATION
On moving in: You will be asked to sign an inventory of all accommodation,
furniture and equipment you are permitted to use, together with a note of its
condition, and details of the days or entry cards issued to you.
The nature of your business: You must only use the accommodation for office
purposes, and only for the business stated in your agreement or subsequently
agreed with us. Office use of a "retail" nature, involving frequent visits by
members of the public, is not permitted. You must not use the name Regus in any
way in connection with your business.
Your name and address: You may only carry on that business in your name or some
other name that we previously agree. At your request and cost we will include
that name in the house directory at the business centre, where this is
available. You must not put up any signs on the doors to your accommodation or
anywhere else which is visible from outside the rooms you are using. You may use
the business centre address as your business address.
Taking care of our property: You must take good care of all parts of the
business centre, its equipment, fittings and furnishings which you use. You must
not alter any part of it. You are liable for any damage caused by you or those
in the business centre with your permission or at your invitation.
Office furniture and equipment: You must not install any furniture or office
equipment, cabling, IT or telecom connections without our consent, which we may
refuse at our absolute discretion.
Keys and security: Any keys or entry cards which we let you use remain our
property at all times. You must not make any copies of them or allow anyone else
to use them without our consent. Any loss must be reported to us immediately and
you must pay the cost of replacement keys or cards and of changing locks, if
required. If you are permitted to use the business centre outside normal working
hours it is your responsibility to lock the doors to your accommodation and to
the business centre when you leave.
Comply with the law: You must comply with all relevant laws and regulations in
the conduct of your business. You must do nothing illegal. You must not do
anything that may interfere with the use of the business centre by us or by
others, cause any nuisance or annoyance, increase the insurance premiums we have
to pay or cause loss or damage to us or to the owner of any interest in the
building which contains the business centre. You acknowledge that (a) the terms
of the foregoing sentence are a material inducement to us of the execution of
your agreement and (b) any violation by you of the foregoing sentenced shall
constitute a material default by you hereunder, entitling us to terminate your
agreement.
Comply with house rules: You must comply with any house rules which we impose
generally on users of the business centre whether for reasons of health and
safety, fire precautions or otherwise. You must not bring animals into the
business centre. You must not play music or use amplification equipment in a way
that can be heard outside your rooms.
Insurance: It is your responsibility to arrange insurance for your own property
which you bring into the business centre and for your own liability to your
employees and to third parties.
PROVIDING THE SERVICES
Access to your accommodation: We can enter your accommodation at any time.
However, unless there is an emergency we will as a matter of courtesy try to
inform you in advance when we need access to carry out testing, repair or works
other than routine inspection, cleaning and maintenance. We will also respect
security procedures to protect the confidentiality of your business.
At the start of your agreement: If for any reason we cannot provide the number
of rooms stated in your agreement by the date when your agreement is due to
start we have no liability to you for any loss or damages but you may cancel the
agreement without penalty. We will not charge you the standard fee for rooms you
cannot use until they become available.
Suspension of services: We may by notice suspend the provision of services
(including access to the accommodation) for reasons of political unrest,
strikes, or other events beyond our reasonable control, in which even payment of
the standard fee will also be suspended for the same period.
Our liability: We are not liable for any loss as a result of our failure to
provide a service as a result of mechanical breakdown, strike delay, failure of
staff, termination of our interest in the building containing the business
centre or otherwise unless we do so deliverability or are grossly negligent. We
are also not liable for any failure until you have told us about it and given us
a reasonable time to put it right.
YOUR AGREEMENT
The nature of your agreement: Your agreement is the commercial equivalent of an
agreement for accommodation in a hotel. The whole of the business centre remains
our property and in our possession and control. You acknowledge that your
agreement creates no tenancy interest, leasehold estate or other real property
interest in your favor with respect to the accommodation. We are giving you just
the right to share with us the use of the business centre so that we can provide
the services to you. The agreement is personal to you and cannot be transferred
to anyone else. We may transfer the benefit of your agreement and our
obligations under it at any time.
Duration: Your agreement lasts for the period stated in it and will then
automatically be extended for successive periods equal to the initial period
hereof until brought to an end by you or by us. The standard fee during any
extension period shall be equal to the then current standard fee for your
accommodation but in no event lower than the fee paid by you during the then
current standard fee for your accommodation but in no event lower than the fee
paid by you during the then expiring period. Bringing your agreement to an end:
Either of us can terminate your agreement at the end date stated in it, or at
the end of any extension period, by giving at least three months' notice to the
other. However, if your agreement is for three months or less and one of us
wishes to terminate it, the notice period is two months or (if shorter) one week
less than the period stated in your agreement.
Ending your agreement immediately: We may put an end to your agreement
immediately by giving you notice if:
. we have a reasonable basis to believe that you may not be able to pay fees on
time
. you are in breach of one of your obligations which cannot be put right or
which we have given you notice to put right and which you have failed to put
right within fourteen days of that notice, or
. your conduct, or that of someone at the business centre with your permission
or at your invitation, is incompatible with ordinary office use.
If we put an end to the agreement for any of these reasons it does not put an
end to any then outstanding obligations you may have and you must
. pay for additional services you have used
. pay the standard fee for the remainder of the period for which your agreement
would have lasted had we not ended it or (if longer) for a further period of
three months, and
. indemnify us against all costs and losses we incur as a result of the
termination.
If the business centre is not available: In the unlikely event that we are no
longer able to provide the services and accommodation at the business centre
stated in your agreement then your agreement will end and you will only have to
pay standard fees up to the date it ends and for the additional services you
have used. We will try to find suitable alternate accommodation for you at
another Regus business centre.
When you agreement ends
. you are to vacate the accommodation immediately leaving it in the same
condition as it was when you took it, save for fair wear and tear. If you
leave any of your own property in the business centre we may dispose of it in
any way to choose without owing you any responsibility for it or any proceeds
of sale
. you must also enter into a Link agreement with us on our standard terms at
the time for at least 3 months.
If you continue to use the accommodation when your agreement has ended
. you are responsible for any loss, claim or liability we incur as a result of
your failure to vacate on time
. we may, at our discretion, permit you an extension subject to a surcharge on
the standard fee.
Employees: While your agreement is in force and for a period of six months
after it ends, you must not solicit or offer employment to any of our staff. If
you do, we estimate our loss at the equivalent of one year's salary for each of
the employees concerned and you must pay us damages equal to that amount.
Notices: All formal notices must be in writing.
Confidentiality: The terms of your agreement are confidential. Neither of us
must disclose them without the other's consent unless required to do so by law
or an official authority. This obligation continues after your agreement ends.
Indemnities: You must indemnify us in respect of all liability, claims,
damages, loss and expenses which may arise (except to the extent caused by our
gross negligence or willful misconduct)
. if someone dies or is injured while in the accommodation you are using
. from a third party in respect of your use of the business centre and services
. from a third party in respect of our provision of services to you
. if you do not comply with the terms of your agreement
You must also pay any costs, including reasonable legal fees, which we incur in
enforcing your agreement.
Consequential loss: If for any reason we cannot provide you with any service
our liability is limited to crediting or returning to you a fair proportion of
the relevant fee. To the extent permitted by law we have no liability whatever
for any consequential loss as a result of any thing we or our staff do or fail
to do.
Applicable law: Your agreement is interpreted and enforced in accordance with
the laws of the state in which the business centre in question is located. We
both accept the non-exclusive jurisdiction of the courts of such jurisdiction.
FEES
Standard services: The standard fee is payable in advance in full by the 1st
day of each month in respect of standard services to be provided during such
calendar month. For a period of less than a month the fee will be apportioned on
a daily basis. You agree to pay promptly (i) all sales, use, excise and any
other taxes and license fees which you are required to pay to any governmental
authority (and, at our request, will provide to us evidence of such payment) and
(ii) any taxes paid by us to any governmental authority that are attributable to
the accommodation, including, without limitation, any gross receipts, rent and
occupancy taxes, or tangible personal property taxes.
Additional services: Fees for additional services are invoiced in arrears and
payable on the 10th day of the month following the calendar month in which the
additional services were provided.
Payment terms: All payments are to be made on or before the required date.
Preferred payment shall be by credit card or wire transfer. When you pay by
check, we reserve the right to deny you access to your accommodation and/or
refuse to provide additional services to you in the absence of cleared funds.
Service retainer: The service retainer you paid on entering into your agreement
will be held by us as security for performance of all your obligations under
your agreement. The service retainer, or any balance after deducting outstanding
fees and other costs due to us, will be returned to you within 60 days after
your agreement ends. We may require you to pay an increased service retainer if
. outstanding fees exceed the service retainer held
. you frequently fail to pay fees when due.
Late payment: If you do not pay fees when due, we may charge interest at the
rate of 2% per month on the amounts outstanding but in no event greater than the
rate permitted by law. If you dispute any part of an invoice you must pay the
amount not in dispute by the due date.
Withholding services: We my withhold services (including for the avoidance of
doubt, denying you access to your accommodation) while there are any outstanding
fees and interest or you are in breach of your agreement.
Subordination: Your agreement is subordinate to our lease with our landlord and
to any other agreement to which our lease with our landlord is subordinate.
<PAGE>
Report on Financial Statement Schedule and Consent
EXHIBIT 23.02
The Board of Directors
ONI Systems Corp.:
The audits referred to in our report dated March 9, 2000, except for Note
13(c) which is as of April 25, 2000, included the related financial statement
schedule of ONI Systems Corp. as of December 31, 1998 and 1999, and for the
period from October 20, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999, included in the registration statement
on page S-1. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
/s/ KPMG LLP
Mountain View, California
May 1, 2000
<PAGE>
Exhibit 23.03
Consent of KPMG LLP, Independent Auditors
The Board of Directors
Object-Mart Inc.
We consent to the use of our report included herein dated April 10, 2000,
related to the balance sheet of Object-Mart Inc. as of December 31, 1998, and
the related statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1998 and for the six months ended June 29, 1999,
and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG LLP
Mountain View, California
May 1, 2000
