<PAGE>
Filed Pursuant to Rule 424B4
Registration No. 333-46784
$300,000,000
ONI Systems Corp.
5% Convertible Subordinated Notes due October 15, 2005
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[ONI Systems Corp. LOGO]
You may convert the notes into shares of ONI Systems' common stock at any
time before their maturity or their prior redemption or repurchase by ONI
Systems. The notes will mature on October 15, 2005. The conversion rate is
10.9129 shares per each $1,000 principal amount of notes, subject to adjustment
in certain circumstances. This is equivalent to a conversion price of
approximately $91.64 per share. On October 23, 2000, the last reported sale
price for the common stock on the Nasdaq National Market was $75.5625 per
share. The common stock is quoted on the Nasdaq National Market under the
symbol "ONIS".
ONI Systems will pay interest on the notes on April 15 and October 15 of
each year. The first interest payment will be made on April 15, 2001. The notes
will be subordinated in right of payment to all of ONI Systems' future senior
debt. The notes will be issued only in denominations of $1,000 and integral
multiples of $1,000.
On or after October 16, 2003, ONI Systems has the option to redeem all or a
portion of the notes that have not been previously converted at the redemption
prices set forth in this prospectus. Prior to October 16, 2003, ONI Systems has
the option to redeem all or a portion of the notes, subject to certain
conditions set forth in this prospectus. You have the option, subject to
certain conditions, to require ONI Systems to repurchase any notes held by you
in the event of a "change in control", as described in this prospectus, at a
price equal to 100% of the principal amount of the notes plus accrued interest
to the date of repurchase.
The notes will be evidenced by a global note deposited with a custodian for
and registered in the name of a nominee of The Depository Trust Company. Except
as described in this prospectus, beneficial interests in the global note will
be shown on, and transfers thereof will be effected only through, records
maintained by The Depository Trust Company and its direct and indirect
participants.
ONI Systems does not intend to apply for listing of the notes on any
securities exchange or for inclusion of the notes in any automated quotation
system.
Concurrently with this offering of notes, ONI Systems and some of its
stockholders are conducting a separate offering of 8,000,000 shares of ONI
Systems common stock. This offering of notes is not conditioned on the
completion of the offering of our common stock.
See "Risk Factors" beginning on page 9 of this prospectus to read about
important factors you should consider before buying the notes.
----------------
Offering Price: 100%
The offering price set forth above does not include accrued interest, if
any. Interest on the notes will accrue from the date of original issuance of
the notes, expected to be October 27, 2000.
----------------
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.
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To the extent that the underwriters sell more than $300,000,000 in principal
amount of notes, the underwriters will have the option to purchase up to an
additional $45,000,000 in principal amount of notes from ONI Systems at the
offering price, less the underwriting discount.
The underwriters expect to deliver the notes in book-entry form only through
the facilities of The Depository Trust Company in New York, New York on October
27, 2000.
Goldman, Sachs & Co. Credit Suisse First Boston
Robertson Stephens
Chase H&Q
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Prospectus dated October 23, 2000.
<PAGE>
[LOGO OF ONI SYSTEMS]
<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.
ONI Systems Corp.
We develop, market and sell communications networking equipment, based
entirely on optical technology, for metropolitan area and regional networks.
Our equipment uses pulses of light rather than electric current in the
transmission and routing 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. Until recently, 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.
Our first product, the ONLINE9000(TM), has been generally available since
January 2000. Our second product, the ONLINE7000(TM), has been generally
available since June 2000. These products incorporate our OPTX(TM) network
operating system and our OLMP(TM) inter-network communications protocol to
manage and support a diverse mix of service offerings by our customers.
The benefits of our products 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.
. 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 within a metro network, and the
scalability of our products allows service providers to build metro
networks in a pay-as-you-grow fashion.
. Rapid and efficient service restoration. Our products provide for rapid
restoration of mission critical services without the need to dedicate
network capacity carrying duplicated traffic for this capability.
We anticipate that two new products, the SONET/SDH Multiplexer and the Data
Multiplexer for use with our ONLINE products, will be generally available in
November 2000. These new products will allow our customers to combine up to 16
lower-speed signals into a single wavelength channel, without traditional
multiplexing equipment.
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<PAGE>
In addition, we anticipate that our new ONLINE11000(TM) product will be
generally available in December 2000. Like our existing ONLINE products, the
ONLINE11000 will incorporate our OPTX network operating system and OLMP inter-
networking protocol to manage and support a diverse mix of service offerings by
our customers.
The following are key elements of our strategy:
. leverage our optical technology 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 June 30, 2000, we incurred cumulative losses of $129.2
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 and our second product only since June 2000, so the
likelihood of success of these 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.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered...... $300,000,000 aggregate principal amount of 5% Convertible
Subordinated Notes due October 15, 2005, which does not
include an additional $45,000,000 aggregate principal
amount of notes that the underwriters have the option to
purchase.
Offering price.......... 100% of the principal amount of the notes.
Interest................ We will pay interest on the notes semi-annually on April
15 and October 15 of each year, commencing on April 15,
2001.
Conversion.............. The notes will be convertible at the option of the holder
into shares of our common stock at a conversion rate of
10.9129 shares of common stock per $1,000 principal
amount of notes, which is equivalent to a conversion
price of approximately $91.64 per share. The conversion
rate is subject to adjustment in certain events. The
notes will be convertible at any time before the close of
business on the maturity date, unless we have previously
redeemed or repurchased the notes. Holders of notes
called for redemption or submitted for repurchase will be
entitled to convert the notes up to and including, but
not after, the date fixed for redemption or repurchase,
as the case may be. See "Description of the Notes--
Conversion Rights".
Subordination........... The notes will be subordinated to our future senior debt,
as that term is defined in "Description of the Notes--
Subordination". The notes are also effectively
subordinated in right of payment to all indebtedness and
other liabilities of our subsidiaries. As of June 30,
2000, we had outstanding senior debt of $64.3 million,
consisting of lease obligations, and our aggregate amount
of liabilities was approximately $21.6 million. The
indenture under which the notes will be issued will not
restrict the incurrence of senior debt by us or any of
our subsidiaries or our incurrence of other indebtedness.
See "Description of the Notes--Subordination".
Global note; Book-entry The notes will be issued only in fully registered form
system................. without interest coupons and in minimum denominations of
$1,000. The notes will be evidenced by one or more global
notes deposited with the trustee, as custodian for the
Depository Trust Company, or DTC. Beneficial interest in
the global note will be shown on, and transfers of those
beneficial interest can only be made through, records
maintained by DTC and its participants. See "Description
of the Notes--Form, Denomination, Transfer, Exchange and
Book-Entry Procedures".
Use of proceeds......... We anticipate using the net proceeds from the offering of
the notes for working capital and other general corporate
purposes.
Redemption by ONI We may redeem the notes, at our option, in whole or in
Systems................ part, on or after October 16, 2003, at the redemption
prices set forth in this prospectus plus accrued and
unpaid interest to the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
redemption date. See "Description of the Notes--Optional
Redemption by ONI Systems-Non-Provisional Redemption". In
addition, if certain conditions are met, we may redeem
the notes at our option, in whole or in part prior to
October 16, 2003 at a redemption price equal to 100% of
the principal amount of the notes to be redeemed plus
accrued and unpaid interest to the redemption date and
specified make-whole amounts described below under
"Description of the Notes--Optional Redemption by ONI
Systems--Provisional Redemption".
Repurchase at option of Upon a "change in control", as that term is defined in
holders upon a Change "Description of the Notes--Repurchase at Option of
in Control............. Holders Upon a Change in Control", you will have the
right, subject to certain conditions and restrictions, to
require us to repurchase your notes, in whole or in part,
at 100% of their principal amount plus accrued and unpaid
interest to the repurchase date. The repurchase price is
payable in cash or, at our option, and subject to certain
conditions, in shares of common stock. If we pay the
repurchase price in common stock, the common stock will
be valued at 95% of the average closing sales prices of
the common stock for the five trading days preceding and
including the third trading day prior to the repurchase
date. See "Description of the Notes--Repurchase at Option
of Holders Upon a Change in Control".
Events of default....... The following will be events of default under the
indenture for the notes:
. we fail to pay principal of or any premium on any note
when due, whether or not the payment is prohibited by
the subordination provisions of the indenture;
. we fail to pay any interest on any note when due and
that default continues for 30 days, whether or not the
payment is prohibited by the subordination provisions
of the indenture;
. we fail to provide the notice that we are required to
give in the event of a "change in control", whether or
not the notice is prohibited by the subordination
provisions of the indenture;
. we fail to perform any other covenant in the indenture
and that failure continues for 60 days after written
notice to us by the trustee or the holders of at least
25% in aggregate principal amount of outstanding notes;
. we or any of our significant subsidiaries fail to pay
when due at final maturity thereof (either at its
maturity or upon acceleration) any indebtedness under
any bonds, debentures, notes or other evidences of
indebtedness for money borrowed (or any guarantee
thereof) in excess of $10.0 million if the indebtedness
is not discharged, or the acceleration is not rescinded
or annulled, within 30 days after
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<S> <C>
written notice to us by the trustee or the holders of at
least 25% in aggregate principal amount of the
outstanding notes; and
. events of bankruptcy, insolvency or reorganization with
respect to us or any of our significant subsidiaries
specified in the indenture.
Nasdaq symbol........ ONIS
Governing law........ The indenture and the notes will be governed by the laws
of the State of New York, without regard to conflicts of
laws principles.
</TABLE>
7
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period From
October 20,
1997 Year Ended Six Months
(Inception) to December 31, Ended June 30,
December 31, ----------------- ------------------
1997 1998 1999 1999 2000
-------------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue.................. $ -- $ 1,733 $ 3,034 $ 965 $ 13,117
Gross profit............. -- 525 2,002 207 3,398
Operating expenses....... 198 9,559 49,195 12,721 79,286
Operating loss........... (198) (9,034) (47,193) (12,514) (75,888)
Net loss................. (199) (8,852) (46,572) (12,109) (73,544)
Beneficial conversion of
preferred stock......... -- -- -- -- (4,242)
Net loss attributable to
common stockholders..... $ (199) $(8,852) $(46,572) $(12,109) $(77,786)
Basic and diluted net
loss per share.......... $(0.77) $ (0.74) $ (2.58) $ (0.85) $ (0.73)
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share................... 257 11,919 18,043 14,310 106,359
Deficiency of earnings
available to cover fixed
charges(1).............. $ (199) $(8,851) $(46,570) $(12,108) $(73,542)
</TABLE>
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(1) Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges, amortization of
debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense we believe to
be representative of interest. Earnings, as defined, were not sufficient
to cover fixed charges in any of the periods presented.
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------
As Further
Actual As Adjusted Adjusted
-------- ----------- ----------
<S> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents...................... $239,530 $529,780 $ 931,316
Working capital................................ 271,238 561,488 963,024
Total assets................................... 325,669 625,669 1,027,205
5% convertible subordinated notes due 2005..... -- 300,000 300,000
Capital lease obligations, less current
portion....................................... 246 246 246
Total stockholders' equity..................... $304,107 $304,107 $ 705,643
</TABLE>
The as adjusted balance sheet data as of June 30, 2000 gives effect to the
sale of convertible subordinated notes with an aggregate principal amount of
$300,000,000 that we are offering in this offering, after deducting the
underwriting discount and estimated offering expenses.
The as further adjusted balance sheet data as of June 30, 2000 also gives
effect to the sale by ONI Systems of 5,646,643 shares of common stock at the
public offering price of $74.50 per share in a concurrent public offering,
after deducting the underwriting discount and estimated offering expenses.
See note 1(r) 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".
8
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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 June 30, 2000, we incurred cumulative losses of $129.2 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.
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 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.
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. We
announced general availability of our first product, the ONLINE9000, in January
2000 and our second product, the ONLINE7000, in June 2000. Consequently, we
have a limited history upon which we can rely in planning and making the
critical decisions that will affect our future operating results. Similarly,
because of the relatively immature state of our business, it will be difficult
for investors to evaluate our prospects. We will need to make decisions in the
immediate future regarding resource allocations for research and development
and marketing and sales. If our predictions about the best use of our resources
turn out to be inaccurate, we may not make the best use of our resources and we
may forego better opportunities. Our limited history makes it difficult for
investors to gauge our capability in making these decisions.
The ONLINE9000 and the ONLINE7000 are our only currently available products
and, if they are not commercially successful, our revenue will not grow and we
may not achieve profitability.
If our customers and potential customers do not adopt, purchase and
successfully deploy our ONLINE9000 and ONLINE7000 products 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 our products 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.
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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 market in which we compete is characterized by more rapid technological
change than most, because it is newly emerging. As a result, we expect there
will be frequent new product introductions, changes in customer requirements
and evolving industry standards. We have no significant track record of our
ability to respond to these developments, and we may not be able to develop new
products or product enhancements in a timely manner, or at all. Because we are
new to this business, an investment in our stock is riskier than most.
Our new products and product enhancements 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 new
products, including our SONET/SDH Multiplexer, Data Multiplexer and
ONLINE11000. We have devoted and expect to continue to devote significant
engineering and financial resources to the development and marketing of new
products and features. Unexpected technical challenges could prevent us from
successfully developing new products and features in a timely manner or at all.
In addition, new products and features could be more costly to develop and test
than we anticipate. Even if we are able to develop and introduce new products
and features, they may not achieve market acceptance if they do not offer
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. As of
September 30, 2000, we had thirteen customers. Most of these customers are not
contractually committed to purchase any minimum quantities of our products. If
these customers 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.
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We face intense competition that could prevent us from growing and could
prevent us from becoming profitable.
The market for communications equipment is rapidly evolving and is marked by
intense competition and technical innovations. We expect the pace of change to
accelerate in the future. We also expect many new competitors to emerge as the
market for optical networking equipment expands and evolves in response to
technical innovations and increasing demand for new broadband and wavelength-
based services. We currently compete with both public and private companies
providing solutions for network and bandwidth management in the metropolitan
market. Many of these companies have existing relationships with communication
service providers, making it more difficult for us to sell our products to
these potential customers.
Some of our current and potential competitors are large public companies
that have longer operating histories, significantly greater financial,
technical and marketing resources, wider customer relationships and a broader
product line than we do. Consequently, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. These large public companies are better positioned than we are to
acquire companies and new technologies that may displace our products or make
them obsolete. Any of these acquisitions could give the acquiring competitor a
strategic advantage. Unlike these large public companies, we have limited
ability to provide vendor-sponsored financing, which may influence the
purchasing decisions of customers and 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 certain
investment opportunities that we may be unable to offer 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.
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If we do not expand our direct sales operations, we may be unable to increase
market awareness and sales of our products.
If we are unable to expand our direct sales force, we may not be able to
increase market awareness and sales of our products, which may prevent us from
achieving and maintaining profitability. Our products and services require a
technical sales effort targeted at several key people within each of our
prospective customers' organizations. Our sales efforts require the attention
of sales personnel and specialized system engineers with extensive experience
in networking technologies. Competition for these individuals is intense, and
we may not be able to hire sufficient numbers of qualified sales personnel and
specialized system engineers.
If we do not expand our customer service and support organization, we may be
unable to increase our sales.
We currently have a small customer service and support organization and will
need to increase our staff to support new and existing customers. Our products
are complex and require highly-trained customer service and support personnel.
Hiring customer service and support personnel is difficult in our industry due
to the limited number of people available with the necessary technical skills.
If we are unable to expand our customer service and support organization, we
may not be able to increase sales.
We depend on sole or limited source suppliers for 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 key components, including optical filters, amplifiers,
transmitters, receivers and switches and electronic microprocessors, from
limited sources. In addition, we rely on a sole supplier for some optical
components, and we are required to purchase at least half of some optical
components from E-TEK Dynamics under our supply agreement with E-TEK, which has
been acquired by JDS Uniphase. 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, we have no material 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.
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If we fail to predict our manufacturing and component requirements accurately,
we could incur additional costs or experience manufacturing delays.
We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our requirements, we may have excess
inventory, which could increase our costs and harm our relationships with our
contract manufacturers and component vendors due to reduced future orders. If
we underestimate our requirements, we may have an inadequate inventory of
components and optical assemblies. Inadequate inventory could interrupt
manufacturing of our products and result in 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 use resources, including your
investment, inefficiently and we may not achieve profitability.
We are still a relatively small company and our success depends on growth.
At December 31, 1998, we had 63 employees, at December 31, 1999, we had 202
employees and at September 30, 2000, we had 447 employees. We plan to hire a
significant number of additional employees this year. Our growth has placed,
and we expect it to 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
13
<PAGE>
managerial controls, reporting systems and procedures, and will need to
continue to expand, train and manage our work force worldwide.
If we are unable to hire additional qualified personnel as necessary, or if we
lose key personnel, we may be unable to manage or grow our business.
If we are unable to identify, attract or retain qualified personnel or to
retain the services of key personnel, especially engineers and sales personnel,
it would be difficult for us to manage our business, make timely product
introductions and increase sales. We intend to continue to hire many
engineering, sales, marketing and support personnel. Competition for these
employees, particularly optical engineers, is intense, especially in the San
Francisco Bay area. We may not be successful in attracting and retaining
qualified personnel.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel,
including Hugh C. Martin, our President, Chief Executive Officer and Chairman
of our board of directors. None of our officers or key employees is bound by an
employment agreement for any specific term, and we do not have "key person"
life insurance policies covering any of our employees.
If we 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. 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 success depends on our customers and potential customers building new
communications systems and offering new communications services to their end-
user customers, which we have no ability to foresee or control.
If our customers and potential customers are not successful in building
their communications 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. Many of our customers and potential customers require
substantial capital for the expansion of their networks. The inability of
customers or potential customers to obtain sufficient financing on attractive
terms, or any downturn in their business, could impair our ability to make
future sales. In addition, we have limited ability to foresee the competitive
success of our customers and to plan accordingly.
If our products do not operate properly with other equipment in our customers'
networks, we may suffer product installations delays, order cancellations or
product returns, 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 warranty, support and repair costs, divert the attention of
our engineering personnel from our product development efforts and suffer
customer relations problems.
14
<PAGE>
Our products may have defects that we find only after full deployment in
complex networks, which could seriously harm our business.
Our currently available products and their OPTX operating system and OLMP
inter-network communication protocol are technically advanced and highly
complex and have been tested or 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,
ONLINE7000, OPTX, OLMP and any future products or releases 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".
15
<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 process 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.
Unlike many companies, we intend to expand our sales and marketing
activities, manufacturing activities and inventory faster than increases in
actual or forecasted revenue. If we achieve our growth targets, our working
capital needs will increase, so we may need to raise additional capital in
order to fund expansion. We may also need additional capital in order to
develop new services or
16
<PAGE>
products, or to acquire complementary services, businesses or technologies.
Product development and acquisition activities are particularly capital-
intensive in our industry. 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; and
. 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.
As of September 30, 2000, our executive officers, directors and entities
affiliated with them beneficially owned approximately 34.8% of our outstanding
common stock. We anticipate that our executive officers, directors and entities
affiliated with them will beneficially own approximately 33.0% of our
outstanding common stock following the completion of this offering, based on
shares outstanding as of September 30, 2000. 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".
The continuing control of ONI Systems by insiders could permit insiders to
engage in transactions to the detriment of stockholder value.
We have engaged in transactions with related parties, including loans to
executive officers. The ability of executive officers, directors and their
affiliated entities to exercise influence over all matters
17
<PAGE>
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".
We have experienced and expect to continue to experience volatility in our
share price which could negatively affect our stock price and therefore the
price of our notes.
The market price of our common stock, and therefore the market price of our
notes, 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.
Stock market volatility has increased, making your investment more risky and
litigation more likely.
The stock markets, particularly the Nasdaq National Market on which our
common stock is listed, have experienced substantial price and volume
fluctuations. These market 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.
Future sales of a substantial amount of our common stock after this offering
could cause our stock price and therefore the price of our notes 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. For example, on
the third business day following the release of our third quarter financial
results, approximately 1,588,011 shares will first be eligible for resale in
the public market, and on November 28, 2000, approximately 4,128,828 additional
shares will first be eligible for resale. Future sales of a substantial number
of shares of our common stock after this offering could cause the price of our
common stock, and therefore the price of our notes, 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".
Leverage and debt service obligations may adversely affect our cash flow.
We will have a substantial amount of outstanding indebtedness upon the
completion of this offering. There is the possibility that we may be unable to
generate cash sufficient to pay the principal of, interest on and other amounts
due in respect of the notes when due.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures; and
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<PAGE>
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete.
The notes will rank below our current and future senior debt, and we may be
unable to repay our obligations under the notes.
The notes are unsecured and will be subordinated in right of payment to all
of our current and future senior debt. Because the notes will be subordinate to
our senior debt, if we experience:
. a bankruptcy, liquidation or reorganization;
. an acceleration of the notes due to an event of default under the
indenture; or
. certain other specified events;
we will be permitted to make payments on the notes only after we have satisfied
all of our senior debt obligations. Therefore, we may not have sufficient
assets remaining to pay amounts due on any or all of the notes. In addition,
the notes effectively will be subordinate to all liabilities, including trade
payables, of our subsidiaries and any subsidiaries that we may in the future
acquire or establish. Consequently, our right to receive assets of any
subsidiaries upon their liquidation or reorganization, and the rights of the
holders of the notes to share in those assets, would be subordinate to the
claims of the subsidiaries' creditors.
The notes will be our obligations exclusively. The indenture for the notes
does not limit our ability, or that of any of our presently existing or future
subsidiaries, to incur senior debt, other indebtedness and other liabilities.
We may have difficulty paying what we owe under the notes if we, or any of our
subsidiaries, incur additional indebtedness or other liabilities. As of June
30, 2000, we had senior debt outstanding of $64.3 million, consisting of lease
obligations, and we had approximately $21.6 million of outstanding liabilities.
From time to time, we and our subsidiaries may incur additional indebtedness,
including senior debt, which could adversely affect our ability to pay our
obligations under the notes.
We may be unable to repay or repurchase the notes.
At maturity, the entire outstanding principal amount of the notes will
become due and payable. In addition, if we experience a change in control, as
defined in "Description of the Notes--Repurchase at Option of Holders Upon a
Change in Control", each holder of the notes may require us to repurchase all
or a portion of that holders notes. At maturity or if a change in control
occurs, we may not have sufficient funds or may be unable to arrange for
additional financing to pay the principal amount or repurchase price due. Under
the terms of the indenture for the notes, we may elect, if we meet certain
conditions, to pay the repurchase price with shares of common stock. Any future
borrowing arrangements or agreements relating to senior debt to which we become
a party may contain restrictions on, or prohibitions against, our repayments or
repurchases of the notes. If the maturity date or change in control occurs at a
time when our other arrangements prohibit us from repaying or repurchasing the
notes, we could try to obtain the consent of the lenders under those
arrangements, or we could attempt to refinance the borrowings that contain the
restrictions. If we do not obtain the necessary consents or refinance these
borrowings, we will be unable to repay or repurchase the notes. In that case,
our failure to repurchase any tendered notes or repay the notes due upon
maturity would constitute an event of default under the indenture. Any such
default, in turn, may cause a default under the terms of our senior debt. As a
result, in those circumstances, the subordination provisions of the indenture
would, absent a waiver, prohibit any repayment or repurchase of the notes until
we pay the senior debt in full.
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<PAGE>
A trading market for the notes may not develop.
The notes are a new issue of securities for which there is currently no
active trading market. We do not intend to apply for listing of the notes on
any securities exchange. If the notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities, the financial
condition and the prospects of our company and other factors beyond our
control, including general economic conditions. Although the underwriters have
advised us that they intend to make a market in the notes, they are not
obligated to do so and may discontinue market making at any time without
notice. We cannot guarantee that the market for the notes will develop or be
maintained. The trading price of the notes will decline if there ceases to be
an active trading market for them.
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. See "Description of Capital Stock--Anti-Takeover
Provisions".
20
<PAGE>
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus constitute forward-
looking statements that involve substantial risks and uncertainties. In some
cases, you can identify these statements by forward-looking words such as
"may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate"
or "continue" and variations of these words or comparable words. In addition,
any statements which refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and situations that may cause our or our industry's actual
results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. The risk factors
contained in this prospectus, as well as any other cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ from the expectations described or implied in our
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. Except as required by law, we do not undertake to update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of our convertible
subordinated notes will be approximately $290.3 million after deducting the
underwriting discount and estimated offering expenses. If the underwriters'
option to purchase additional notes in this offering is exercised in full, we
estimate that our net proceeds will be approximately $333.9 million.
Concurrently with this offering of convertible subordinated notes, ONI
systems and some of our stockholders are conducting a separate offering of
8,000,000 shares of common stock, of which we are selling 5,646,643 shares.
This offering is not conditioned on the completion of the offering of our
common stock.
The principal purpose of this offering is to obtain additional working
capital. Pending our use of the net proceeds, we intend to invest them in
short-term, interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock commenced trading publicly on the Nasdaq National Market on
June 1, 2000 under the symbol ONIS. The following table sets forth the high and
low sales prices of our common stock as reported by the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
High Low
Fiscal 2000 -------- --------
<S> <C> <C>
Second Quarter (starting June 1, 2000).................. $142.000 $72.9844
Third Quarter........................................... 128.625 71.9375
Fourth Quarter (through October 23, 2000)............... 82.750 51.6250
</TABLE>
On October 23, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $75.5625 per share. As of September 30, 2000, there
were approximately 556 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
. on an actual basis;
. on an as adjusted basis to reflect the sale of our convertible
subordinated notes with an aggregate principal amount of $300,000,000 in
this offering, after deducting the underwriting discount and estimated
offering expenses payable by us; and
. on an as further adjusted basis to reflect the sale by us of 5,646,643
shares of common stock in a concurrent public offering at the public
offering price of $74.50 per share.
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------
As Further
Actual As Adjusted Adjusted
--------- ----------- ----------
(in thousands, except share and
per share data)
<S> <C> <C> <C>
Current portion of capital-lease
obligations................................ $ 175 $ 175 $ 175
Long term debt (excluding current
maturities)
Capital lease obligations................. 246 246 246
5% convertible subordinated notes due
2005..................................... -- 300,000 300,000
Stockholders' equity:
Preferred Stock, $0.0001 par value per
share, 10,000,000 shares authorized and
no shares issued and outstanding, actual,
as adjusted and as further adjusted -- -- --
Common stock, $0.0001 par value per share,
700,000,000 shares authorized;
126,143,466 shares issued and
outstanding, actual and as adjusted;
131,790,109 as further adjusted ......... 13 13 13
Additional paid-in capital................ 530,823 530,823 932,359
Notes receivable from stockholders........ (8,250) (8,250) (8,250)
Services receivable from stockholder...... (12) (12) (12)
Deferred stock compensation............... (89,300) (89,300) (89,300)
Accumulated deficit....................... (129,167) (129,167) (129,167)
--------- --------- ----------
Total stockholders' equity.............. 304,107 304,107 705,643
--------- --------- ----------
Total capitalization.................. $ 304,528 $ 604,528 $1,006,064
========= ========= ==========
</TABLE>
The outstanding share information in the preceding table does not include,
as of September 30, 2000:
. 19,548,315 shares of our common stock subject to options outstanding
under our stock incentive plans, with a weighted average exercise price
of $4.63 per share, and 7,985,677 shares of common stock available for
future grant under these plans;
. 1,200,926 shares of common stock issuable upon the exercise of
outstanding warrants with a weighted average exercise price of $3.25 per
share;
. 5,646,643 shares of common stock being offered by us in a concurrent
public offering; and
. the shares of common stock issuable upon conversion or redemption of the
notes being offered by ONI Systems in this offering.
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>
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 June 30, 1999 and 2000, and the balance sheet data
as of June 30, 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, see note 1(r)
of our notes to consolidated financial statements.
<TABLE>
<CAPTION>
Period From
October 20, 1997 Year Ended Six Months Ended
(Inception) to December 31, June 30,
Consolidated Statements of December 31, ------------------ ------------------
Operations Data 1997 1998 1999 1999 2000
-------------------------- ---------------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................... $ -- $ 1,733 $ 3,034 $ 965 $ 13,117
Cost of goods sold....... -- 1,208 1,032 758 9,719
------ -------- -------- -------- --------
Gross profit........... -- 525 2,002 207 3,398
------ -------- -------- -------- --------
Operating expenses:
Research and
development, excluding
deferred stock
compensation
amortization amounts.... 39 4,009 24,858 7,126 24,344
Sales and marketing,
excluding deferred stock
compensation
amortization amounts..... 21 649 4,557 1,439 8,928
General and
administrative,
excluding deferred
stock
compensation
amortization amounts.... 49 1,591 3,455 1,041 7,530
Amortization of deferred
stock compensation...... 89 3,310 11,422 2,945 32,065
Common stock warrant
expense................. -- -- 2,891 -- 4,545
Amortization of goodwill
and intangibles......... -- -- 1,842 -- 1,874
In-process research and
development............. -- -- 170 170 --
------ -------- -------- -------- --------
Total operating
expenses.............. 198 9,559 49,195 12,721 79,286
------ -------- -------- -------- --------
Operating loss......... (198) (9,034) (47,193) (12,514) (75,888)
Interest income (expense),
net...................... (1) 183 623 413 2,399
Other income (expense),
net...................... -- -- -- (7) (53)
Loss before income
taxes................. (199) (8,851) (46,570) (12,108) (73,542)
Income taxes.............. -- 1 2 1 2
------ -------- -------- -------- --------
Net loss............... (199) (8,852) (46,572) (12,109) (73,544)
Beneficial conversion of
preferred stock.......... -- -- -- -- (4,242)
------ -------- -------- -------- --------
Net loss attributable to
common stockholders...... $ (199) $ (8,852) $(46,572) $(12,109) $(77,786)
====== ======== ======== ======== ========
Basic and diluted net loss
per share................ $(0.77) $ (0.74) $ (2.58) $ (0.85) $ (0.73)
Weighted-average shares
outstanding used in
computing basic
and diluted net loss per
share.................... 257 11,919 18,043 14,310 106,359
Deficiency of earnings
available to cover fixed
charges(1)............... $ (199) $ (8,851) $(46,570) $(12,108) $(73,542)
</TABLE>
-------
(1) Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges, amortization of
debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense we believe to
be representative of interest. Earnings, as defined, were not sufficient to
cover fixed charges in any of the periods presented.
<TABLE>
<CAPTION>
December 31, December 31, June 30,
Balance Sheet Data 1998 1999 2000
------------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................ $19,092 $ 80,023 $239,530
Working capital.......................... 19,627 81,758 271,238
Total assets............................. 21,312 100,942 325,669
Capital lease obligations, less current
portion................................. 79 367 246
Total stockholders' equity............... $20,565 $ 91,728 $304,107
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We develop, market and sell 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 announced general availability of our
first product, the ONLINE9000, which is a combined hardware and software
product for optical transmission and routing of voice, Internet and other data
communication services. In June 2000, we announced general availability of the
ONLINE7000, which is designed to provide metropolitan service providers with a
more cost-effective solution for metro access applications.
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 reserved, and were obligated to issue, 233,468
shares of our common stock upon the exercise of warrants to purchase capital
stock of Optivision. These warrants were exercised in August 2000, and we
issued 233,468 shares of our common stock. We did 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 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 June 30,
2000, the remaining unamortized goodwill was $2.8 million.
Since our inception, we have incurred significant losses, and as of June 30,
2000, we had an accumulated deficit of $129.2 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 June 2000, we
announced general availability of our ONLINE7000 product. For the six months
ended June 30, 2000, all of our revenue was derived from sales of our
ONLINE9000 product to seven customers. Sales to COLT Telecom, which is based in
the United Kingdom, and Lucent Technologies, Inc. in China are denominated in
United States Dollars. While we will continue to seek to diversify and grow our
customer base, we anticipate that
25
<PAGE>
our operating results for any given period may depend on a small number of
customers. We plan to release new products, including our SONET/SDH
Multiplexer, Data Multiplexer, ONLINE11000 and product enhancements, although
we may be unsuccessful in these efforts.
We market and sell our products primarily through our direct sales force to
competitive local exchange carriers, inter-exchange carriers, Internet service
and application service providers, cable operators, utilities and their
affiliates and incumbent local exchange carriers. In some international regions
where it is difficult to maintain a direct sales force, we may rely on
resellers for distribution of our products, such as our OEM agreement with
Lucent Technologies for the sale of our products in China.
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. Revenue from service obligations are deferred and
recognized ratably over the service period. We provide a limited warranty on
our products. Estimated expenses for warranty obligations are recorded at the
time revenue is recognized.
Our cost of goods sold 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 goods sold consists of payments to third-
party contract manufacturers. We conduct supply chain management, production
engineering, documentation and quality assurance at our manufacturing facility
in San Jose, California. We outsource most of the manufacturing of optical
modules used in our products, and we complete the final assembly of these
optical modules at our facilities. The majority of our electronic manufacturing
and assembly is outsourced. Currently, we use a number of manufacturing vendors
for electronic assemblies, while E-TEK Dynamics performs the majority of our
outsourced optical assembly. This approach to manufacturing allows us to:
. reduce capital equipment expenditures required for a turnkey
manufacturing operation;
. reduce our facilities 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
. provide flexibility in meeting market demand.
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.
26
<PAGE>
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities and human resources
personnel, recruiting expenses, professional fees and other corporate expenses.
We expect general and administrative expenses to increase in absolute dollars
as we add personnel, improve and expand our information system infrastructure
and incur additional expenses as we grow and operate as a public company.
Nortel Networks Corporation has initiated litigation against us involving
intellectual property-related claims. We expect that the costs of defending
these lawsuits will be substantial, and that management time and attention will
be diverted to them, regardless of their merit. We entered into a lease for a
new facility in May 2000. We paid the deposit required to secure this facility,
approximately $1.3 million, and the first month's rent, approximately $700,000,
at the time that the lease was signed. The lease term is for a period of 120
months, commencing on February 1, 2001. The expected rent will be approximately
$7.9 million for the first year, $8.2 million for the second year, $10.6
million for the third year and $11.0 million for the fourth year. Thereafter,
the base rent will increase by 4% per year.
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 six months
ended June 30, 2000, we recorded approximately $41.7 million, and $83.2
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 $32.1
million of deferred stock compensation in the year ended December 31, 1999 and
the six months ended June 30, 2000, respectively. Approximately $35.5 million
and $89.3 million of deferred stock compensation related to all prior issuances
remained to be amortized over four years as of December 31, 1999 and June 30,
2000, respectively.
Results of Operations
We plan to increase our operating expenses significantly in order to fund
greater levels of research and development, expand our sales and marketing
operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that 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.
27
<PAGE>
Comparison of Six Months Ended June 30, 1999 and 2000
Revenue
Revenue was $13.1 million for the six months ended June 30, 2000, all of
which was from sales of our ONLINE9000 product. Revenue recorded for the six
months ended June 30, 1999 was from government research and development
contracts, which were completed in 1999.
Cost of goods sold
Cost of goods sold was $9.7 million for the six months ended June 30, 2000.
As a percentage of revenue, cost of goods sold for the six months ended June
30, 2000 was 74% compared to 79% for the six months ended June 30, 1999. We
believe the comparison of these two periods is not meaningful, because our
revenue in 1999, and the related cost of goods sold, were from governmental
research and development contracts.
Cost of goods sold as a percentage of revenue for the six months ended June
30, 2000 is higher than it is anticipated to be in the future due to the high
cost of initial start-up of production 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. Accordingly, we expect the quarterly gross profit percentages
to fluctuate in accordance with the quarterly product mix of related sales.
Research and development expense
Research and development expense was $7.1 million for the six months ended
June 30, 1999, and increased by 242% to $24.3 million for the six months ended
June 30, 2000, representing 56% of total operating expenses in 1999 and 30.7%
of total operating expenses in 2000. The increase in 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. At June 30, 1999, we had a total of approximately 81
research and development employees, and at June 30, 2000, we had approximately
271 research and development employees.
Sales and marketing expense
Sales and marketing expense was $1.4 million for the six months ended June
30, 1999, and increased by 521% to $8.9 million for the six months ended June
30, 2000, representing 11.3% of total operating expenses in each of 1999 and
2000. The increase in sales and marketing expense is primarily due to the
expanded sales and marketing activity associated with bringing our products to
market. At June 30, 1999, we had a total of approximately nine sales and
marketing employees, and at June 30, 2000, we had approximately 78 sales and
marketing employees.
General and administrative expense
General and administrative expense was $1.0 million for the six months ended
June 30, 1999, and increased by 624% to $7.5 million for the six months ended
June 30, 2000, representing 8.2% of total operating expenses in 1999 and 9.5%
of total operating expenses in 2000. The increase in general and administrative
expense primarily reflects the expansion in infrastructure to support our
planned growth. At June 30, 1999, we had a total of approximately 13 general
and administrative employees, and at June 30, 2000, we had approximately 75
general and administrative employees.
Amortization of deferred stock compensation
Amortization of deferred stock compensation was $2.9 million for the six
months ended June 30, 1999, and increased by 989% to $32.1 million for the six
months ended June 30, 2000. From
28
<PAGE>
inception through June 30, 2000, we have amortized a total of $46.9 million of
deferred stock compensation, leaving an unamortized balance of $89.3 million as
of June 30, 2000.
Amortization of goodwill and intangibles
Amortization of goodwill and intangibles was $1.9 million for the six months
ended June 30, 2000 and zero for the comparable period in 1999. We recorded
goodwill of $5.7 million and intangibles of $1.2 million in relation to the
acquisition of Object-Mart, Inc. on June 29, 1999. In addition, we recorded
$250,000 of intangibles in the six months ended June 30, 2000 related to the
purchase of a domain name. Goodwill and intangibles are being amortized over a
period not exceeding two years.
Common stock warrant expense
In February 2000, in connection with the signing of a purchase and license
agreement with FMR Corp. for the purchase of our products by KVH Industries
Inc. and MetroRED Telecommunicaciones S.A., we issued a warrant to purchase
223,000 shares of common stock at an exercise price of $0.91 per share. FMR,
KVH Industries and MetroRED are not obligated to purchase any of our products
as a condition to FMR exercising the warrant. We believe that, given our early
stage of development at the time of the negotiation and issuance of the
warrant, the issuance of this warrant was a cost of establishing a relationship
with this potential customer. The value of $3.0 million 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.
Given that there are no future performance obligations to exercise this
warrant, the warrant was expensed upon issuance.
In a separate transaction in March 2000, as consideration for professional
services rendered, we issued a warrant to purchase 200,000 shares of common
stock to Fenwick & West LLP at an exercise price of $15.00 per share. The value
of $1.5 million ascribed to the warrant was estimated using the Black-Scholes
option valuation model using the following assumptions:
. no expected dividend yield;
. risk free interest rate of 5.50%;
. expected volatility of 70%; and
. contractual term of four years.
The warrant was expensed upon issuance.
Interest income (expense), net
Interest income (expense), net was $414,000 for the six months ended June
30, 1999, and increased by 480% to $2.4 million for the six months ended June
30, 2000. The increase was primarily due to the interest earned on the net cash
proceeds received in connection with the completion of our initial public
offering in June 2000.
29
<PAGE>
Comparison of Years 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 goods sold
Cost of goods sold 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
520% to $24.9 million in 1999, representing 41.9% of total operating expenses
in 1998 and 50.5% 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 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 117.2% to $3.5 million in 1999, representing 16.6% of total operating
expenses in 1998 and 7.0% 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.
30
<PAGE>
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%. 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.
Amortization of goodwill and intangibles
Amortization of goodwill and intangibles was $1.8 million in 1999 and zero
in 1998. We recorded goodwill of $5.7 million and intangibles of $1.2 million
in relation to the acquisition of Object-Mart, Inc. on June 29, 1999. Goodwill
and intangibles are being amortized over a period not exceeding two years.
Common stock warrant expense
In December 1999, in connection with the signing of a purchase and license
agreement with COLT Telecom plc, we issued a warrant to purchase 500,000 shares
of common stock at an exercise price of $0.91 per share. COLT is not obligated
to purchase any of our products as a condition to exercising the warrant. We
believe that, given our early stage of development at the time of the
negotiation and issuance of the warrant, the issuance of this warrant was a
cost of establishing a relationship with this potential customer. The value of
$2.9 million 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.
Given that there are no future performance obligations to exercise this
warrant, the warrant was expensed in the year ended December 31, 1999.
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%. 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 carry-forwards will
expire at various dates from 2012 through 2019. Utilization of the net
operating losses may be subject to a substantial annual limitation due to the
ownership change limitations contained in Section 382 of the Internal Revenue
Code. There is sufficient uncertainty regarding the reliability of the deferred
tax assets that we have recorded a full valuation allowance.
31
<PAGE>
Liquidity and Capital Resources
On May 31, 2000, we completed the initial public offering of our common
stock and realized net proceeds from the offering of approximately $226.1
million, including $14.0 million from two private placements of common stock
that closed concurrently with our initial public offering. From inception
through December 31, 1999, we financed our operations primarily through private
sales of convertible preferred stock, for net proceeds of approximately $122.9
million, and common stock, for net proceeds of approximately $329,000. We
raised an additional $22.0 million from the sale of preferred stock and
$904,000 from the sale of common stock during the six months ended June 30,
2000. The following table describes the preferred stock issuances that have
funded our operations from inception through June 30, 2000:
<TABLE>
<CAPTION>
Consideration Price per Preferred
Date Closed Series ($ 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
5/00 H $20.0 $15.00 1,333,333
</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 our initial public offering. No warrants had been
exercised as of June 30, 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
$61.8 million in cash in operating activities in the six months ended June 30,
2000, an increase of $54.4 million from the $7.4 million used in the six months
ended June 30, 1999. The increase was primarily due to the increase in our net
loss of $61.4 million, an increase in inventory of $28.8 million and other
working capital of $2.3 million, offset by common stock warrants expense,
increased amortization of deferred stock compensation of $33.7 million, and
depreciation and amortization of $4.4 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 $27.5
million in cash in investing activities in the six months ended June 30, 2000,
an increase of $24.4 million from the $3.1 million used in the six months ended
June 30, 1999. The increase was related to the increase in purchases of
property and 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
32
<PAGE>
capital purchases of property and equipment. We had $119,000 in capital lease
obligations outstanding at December 31, 1998 and $533,000 at December 31, 1999.
We generated $248.9 million in cash from financing activities in the six months
ended June 30, 2000, an increase of $241.6 million from the $7.3 million
generated in the six months ended June 30, 1999, primarily from the net
proceeds from our initial public offering and the private sales of convertible
preferred stock and common stock.
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 June 30, 2000, cash and cash equivalents totaled $239.5 million,
an increase of $159.5 million from the balance of $80.0 million at December 31,
1999. The increase was primarily due to the receipt of $226.1 million, from the
net proceeds of our initial public offering and concurrent private placements,
and $22.0 million from the private sales of convertible preferred stock, offset
by $61.8 million of cash used in operating activities and $27.5 million of cash
used in investing activities.
We have a lease financing facility for $1.5 million, of which $467,000 had
been drawn as of June 30, 2000. 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 June 2000, we sold 160,000 shares of common stock to Internet Initiative
Japan Inc. at $25 per share, in a private placement that closed concurrently
with our initial public 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 June 2000, we sold 400,000 shares of common stock to CCT Telecom Holdings
Limited at $25 per share in a private placement that closed concurrently with
our initial public offering. CCT Telecom will be granted the right to include
these shares in future registered offerings that we may file.
In May 2000, we sold 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. In June 2000, upon the
completion of our initial public offering, these shares of preferred stock
automatically converted into 969,697 shares of common stock. The preferred
shares converted at a 17.5% discount off of the initial public offering price,
resulting in a beneficial conversion in the amount of $4,242,424. This
beneficial conversion increased the net loss attributable to common
stockholders and the basic and diluted net loss per share.
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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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 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.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions involving
Stock Compensation--an Interpretation of Accounting Principles Board (APB)
Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and is
effective July 1, 2000. We believe that FIN 44 will not have a material effect
on our financial position or results of operations.
In June 2000, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, and amendment to SFAS No. 133". SFAS No. 138 addresses a limited
number of issues causing implementation difficulties for companies that are
required to apply SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
effective date of SFAS No. 133", and SFAS No. 138 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. We have not
determined the impact that SFAS 133 and SFAS 138 will have on our financial
statements and believe that such determination will not be meaningful until
closer to the date of initial adoption.
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BUSINESS
Overview
We develop, market and sell 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.
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 the synchronous optical
networking standard. 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 allow transmission of multiple signals on a single strand of
optical fiber, each signal using a different wavelength of light. Technology
currently enables transmission of up to 160 different wavelengths on a single
fiber. This means that today a service provider using appropriate technology
can multiply the transmission capacity of its existing fibers 160 times.
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.
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.
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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.
Optical solutions specifically designed to address the challenges faced by
metro core and access networks have only recently become 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
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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 equipment based on the
synchronous optical network standard, deploying additional fiber, and adapting
long-haul solutions such as existing point-to-point implementations of current
optical technology to the metro network. When applied to metro networks, these
efforts are costly, time-consuming, difficult to scale or difficult to manage.
For example, the synchronous optical network standard 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,
synchronous optical networking requires that at least 50% of network capacity
be reserved for carrying duplicated traffic to provide restoration capability
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. Current optical technology
was originally designed for long-haul applications in a synchronous optical
network environment. As designed for long-haul networks, current optical
technology is inefficient and expensive to deploy in metro networks. To be
applied in the metro network, many currently available optical networking
implementations require additional electrical equipment to add and drop traffic
and to provide rapid service restoration.
In addition, today's networks are not entirely 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 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 currently consists of the ONLINE9000 for metro core networks, the
ONLINE7000 for metro access
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networks, our OPTX network operating system and our OLMP inter-network
communications protocol. In addition, we expect that our SONET/SDH Multiplexer
and Data Multiplexer will become available in November 2000 and our
ONLINE11000 for larger regional networks will become available in December
2000.
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 the
synchronous optical network standard, 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
services based on the synchronous optical network standard, gigabit ethernet
and fibre channel, are supported on the same platform by our equipment and
interfaces.
Manageability and flexibility. As network complexity increases, service
providers require software and systems that allow easy end-to-end service
management. Our products combine a network operating system, management
software and inter-network communications protocols to enable:
. real-time control of bandwidth allocation as needed, where needed and
when needed;
. real-time surveillance of network performance;
. interoperability with third-party management software and data routing
and switching equipment; and
. point-and-click activation of services.
Cost effectiveness and scalability. Our solution is designed to scale
efficiently as demand for bandwidth and new services increases. Our products
lower service providers' equipment acquisition and network operation costs by
reducing the amount of equipment required, and by allowing them to install
their equipment incrementally in a pay-as-you-grow fashion without sacrificing
their existing infrastructure investments. In addition, our solution requires
less space in service providers' facilities because our products are designed
to handle 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 synchronous optical network standard of 50 milliseconds, without
the need to dedicate bandwidth for restoration by carrying duplicated traffic,
as is required by typical synchronous optical network standard-based
equipment. Since our products do not require carrying duplicated traffic,
communications service providers can utilize their existing fiber more
efficiently by placing more traffic on each fiber route.
The ONI Systems Strategy
The key elements of our strategy are to:
Leverage our 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 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.
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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 optical architecture and dynamic network operating system are key
elements of our technology leadership. We believe that these elements can be
incorporated into future product offerings for other segments of the
communications network. We intend to extend our technology leadership and to
develop new product offerings and future product enhancements through continued
investment in research and development.
Leverage optical manufacturing expertise
Our ability to manufacture complex optical networking products is a key to
our success. We believe we have developed a world-class manufacturing
capability through a combination of our own manufacturing systems and third-
party manufacturing relationships. We believe that this combination gives us a
competitive advantage and will enable us to reduce our manufacturing costs,
while providing us with manufacturing flexibility to meet changing demand.
Expand direct sales, service and support organizations to address global
opportunities
We intend to expand our direct sales capability into global markets. We
believe that sales efforts on a customer-by-customer basis are most effective
because deployment of communications equipment involves careful technical
evaluation, multiple levels of decision making and significant investments by
our customers. While we may consider indirect sales channels where appropriate,
we intend to continue to focus our sales and distribution efforts on direct
sales. We have developed a 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 continue 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.
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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 supports the following functions in an 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.
[GRAPHIC]
[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 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 protocol. OPTX helps provide comprehensive and
integrated network design, operations and service management capabilities by
managing networks built with our ONLINE9000 and ONLINE7000 products.
[GRAPHIC]
[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]
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ONLINE Products
ONLINE9000
The ONLINE9000 is designed for metropolitan area and smaller regional
networks and delivers cost-effective, scalable capacity for the metro
communications service provider. It provides restoration faster than the
synchronous optical network standard of 50 milliseconds and supports dynamic
optical add-drop capabilities on all deployed channels. To help service
providers deploy large networks, the ONLINE9000 includes optical amplifiers to
extend transmission distances. In its base configuration, the ONLINE9000
includes the following key features:
. 33 protected or 66 unprotected channels;
. line-based optical rerouting of channels in the event of optical fiber
failure;
. a universal optical architecture supporting multiple bit rates and
protocols, including OC-3, OC-12, OC-48, OC-192, gigabit ethernet and
fibre channel;
. client interfaces currently supporting OC-3, OC-12, OC-48, gigabit
ethernet, fibre channel, ESCON, and, expected in the fourth calendar
quarter of 2000, OC-192; and
. integrated optical amplifiers with sophisticated power management
capabilities.
ONLINE7000
The ONLINE7000, which became generally available in June 2000, 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 includes many functions of synchronous optical network and
data multiplexers. This capability will allow the carrier to deploy multiple
synchronous optical network or native-format data services using a single
wavelength. The ONLINE7000 is scalable up to 33 protected or 66 unprotected
channels. In its base configuration, key features of the ONLINE7000 include:
. system configuration for unamplified rings with one to 11 channels;
. path based rerouting of channels in the event of optical fiber failure;
. a 190 shelf form-factor suitable for metro access networks; and
. the ability to add or drop multiple synchronous optical network or data
channels to or from a single wavelength, using our multiplexer products,
expected to be released in October 2000.
ONLINE11000
We recently announced the ONLINE11000, which we anticipate will be generally
available in December 2000. The ONLINE11000 is designed to offer service
providers a cost effective optical transport solution for large regional
networks. The product is designed to include optical line amplifiers to enable
operation of the ONLINE11000 in large optical rings ranging in circumference
from a few hundred kilometers to more than 1,000 kilometers. We expect this
product to provide full add/drop capabilities for any number of channels at all
nodes in a ring, and that our multiplexer products can be deployed with the
ONLINE11000 to further enhance the efficiency of regional networks. In its base
configuration, key features will include:
. 640 kilometer reach from node to node without the need for regeneration
of optical signals;
. optical line amplifiers together with integrated optical amplifiers with
sophisticated power management capabilities;
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. dynamic optical power balancing;
. 33 protected or 66 unprotected channels;
. line-based optical or path-based rerouting of channels in the event of
optical fiber failure;
. a universal optical architecture supporting multiple bit rates and
protocols, including OC-3, OC-12, OC-48, OC-192, gigabit ethernet and
fibre channel; and
. client interfaces currently supporting OC-3, OC-12, OC-48, gigabit
ethernet, fibre channel, ESCON, and, expected in the fourth calendar
quarter of 2000, OC-192.
Our ONLINE products can be used in conventional ring network topologies and
can transport a variety of traffic patterns, including mesh. We intend in the
future to develop products that can be used in ring-mesh and mesh network
topologies. These products share the same management and operating system and
can be deployed together as required to provide flexible network solutions for
service providers.
Multiplexer Products
We recently introduced two new wavelength multiplexer products, our
SONET/SDH Multiplexer and Data Multiplexer, which we anticipate will be
available in November 2000. Multiplexing allows multiple synchronous optical
network or data signals to be combined within an individual wavelength channel.
Service providers who deploy our multiplexer products with our ONLINE products
can combine up to 16 lower-speed signals into a single wavelength channel,
resulting in efficiencies by eliminating the need for traditional multiplexing
equipment in the network. In addition, utilizing the Data Multiplexer, service
providers can combine various data formats, such as two fibre channels or
gigabit ethernet signals, onto a single wavelength with standards-based OC-
48/STM-16 frames for direct connection from metro to long-haul networks. This
allows service providers to leverage the installed base of their transport
infrastructure without additional processing equipment. We anticipate that a
two-port version of the Data Multiplexer and that four- and eight- port
versions of the SONET/SDH Multiplexer will be available in November 2000. In
addition, we anticipate that a 16-port version of the SONET/SDH Multiplexer
product will be available in December 2000.
OPTX Operating System
Our OPTX optical network operating system 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 preferences. 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 configuration for
each node in the network;
. Network and service management interface and applications, including
surveillance, service activation and ordering systems and network
inventory reports; and
. CORBA-based interfaces to the service provider's network operations
support systems.
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OLMP (Optical Link Management Protocol)
Our OLMP inter-network communications protocol 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. Our OLMP protocol is designed to enable data equipment
to 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 one of the
earliest network-level internetworking protocols to link the data and switching
equipment to optical transmission equipment.
Customers
Our target customers include communication service providers such as
competitive local exchange carriers, inter-exchange carriers, Internet service
and application service providers, cable operators, utilities and their
affiliates and incumbent local exchange carriers. As of September 30, 2000, we
had 13 customers, including COLT Telecom plc, EPIK Communications,
Incorporated, Internet Initiative Japan Inc., Marietta Fibernet, S.A., Qwest
Communications International, Inc., Sphera Optical Networks, Inc.,
StorageNetworks, Inc., Williams Communications, Inc. and two service providers
in China through our OEM relationship with Lucent Technologies.
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 through April 2001.
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.
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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 192 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, $24.9 million for the year ended December 31, 1999 and
$24.3 million for the six months ended June 30, 2000. 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 facility in San Jose, California. We
outsource most of the manufacturing of optical modules used in our products,
and we complete the final assembly of these optical modules at our facilities.
The majority of our electronic manufacturing and assembly is outsourced.
Currently, we use a number of manufacturing vendors for electronic assemblies
while E-TEK Dynamics, Inc., a subsidiary of JDS Uniphase Corporation, 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 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. We are
required to purchase at least half of our requirements of the optical
components covered by this agreement from E-TEK Dynamics.
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,
44
<PAGE>
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 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 25 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),
ONLINE11000(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.
45
<PAGE>
Employees
As of September 30, 2000, we had a total of 447 employees:
. 182 in research and development;
. 62 in sales and marketing;
. 27 in customer service and support;
. 99 in manufacturing; and
. 77 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 2,600 square feet in Raleigh, North Carolina, under a short-term
lease. We expect to require additional space within the next 12 months. We
entered into a lease for a new facility in May 2000. The lease will expire in
2011. The new facility is initially approximately 346,000 square feet, and will
expand to approximately 445,000 square feet in January 2003. We intend to move
our headquarters to this new facility in the second quarter of 2001.
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 Nortel Networks. This suit sought 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.
In March 2000, Nortel Networks filed an additional suit against us in the
United States District Court for the Northern District of California. This 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.
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. On June 23, 2000, the
court dismissed one of Nortel Networks' unfair competition claims and stayed
its remaining claims for trade secret misappropriation and unlawful business
practices in the California suit because of the pendency of the suit in Canada.
On July 14, 2000, Nortel Networks filed a Discontinuance of Suit dismissing the
suit in Canada against our employees and us and terminating the temporary
orders previously issued in this suit. Simultaneous with this, Nortel Networks
filed a Notice of Motion to lift the stay of the trade secret
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<PAGE>
misappropriation and unlawful business practices claims in the California suit,
which was granted in September 2000.
We are in the process 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 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. 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.
47
<PAGE>
MANAGEMENT
Executive Officers, Directors and Significant Employees
Our executive officers, directors and significant employees, and their ages
and positions as of September 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors:
Hugh C. Martin...................... 46 President, Chief Executive Officer
and Chairman of the Board of
Directors
Chris A. Davis...................... 50 Executive Vice President, Chief
Financial and Administrative Officer
Hon Wah Chin........................ 46 Chief Scientist
William R. Cumpston................. 39 Executive Vice President, Engineering
and Operations
Michael A. Dillon................... 41 Vice President, General Counsel and
Secretary
Robert J. Jandro.................... 45 Executive Vice President, Worldwide
Sales and Marketing
Andrew W. Page...................... 34 Vice President, Business Development
Rohit Sharma........................ 32 Chief Technology Officer
Matthew W. Bross.................... 40 Director
Kevin R. Compton.................... 42 Director
Jonathan D. Feiber.................. 44 Director
James F. Jordan..................... 60 Director
Gregory B. Maffei................... 40 Director
Significant Employees:
Martin Desroches.................... 35 Vice President, Operations
William S. Jarvis................... 37 Vice President, Worldwide Sales
</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
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 Scientist of ONI Systems since August 2000.
Mr. Chin served as Chief Technology Officer of ONI Systems from June 1998 to
July 2000. 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 an 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 Executive 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, Business 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.
Rohit Sharma founded ONI Systems in our spin-out from Optivision, Inc. and
has served as Chief Technology Officer since August 2000. Mr. Sharma served as
our Vice President, Optical Hardware Development from January 1999 to July
2000. 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.
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 360networks Inc.,
Active Software, Inc., Citrix Systems, Inc., Corsair Communications, Inc.,
Rhythms NetConnections Inc. and VeriSign, Inc.
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.
49
<PAGE>
James F. Jordan has served as a director of ONI Systems since March 1998.
Mr. Jordan has privately managed his investment fund since 1994. He was one of
the founders of Ungermann-Bass Inc. and was President and Chief Executive
Officer of Kalpana, Inc. prior to the sale of the company to Cisco Systems in
1994. He holds a B.S. in Business and Marketing from the University of Utah.
Gregory B. Maffei has served as a director of ONI Systems since February
2000. Mr. Maffei has served as Chief Executive Officer and as a member of the
board of directors of 360networks Inc., a communications service provider,
since December 1999. From 1993 to December 1999, Mr. Maffei served in various
capacities with Microsoft Corporation, a software company, most recently as
Senior Vice President, Finance and Administration, and Chief Financial Officer.
He serves on the board of directors of Avenue A, Inc., Expedia, Inc. and
Starbucks Corporation. He holds an M.B.A. from Harvard University Graduate
School of Business and a B.A. from Dartmouth College.
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.
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 board of directors is divided into three classes. The Class I directors,
Messrs. Feiber and Compton, will serve an initial term until the 2001 annual
meeting. The Class II directors, Messrs. Jordan and Martin, will serve an
initial term until the 2002 annual meeting. The Class III directors, Messrs.
Bross and Maffei, will serve an initial term until the 2003 annual meeting.
Members of each class will be elected for three-year terms following its
respective initial term. The classification of our board of directors could
have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from acquiring, control of ONI Systems.
Board Committees
Our board of directors has two committees:
Compensation Committee. The current members of our compensation committee
are Messrs. Compton and Feiber. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers. The compensation committee also administers our stock plans.
Audit Committee. The current members of our audit committee are Messrs.
Jordan, Feiber and Maffei. Our audit committee reviews and monitors our
financial statements and accounting practices, makes recommendations to our
board regarding the selection of independent auditors and reviews the results
and scope of the audit and other services provided by our independent auditors.
50
<PAGE>
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.
Under the terms of the plan, we automatically granted options to purchase
80,000 shares of common stock at an exercise price of $82.56 to Messrs. Feiber
and Compton, who are non-employee directors who became members of the board
prior to May 31, 2000 and who had not previously received an option grant. In
addition, each non-employee director who becomes a member of the board will be
granted an option to purchase 80,000 shares of common stock on the date on
which the individual first becomes a non-employee director. 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.
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
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<PAGE>
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, Business 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 Compensation Awards
---------------- ---------------------
Restricted Securities
Annual 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 Scientist
William R. Cumpston.................... 191,666 85,000 -- 800,000
Executive Vice President, Engineering
and Operations
Rohit Sharma........................... 147,981 -- -- 256,668
Chief Technology Officer
</TABLE>
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.
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<PAGE>
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
. multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $25.00 per share for
options granted prior to the initial public offering, and
. subtracting from that result the aggregate option exercise price.
Potential realizable values are computed by
. multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $25.00 per share for
options granted prior to the initial public offering,
. 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
. 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
Percentage Value at Assumed Annual
Number of of Total Rates of Stock Price
Securities Options Exercise Appreciation for Option
Underlying Granted to Price Term
Options Employees Per Expiration Estimated -----------------------
Name Granted in 1999 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 $28,876,058 $47,991,844 $77,319,214
Terrence J. Schmid...... 120,000 0.62 0.09 3/4/09 2,989,200 4,875,884 7,770,427
200,000 1.04 1.25 12/21/09 4,750,000 7,894,473 12,718,712
Hon Wah Chin............ 100,000 0.52 0.09 7/15/09 2,491,000 4,063,237 6,475,356
100,000 0.52 1.25 12/21/09 2,375,000 3,947,237 6,359,356
William R. Cumpston..... 300,000 1.56 0.09 3/4/09 7,473,000 12,189,710 19,426,068
200,000 1.04 0.91 9/15/09 4,818,000 7,962,473 12,786,712
300,000 1.56 1.25 12/21/09 7,125,000 11,841,710 19,078,068
Rohit Sharma............ 106,668 0.53 0.09 3/4/09 2,657,100 4,334,173 6,907,133
150,000 0.74 1.25 12/21/09 3,562,500 5,920,855 9,539,034
</TABLE>
Option Grants in 2000
The following table sets forth grants of stock options to executive officers
who joined ONI between December 31, 1999 and the date of our initial public
offering:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Number of Rates of Stock Price
Securities Exercise Appreciation for Option
Underlying Price Term
Options Per Expiration Estimated -----------------------
Name Granted Share Date Value 5% 10%
---- ---------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Chris A. Davis.......... 1,000,000 $ 4.00 5/3/10 $21,000,000 $36,722,366 $60,843,562
Robert J. Jandro........ 900,000 3.20 3/1/10 19,620,000 33,770,129 55,479,205
Andrew W. Page.......... 300,000 3.20 3/1/10 6,540,000 11,256,710 18,493,068
50,000 10.00 5/3/10 750,000 1,536,118 2,742,178
</TABLE>
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<PAGE>
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. To date, Ms. Davis has 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
Rohit Sharma........................................... 819,168 339,082
</TABLE>
Employee Benefit Plans
1997 Stock Option Plan. As of September 30, 2000, options to purchase
225,485 shares of common stock were outstanding under our 1997 stock option
plan with a weighted average exercise price of $0.04 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.
1998 Equity Incentive Plan. As of September 30, 2000, options to purchase
16,539,405 shares of common stock were outstanding under our 1998 equity
incentive plan with a weighted average exercise price of $1.70 per share. Our
1998 equity incentive plan terminated on May 31, 2000, at which time our 2000
equity incentive plan became effective. As a result, no options have been
granted under our 1998 equity incentive plan since May 31, 2000. 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.
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<PAGE>
1999 Equity Incentive Plan. As of September 30, 2000, options to purchase
1,197,000 shares of common stock were outstanding under our 1999 equity
incentive plan with a weighted average exercise price of $4.40 per share. Our
1999 equity incentive plan terminated on May 31, 2000, at which time our 2000
equity incentive plan became effective. As a result, no options have been
granted under our 1999 equity incentive plan since May 31, 2000. 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. As of September 30, 2000, options to purchase
586,425 shares of common stock were outstanding under our 2000 equity incentive
plan with a weighted average exercise price of $90.69 per share. Our 2000
equity incentive plan became effective on May 31, 2000 and serves as the
successor to our 1998 equity incentive plan and our 1999 equity incentive plan.
We initially have reserved 7,048,905 shares of common stock to be issued under
this plan. In addition, any shares issued under our 1997 stock option plan,
1998 equity incentive plan and 1999 equity incentive plan 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, are
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.
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 is 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".
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Our 2000 equity incentive plan provides 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
became effective on June 1, 2000. We 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.
Our 2000 employee stock purchase plan is 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 are 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
ends automatically upon termination of employment for any reason.
Under our 2000 employee stock purchase plan, eligible employees are
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.
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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 begin on February
1 and August 1 of each year. Since the first offering period began on June 1,
2000 and not on February 1 or August 1, the length of the first offering period
will be more than two years, and the length of the first purchase period will
be more 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 is 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 has 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 has 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 is 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 is able to make amendments to the plan as
it determines to be advisable if the financial accounting treatment for the
plan is different from the financial accounting treatment in effect on the date
the plan was adopted by the board of directors.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees who
are at least 21 years old are generally eligible to participate. Participants
may make pre-tax contributions to the plan of up to 15% of their eligible
earnings, subject to a statutorily prescribed annual limit. Each participant is
fully vested in his or her contributions and the investment earnings. There are
no matching contributions under the plan. Contributions by the participants to
the plan, and the income earned on these contributions, are generally not
taxable to the participants until withdrawn. Participant contributions are held
in trust as required by law. Individual participants may direct the trustee to
invest their accounts in authorized investment alternatives.
Employment-Related Agreements
Hugh C. Martin. In January 1998, we entered into an at-will employment
agreement with Mr. Martin. Mr. Martin initially received a base salary of
$200,000 per year. Mr. Martin's current salary is $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
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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 chose the second alternative. Her option is 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.
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.
Rohit Sharma. In October 1997, we entered into an at-will employment
agreement with Mr. Sharma. Mr. Sharma initially received a base salary of
$84,936 per year. Mr. Sharma's current salary is $300,000 per year. In
addition, we granted Mr. Sharma a stock award to purchase 133,332 shares of
common stock, subject to vesting requirements. We also granted Mr. Sharma
options to purchase an aggregate of 400,000 shares of common stock, subject to
vesting and performance requirements.
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 $250,000 per year. He also received a signing
bonus of $40,000. 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.
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<PAGE>
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 $300,000 per year. He also
received a signing bonus of $45,000 and is eligible to receive an annual
performance bonus of at least $50,000. 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;
. 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.
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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, we have 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 have
obtained 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 involving 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;
. 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 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
beneficial 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
Rohit Sharma............ -- -- 40,000 -- -- 40,000
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>
Upon completion of our initial public offering, all shares of our then-
outstanding preferred stock were automatically converted to common stock.
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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. Following this offering and based on shares held as of
September 30, 2000, holders of approximately 79 million shares of our common
stock will be entitled to registration rights with respect to the shares of
common stock. 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 and December 1999, we made four loans to Rohit Sharma, our Chief
Technology Officer, in connection with his exercise of options to acquire
141,668 shares, 45,836 shares, 106,668 shares and 150,000 shares of common
stock, respectively, for an aggregate purchase price of $213,975. The loans are
evidenced by a promissory note in the principal amount of $12,750, with
interest compounded annually on the unpaid balance at a rate of 6.08% per year,
a promissory note in the principal amount of $4,125, with interest compounded
annually on the unpaid balance at a rate of 6.08% per year, a promissory note
in the principal amount of $9,600, 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 $187,500, with interest compounded annually on the unpaid
balance at a rate of 6.20% per year. In March 2000, we made another loan to Mr.
Sharma in connection with his exercise of an option to acquire 50,000 shares of
common stock for a purchase price of $160,000. The loan is evidenced by a
promissory note in the principal amount of $160,000, with interest compounded
annually at a rate of 6.80% per year.
In November 1999, we made three loans to William R. Cumpston, our Executive
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.
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In November 1999, we made a loan to Hon Wah Chin, our Chief Scientist, 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 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,
Business 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.
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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 our initial public offering.
In November 1998, Hon Wah Chin, our Chief Scientist, 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.
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 which
Williams Communications may, but is not obligated to, purchase $30.0 million of
our products. The agreement also provided that Williams Communications purchase
$1,215,506 of our products during the first quarter of calendar year 2000. The
agreement expires June 30, 2001, unless earlier terminated by the parties. In
December 1999, we also executed a redemption and repurchase agreement with
Williams Communications, which provides us with the right to repurchase, if
Williams Communications fails to purchase $30.0 million of our products and
services by June 30, 2001, at $6.32 per share, the shares of Series G preferred
stock owned by Williams Communications, which were converted into 1,582,904
shares of common stock. The agreement also provided Williams Communications
with the right to require us to redeem the shares held by it at $8.50 per
share, which right lapsed upon completion of lab trials for our ONLINE9000
product in March 2000.
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PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
common stock as of September 30, 2000, and as adjusted to reflect the sale of
8,000,000 shares of common stock in a concurrent public offering, by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each of our executive officers named in the Summary Compensation Table;
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 September 30, 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 prior to this offering is based
on 126,056,209 shares of common stock outstanding as of September 30, 2000, and
the percentage of common stock outstanding after this offering is based on
those shares plus 5,646,643 shares of common stock offered by ONI Systems in
our concurrent offering.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Concurrent Offering Shares Concurrent Offering
----------------------- Being -----------------------
Name of Beneficial Owner Number Percent Offered Number Percent
------------------------ ------------ ----------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Jonathan D. Feiber(1)..... 14,331,515 11.4% -- 14,331,515 10.9%
Mohr, Davidow Ventures
and affiliates
Kevin R. Compton(2)....... 13,665,822 10.8 -- 13,665,822 10.4
Kleiner Perkins Caufield
& Byers and affiliates
Hugh C. Martin(3)......... 5,999,998 4.8 193,836 5,806,162 4.4
Matthew W. Bross(4)....... 1,925,364 1.5 -- 1,925,364 1.5
Williams Communications,
Inc.
James F. Jordan(5)........ 1,873,334 1.5 -- 1,873,334 1.4
William R. Cumpston(6).... 1,252,000 1.0 48,000 1,204,000 *
Hon Wah Chin(7)........... 954,000 * 48,000 906,000 *
Rohit Sharma(8)........... 840,668 * 51,520 789,148 *
Gregory B. Maffei(9)...... 280,000 * -- 280,000 *
Terrence J. Schmid(10).... 250,050 * -- 250,050 *
All executive officers and
directors as a group (13
persons)(11)............. 43,866,701 34.8 402,479 43,464,222 33.0
</TABLE>
--------
* Represents beneficial ownership of less than 1%
(1) Represents 348 shares held by Mr. Feiber, 34,484 shares held by the
Feiber-Buhr Trust, 12,073,757 shares 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
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nominee for MDV Entrepreneurs' Network Fund II (A), L.P. and MDV
Entrepreneurs' Network Fund II (B), L.P. and the shares represented
exclude 316,348 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 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 12,594,422 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P., 729,756 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 1,609,672 shares subject to a repurchase
right that lapses at a rate of 84,719 shares per month until January
2002. Includes 1,063,855 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 157,500 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 75,000 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 281,250 shares subject to a repurchase right
that lapses at a rate of 10,416 shares per month until September 2002.
Includes 193,750 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 262,500 shares subject to a repurchase right
that lapses at a rate of 6,250 shares per month until December 2003.
(7) Represents 922,000 shares held by Mr. Chin and 32,000 shares held by the
Chin Children's Trust u/i dtd. February 10, 2000. Includes 337,100 shares
held by Mr. Chin subject to a
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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 87,500 shares
subject to a repurchase right that lapses at a rate of 2,083 shares per
month until December 2003.
(8) Includes 18,518 shares held by Mr. Sharma subject to a repurchase right
that lapses at a rate of 3,704 shares per month until November 2000.
Includes 937 shares subject to a repurchase right that lapses at a rate
of 52 shares per month until December 2001. Includes 11,112 shares
subject to a repurchase right that lapses at a rate of 556 shares per
month until February 2002. Includes 91,667 shares subject to a repurchase
right that lapses at a rate of 4,167 shares per month until April 2002.
Includes 29,167 shares subject to a repurchase right that lapses at a
rate of 1,389 shares per month until April 2002. Includes 68,890 shares
subject to a repurchase right that lapses at a rate of 2,222 shares per
month until March 2003. Includes 131,250 shares subject to a repurchase
right that lapses at a rate of 3,125 shares per month until December
2003. Includes 50,000 shares subject to a repurchase right that lapses as
to 12,500 shares in March 2001 and lapses at a rate of 1,042 shares per
month thereafter until March 2004.
(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) Reflects our repurchase on April 28, 2000 of all unvested shares of
common stock held by Mr. Schmid.
(11) Includes shares held by individuals and entities affiliated with
executive officers and directors including those described in notes 1, 2,
3, 4, 5, 6, 7, 8 and 9 and shares issuable upon exercise of options
exercisable within 60 days of September 30, 2000.
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DESCRIPTION OF NOTES
We will issue the notes under a document called the "Indenture". The
Indenture is a contract between us and State Street Bank and Trust Company of
California, N.A., as Trustee. The Indenture and the notes are governed by New
York law. Because this section is a summary, it does not describe every aspect
of the notes and the Indenture. This summary is subject to and qualified in its
entirety by reference to all of the provisions of the Indenture, including
definitions of certain terms used in the Indenture. For example, in this
section we use capitalized words to signify defined terms that have been given
special meaning in the Indenture. We describe the meaning of only the more
important terms. Wherever we refer to particular defined terms, those defined
terms are incorporated by reference here. In this section, references to "ONI
Systems", "we", "our" or "us" refer solely to ONI Systems Corp. and not its
subsidiaries.
General
The notes will be general, unsecured obligations of ONI Systems. The notes
will be subordinated, which means that they will rank behind certain of our
indebtedness as described below. The notes will be limited to $300,000,000
aggregate principal amount, or $345,000,000 if the underwriters exercise in
full their right to purchase additional notes. We are required to repay the
principal amount of the notes in full on October 15, 2005. The notes will bear
interest at the rate per annum shown on the front cover of this prospectus from
October 27, 2000. We will pay interest on the notes on April 15 and October 15
of each year, commencing on April 15, 2001. Interest payable per $1,000
principal amount of notes for the period from October 27, 2000 to April 15,
2001 will be $23.3333.
You may convert the notes into shares of our common stock initially at the
conversion rate stated on the front cover of this prospectus at any time before
the close of business on October 15, 2005, unless the notes have been
previously redeemed or repurchased. The conversion rate may be adjusted as
described below.
We may redeem the notes at our option at any time on or after October 16,
2003, in whole or in part, at the redemption prices set forth below under "--
Optional Redemption by ONI Systems--Non-Provisional Redemption", plus accrued
and unpaid interest to the redemption date. In addition, if certain conditions
are met, we may redeem the notes at our option, in whole or in part prior to
October 16, 2003 at a redemption price equal to 100% of the principal amount of
the notes to be redeemed plus accrued and unpaid interest to the redemption
date and specified make-whole amounts described below under "--Optional
Redemption by ONI Systems--Provisional Redemption". If there is a Change in
Control of ONI Systems, you may have the right to require us to repurchase your
notes as described below under "--Repurchase at Option of Holders Upon a Change
in Control".
Form, Denomination, Transfer, Exchange and Book-Entry Procedures
The notes will be issued:
. only in fully registered form;
. without interest coupons; and
. in denominations of $1,000 and greater multiples.
The notes will be evidenced by one or more global notes, which will be
deposited with the trustee as custodian for the Depository Trust Company, or
DTC, and registered in the name of Cede & Co., as nominee of DTC. Except as set
forth below, record ownership of the global note may be transferred, in whole
or in part, only to another nominee of DTC or to a successor of DTC or its
nominee.
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The global note will not be registered in the name of any person, or
exchanged for notes that are registered in the name of any person, other than
DTC or its nominee unless either of the following occurs:
. DTC notifies us that it is unwilling, unable or no longer qualified to
continue acting as the depositary for the global note; or
. an Event of Default with respect to the notes represented by the global
note has occurred and is continuing.
In those circumstances, DTC will determine in whose names any securities
issued in exchange for the global note will be registered.
DTC or its nominee will be considered the sole owner and holder of the
global note for all purposes, and as a result:
. you cannot get notes registered in your name if they are represented by
the global note;
. you cannot receive certificated (physical) notes in exchange for your
beneficial interest in the global notes;
. you will not be considered to be the owner or holder of the global note
or any note it represents for any purpose; and
. all payments on the global note will be made to DTC or its nominee.
The laws of some jurisdictions require that certain kinds of purchasers, for
example, some insurance companies, can only own securities in definitive, or
certificated form. These laws may limit your ability to transfer your
beneficial interests in the global note to these types of purchasers.
Only institutions, such as a securities broker or dealer, that have accounts
with the DTC or its nominee, called "participants", and persons that may hold
beneficial interests through participants can own a beneficial interest in the
global note. The only place where the ownership of beneficial interests in the
global note will appear and the only way the transfer of those interests can be
made will be on the records kept by DTC for their participants' interests, and
the records kept by those participants for interests of persons held by
participants on their behalf.
Secondary trading in bonds and notes of corporate issuers is generally
settled in clearinghouse, that is, next-day, funds. In contrast, beneficial
interests in a global note usually trade in DTC's same-day funds settlement
system, and settle in immediately available funds. We make no representations
as to the effect that settlement in immediately available funds will have on
trading activity in those beneficial interests.
We will make cash payments of interest on and principal of and the
redemption or repurchase price of the global note to Cede, the nominee for DTC,
as the registered owner of the global note. We will make these payments by wire
transfer of immediately available funds on each payment date.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the notes represented by the global note as
shown on DTC's records, unless DTC has reason to believe that it will not
receive payment on that payment date. Payments by participants to owners of
beneficial interests in notes represented by the global note held through
participants will be the responsibility of those participants, as is now the
case with securities held for the accounts of customers registered in "street
name".
We will send any redemption notices to Cede. We understand that if less than
all the notes are being redeemed, DTC's practice is to determine by lot the
amount of the holdings of each participant to be redeemed.
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We also understand that neither DTC nor Cede will consent or vote with
respect to the notes. We have been advised that under its usual procedures, DTC
will mail an "omnibus proxy" to us as soon as possible after the record date.
The omnibus proxy assigns Cede's consenting or voting rights to those
participants to whose accounts the notes are credited on the record date
identified in a listing attached to the omnibus proxy.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by the global note to pledge the
interest to persons or entities that do not participate in the DTC book-entry
system, or otherwise take actions in respect of that interest, may be affected
by the lack of a physical certificate evidencing its interest.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange, only at the
direction of one or more participants to whose account with DTC interests in
the global note are credited and only in respect of such portion of the
principal amount of the notes represented by the global note as to which such
participant or participants has or have given such direction.
DTC has also advised us that it is
. a limited purpose trust company organized under the laws of the State of
New York,
. a member of the Federal Reserve System,
. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
. a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Some
participants, or their representatives, together with other entities, own DTC.
Indirect access to the DTC system is available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
The policies and procedures of DTC, which may change periodically, will
apply to payments, transfers, exchanges and other matters relating to
beneficial interests in the global note. We and the trustee have no
responsibility or liability for any aspect of DTC's or any participants'
records relating to beneficial interests in the global note, including for
payments made on the global note, and we and the trustee are not responsible
for maintaining, supervising or reviewing any of those records.
Conversion Rights
You may, at your option, convert any portion of the principal amount of any
note that is an integral multiple of $1,000 into shares of our common stock at
any time on or prior to the close of business on the maturity date, unless the
notes have been previously redeemed or repurchased, at a conversion rate of
10.9129 shares of common stock per $1,000 principal amount of notes. The
conversion rate is equivalent to a conversion price of approximately $91.64.
Your right to convert a note called for redemption or delivered for repurchase
will terminate at the close of business on the redemption date or repurchase
date for that note, unless we default in making the payment due upon redemption
or repurchase.
You may convert all or part of any note by delivering the note at the
Corporate Trust Office of State Street Bank and Trust Company of California,
N.A., the trustee, in the Borough of Manhattan, The City of New York,
accompanied by a duly signed and completed notice of conversion, a copy of
which may be obtained by the trustee. The conversion date will be the date on
which the note and the duly signed and completed notice of conversion are so
delivered.
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As promptly as practicable on or after the conversion date, we will issue
and deliver to the trustee a certificate or certificates for the number of full
shares of our common stock issuable upon conversion, together with payment in
lieu of any fraction of a share. The certificate will then be sent by the
trustee to the conversion agent for delivery to the Holder. The shares of our
common stock issuable upon conversion of the notes will be fully paid and
nonassessable and will rank equally with the other shares of our common stock.
If you surrender a note for conversion on a date that is not an Interest
Payment Date, you will not be entitled to receive any interest for the period
from the immediately preceding Interest Payment Date to the conversion date,
except as described below in this paragraph. Any note surrendered for
conversion during the period from the close of business on any Regular Record
Date to the opening of business on the next succeeding Interest Payment Date,
except notes or portions thereof, called for redemption on a redemption date or
to be repurchased on a repurchase date for which the right to convert would
terminate during such period, must be accompanied by payment of an amount equal
to the interest payable on such Interest Payment Date on the principal amount
of notes being surrendered for conversion. In the case of any note which has
been converted after any Regular Record Date but before the next succeeding
Interest Payment Date, interest payable on such Interest Payment Date shall be
payable on such Interest Payment Date notwithstanding such conversion, and such
interest shall be paid to the holder of such note on such Regular Record Date.
No other payment or adjustment for interest, or for any dividends in respect
of our common stock, will be made upon conversion. Holders of our common stock
issued upon conversion will not be entitled to receive any dividends payable to
holders of our common stock as of any record time or date before the close of
business on the conversion date. We will not issue fractional shares upon
conversion. Instead, we will pay cash based on the market price of our common
stock at the close of business on the conversion date.
You will not be required to pay any taxes or duties relating to the issue or
delivery of our common stock on conversion but you will be required to pay any
tax or duty relating to any transfer involved in the issue or delivery of our
common stock in a name other than yours. Certificates representing shares of
our common stock will not be issued or delivered unless all taxes and duties,
if any, payable by you have been paid.
The conversion rate will be subject to adjustment for, among other things:
. dividends and other distributions payable in our common stock on shares
of our capital stock;
. the issuance to all holders of our common stock of rights, options or
warrants entitling them to subscribe for or purchase our common stock at
less than the then Current Market Price of such common stock, determined
as provided in the Indenture, as of the record date for shareholders
entitled to receive such rights, options or warrants;
. subdivisions, combinations and reclassifications of our common stock;
. distributions to all holders of our common stock of evidences of
indebtedness of ONI Systems, shares of capital stock, or other property,
including cash, assets or securities, but excluding dividends and other
distributions referred to in the first clause, rights, options or
warrants referred to in the second clause, dividends and distributions
paid exclusively in cash and distributions upon mergers or consolidations
discussed below;
. distributions consisting exclusively of cash, excluding any cash portion
of distributions referred to in the immediately preceding clause, or cash
distributed upon a merger or consolidation to which the next succeeding
paragraph applies, to all holders of our common stock in an aggregate
amount that, combined together with (1) other such all-cash distributions
made
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within the preceding 365-day period in respect of which no adjustment has
been made and (2) any cash and the fair market value of other
consideration payable in connection with any tender offer by us or any of
our subsidiaries for our common stock concluded within the preceding 365-
day period in respect of which no adjustment has been made, exceeds 10% of
our market capitalization, which is the product of the Current Market
Price per share of the common stock on the record date for such
distribution and the number of shares of common stock then outstanding;
and
. the successful completion of a tender offer made by us or any of our
subsidiaries for our common stock which involves an aggregate
consideration that, together with (1) any cash and other consideration
payable in a tender offer by us or any of our subsidiaries for our common
stock expiring within the 365-day period preceding the expiration of such
tender offer in respect of which no adjustment has been made and (2) the
aggregate amount of any such all-cash distributions referred to in the
immediately preceding clause above to all holders of our common stock
within the 365-day period preceding the expiration of such tender offer
in respect of which no adjustments have been made, exceeds 10% of our
market capitalization on the expiration of such tender offer.
We reserve the right to effect such increases in the conversion rate in
addition to those required by the foregoing provisions as we consider to be
advisable in order that any event treated for United States federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
recipients. We will not be required to make any adjustment to the conversion
rate until the cumulative adjustments amount to 1.0% or more of the conversion
rate. We will compute all adjustments to the conversion rate and will give
notice by mail to holders of the registered notes of any adjustments.
In case of any consolidation or merger of ONI Systems with or into another
entity or any merger of another entity into ONI Systems, other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of our common stock, or in case of any sale or transfer of all or
substantially all of our assets, each note then outstanding will become
convertible only into the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of common stock into which the notes were
convertible immediately prior to the consolidation or merger or sale or
transfer.
We may increase the conversion rate for any period of at least 20 days, upon
at least 15 days' notice, if our board of directors determines that the
increase would be in our best interest. The board of directors determination in
this regard will be conclusive. We will give holders of notes at least 15 days'
notice of such an increase in the conversion rate. Any increase, however, will
not be taken into account for purposes of determining whether the closing price
of our common stock exceeds the conversion price by 105% in connection with an
event which otherwise would be a Change In Control as defined below.
If at any time we make a distribution of property to our stockholders that
would be taxable to such stockholders as a dividend for United States federal
income tax purposes, such as distributions of evidences of indebtedness or
assets of ONI Systems, but generally not stock dividends on common stock or
rights to subscribe for common stock, and, pursuant to the anti-dilution
provisions of the Indenture, the number of shares into which notes are
convertible is increased, that increase may be deemed for United States federal
income tax purposes to be the payment of a taxable dividend to holders of
notes. See "Certain United States Federal Income Tax Consequences--U.S.
Holders".
Subordination
The notes are subordinated and, as a result, the payment of the principal,
any premium and interest on the notes, including amounts payable on any
redemption or repurchase, will be
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subordinated to the prior payment in full, in cash or other payment
satisfactory to holders of Senior Debt, of all of our Senior Debt. The notes
are also effectively subordinated to any debt or other liabilities of our
subsidiaries. On June 30, 2000, we had outstanding Senior Debt of $64.3
million, consisting of lease obligations, and our aggregate amount of
liabilities was $21.6 million, excluding intercompany liabilities.
"Senior Debt" is defined in the Indenture to mean: the principal of, and
premium, if any, and interest on, including all interest accruing subsequent to
the commencement of any bankruptcy or similar proceeding, whether or not a
claim for post-petition interest is allowable as a claim in any such
proceeding, and all fees and other amounts payable in connection with, the
following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the Indenture or thereafter created,
incurred or assumed:
. our indebtedness evidenced by a credit or loan agreement, note, bond,
debenture or other written obligation;
. all of our obligations for money borrowed;
. all of our obligations evidenced by a note or similar instrument given in
connection with the acquisition of any businesses, properties or assets
of any kind;
. our obligations (1) as lessee under leases required to be capitalized on
the balance sheet of the lessee under generally accepted accounting
principles or (2) as lessee under other leases for facilities, capital
equipment or related assets, whether or not capitalized, entered into or
leased for financing purposes;
. all of our obligations under interest rate and currency swaps, caps,
floors, collars, hedge agreements, forward contracts or similar
agreements or arrangements;
. all of our obligations with respect to letters of credit, bankers'
acceptances and similar facilities, including reimbursement obligations
with respect to the foregoing;
. all of our obligations issued or assumed as the deferred purchase price
of property or services, excluding trade accounts payable and accrued
expenses arising in the ordinary course of business as determined in good
faith by us;
. all obligations of the type referred to in the above clauses of another
person and all dividends of another person, the payment of which, in
either case, we have assumed or guaranteed, or for which we are
responsible or liable, directly or indirectly, jointly or severally, as
obligor, guarantor or otherwise, or which are secured by a lien on our
property; and
. renewals, extensions, modifications, replacements, restatements and
refundings of, or any indebtedness or obligation issued in exchange for,
any such indebtedness or obligation described in the above clauses of
this definition.
Senior Debt will not include any other indebtedness or obligation if its
terms or the terms of the instrument under which or pursuant to which it is
issued expressly provide that it is not superior in right of payment to the
notes.
We may not make any payment on account of principal, premium or interest on
the notes, or redemption or repurchase of the notes, if either of the following
occurs:
. we default in our obligations to pay principal, premium, interest or
other amounts on our Senior Debt, including a default under any
redemption or repurchase obligation, and the default continues beyond any
grace period that we may have to make those payments; or
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. any other default occurs and is continuing on any Designated Senior Debt
and (1) the default permits the holders of the Designated Senior Debt (as
defined below) to accelerate its maturity and (2) the trustee has
received a notice of the default, called a "Payment Blockage Notice",
from ONI Systems, the holder of such debt or such other person permitted
to give such notice under the Indenture.
If payments of the notes have been blocked by a payment default on Senior
Debt, payments on the notes may resume when the payment default has been cured
or waived or ceases to exist. If payments on the notes have been blocked by a
nonpayment default, payments on the notes may resume on the earlier of (1) the
date the nonpayment default is cured or waived or ceases to exist or (2) 179
days after the Payment Blockage Notice is received.
No nonpayment default that existed on the day a Payment Blockage Notice was
delivered to the trustee can be used as the basis for any subsequent Payment
Blockage Notice. In addition, once a holder of Designated Senior Debt has
blocked payment on the notes by giving a Payment Blockage Notice, no new period
of payment blockage can be commenced pursuant to a subsequent Payment Blockage
Notice until both of the following are satisfied:
. 365 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
. all scheduled payments of principal, any premium and interest with
respect to the notes that have come due have been paid in full in cash.
"Designated Senior Debt" means our obligations under any particular Senior
Debt in which the instrument creating or evidencing the same or the assumption
or guarantee thereof, or related agreements or documents to which we are a
party, expressly provides that such indebtedness shall be "Designated Senior
Debt" for purposes of the Indenture. The instrument, agreement or other
document evidencing any Designated Senior Debt may place limitations and
conditions on the right of such Senior Debt to exercise the rights of
Designated Senior Debt.
In addition, upon any acceleration of the principal due on the notes as a
result of an Event of Default or payment or distribution of our assets to
creditors upon any dissolution, winding up, liquidation or reorganization,
whether voluntary or involuntary, marshaling of assets, assignment for the
benefit of creditors, or in bankruptcy, insolvency, receivership or other
similar proceedings, all principal, premium, if any, interest and other amounts
due on all Senior Debt must be paid in full before you are entitled to receive
any payment. By reason of such subordination, in the event of insolvency, our
creditors who are holders of Senior Debt are likely to recover more, ratably,
than the you are, and you will likely to experience a reduction or elimination
of payments on the notes.
In addition, the notes will be "structurally subordinated" to all
indebtedness and other liabilities, including trade payables and lease
obligations, of our subsidiaries. This occurs because any right of ONI Systems
to receive any assets of our subsidiaries upon their liquidation or
reorganization, and the right of the holders of the notes to participate in
those assets, will be effectively subordinated to the claims of that
subsidiary's creditors, including trade creditors, except to the extent that
ONI Systems itself is recognized as a creditor of such subsidiary, in which
case the claims of ONI Systems would still be subordinate to any security
interest in the assets of the subsidiary and any indebtedness of the subsidiary
senior to that held by ONI Systems.
The Indenture does not limit our ability to incur Senior Debt or our ability
or the ability of our subsidiaries to incur any other indebtedness.
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Optional Redemption by ONI Systems
Provisional Redemption
We may redeem any portion of the notes at any time prior to October 16, 2003
upon at least 30 and not more than 60 days' notice by mail to the holders of
the notes, at a redemption price equal to 100% of the principal amount of the
notes to be redeemed per note plus accrued and unpaid interest to the
redemption date if the closing price of our common stock has exceeded 150% of
the conversion price for at least 20 trading days in any consecutive 30-day
trading period ending on the trading day prior to the mailing of the notice of
redemption.
If we redeem the notes under these circumstances, we will make an additional
"make whole" payment on the redeemed notes equal to $150 per $1,000 note, minus
the amount of any interest actually paid or accrued and unpaid on the note
prior to the redemption date. We must make these "make whole" payments on all
notes called for redemption, including notes converted after the date we mailed
the notice. The "make whole" payment for notes converted shall not be reduced
by accrued and unpaid interest. We may make these "make whole" payments, at our
option, either in cash or in our common stock or a combination of cash and
stock. We will specify the type of consideration for the "make whole" payment
in the redemption notice.
Payments made in our common stock will be valued at 95% of the average of
the closing sales prices of our common stock for the five trading days ending
on the day prior to the redemption date.
Non-Provisional Redemption
On or after October 16, 2003 we may redeem the notes, in whole or in part,
at the prices set forth below. If we elect to redeem all or part of the notes,
we will give at least 30, but no more than 60, days notice to you.
The redemption price, expressed as a percentage of principal amount, is as
follows for the 12-month periods beginning on:
<TABLE>
<CAPTION>
Redemption
Date Price
---- ----------
<S> <C>
October 16, 2003................................................ 102%
October 15, 2004................................................ 101%
</TABLE>
and thereafter is equal to 100% of the principal amount, in each case together
with accrued interest to the date of redemption.
No sinking fund is provided for the notes, which means that the Indenture
does not require us to redeem or retire the notes periodically.
We may, to the extent permitted by applicable law, at any time purchase
notes in the open market, by tender at any price or by private agreement. Any
note that we purchase may, to the extent permitted by applicable law and
subject to restrictions contained in the underwriting agreement with the
underwriters, be re-issued or resold or may, at our option, be surrendered to
the trustee for cancellation. Any notes surrendered for cancellation may not be
re-issued or resold and will be canceled promptly.
Payment and Conversion
We will make all payments of principal and interest on the notes by dollar
check drawn on an account maintained at a bank in The City of New York. If you
hold registered notes with a face value greater than $2,000,000, at your
request we will make payments of principal or interest to you by
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wire transfer to an account maintained by you at a bank in The City of New
York. Payment of any interest on the notes will be made to the person in whose
name the note, or any predecessor note, is registered at the close of business
on April 1 or October 1, whether or not a business day, immediately preceding
the relevant Interest Payment Date, referred to as a "Regular Record Date". If
you hold registered notes with a face value in excess of $2,000,000 and you
would like to receive payments by wire transfer, you will be required to
provide the trustee with wire transfer instructions at least 15 days prior to
the relevant payment date.
Payments on any global note registered in the name of DTC or its nominee
will be payable by the trustee to DTC or its nominee in its capacity as the
registered holder under the Indenture. Under the terms of the Indenture, we and
the trustee will treat the persons in whose names the notes, including any
global note, are registered as the owners for the purpose of receiving payments
and for all other purposes. Consequently, neither we, the trustee nor any of
our agents or the trustee's agents has or will have any responsibility or
liability for (1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of beneficial
ownership interests in the global note, or for maintaining, supervising or
reviewing any of DTC's records or any participant's or indirect participant's
records relating to the beneficial ownership interests in the global note, or
(2) any other matter relating to the actions and practices of DTC or any of its
participants or indirect participants.
We will not be required to make any payment on the notes due on any day
which is not a business day until the next succeeding business day. The payment
made on the next succeeding business day will be treated as though it were paid
on the original due date and no interest will accrue on the payment for the
additional period of time.
Notes may be surrendered for conversion at the Corporate Trust Office of
State Street Bank and Trust Company of California, N.A., the trustee, in the
Borough of Manhattan, The City of New York. Notes surrendered for conversion
must be accompanied by appropriate notices and any payments in respect of
interest or taxes, as applicable, as described above under "--Conversion
Rights".
We have initially appointed the trustee as paying agent and conversion
agent. We may terminate the appointment of any paying agent or conversion agent
and appoint additional or other paying agents and conversion agents. However,
until the notes have been delivered to the trustee for cancellation, or moneys
sufficient to pay the principal of, premium, if any, and interest on the notes
have been made available for payment and either paid or returned to us as
provided in the Indenture, the trustee will maintain an office or agency in the
Borough of Manhattan, The City of New York for surrender of notes for
conversion. Notice of any termination or appointment and of any change in the
office through which any paying agent or conversion agent will act will be
given in accordance with "--Notices" below.
All moneys deposited with the trustee or any paying agent, or then held by
us, in trust for the payment of principal of, premium, if any, or interest on
any notes which remain unclaimed at the end of two years after the payment has
become due and payable will be repaid to us, and you will then look only to us
for payment.
Repurchase at Option of Holders Upon a Change in Control
If a Change in Control as defined below occurs, you will have the right, at
your option, to require us to repurchase all of your notes not previously
called for redemption, or any portion of the principal amount thereof, that is
equal to $1,000 or an integral multiple of $1,000. The price we are required to
pay is 100% of the principal amount of the notes to be repurchased, together
with interest accrued to, but excluding, the repurchase date.
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At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in our common stock valued at 95% of the average of the
closing prices of the our common stock for the five trading days immediately
preceding and including the third day prior to the repurchase date. We may only
pay the repurchase price in our common stock if we satisfy conditions provided
in the Indenture.
Within 30 days after the occurrence of a Change in Control, we are obligated
to give to you notice of the Change in Control and of the repurchase right
arising as a result of the Change of Control. We must also deliver a copy of
this notice to the trustee. To exercise the repurchase right, you must deliver
on or before the 30th day after the date of our notice irrevocable written
notice to the trustee of your exercise of your repurchase right, together with
the notes with respect to which the right is being exercised. We are required
to repurchase the notes on the date that is 45 days after the date of our
notice.
A Change in Control will be deemed to have occurred at the time after the
notes are originally issued that any of the following occurs:
(1) any person, including any syndicate or group deemed to be a
"person" under Section 13(d)(3) of the Exchange Act, acquires beneficial
ownership, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, of shares of our capital
stock entitling the person to exercise 50% or more of the total voting
power of all shares of our capital stock that is entitled to vote generally
in elections of directors, other than an acquisition by us, any of our
subsidiaries or any of our employee benefit plans; or
(2) we merge or consolidate with or into any other person, any merger
of another person into us, or we convey, sell, transfer or lease all or
substantially all of our assets to another Person, other than (a) any such
transaction (i) that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of our capital stock and
(ii) pursuant to which the holders of our common stock immediately prior to
such transaction have the entitlement to exercise, directly or indirectly,
50% or more of the total voting power of all shares of capital stock
entitled to vote generally in the election of directors of the continuing
or surviving corporation immediately after such transaction and (b) any
merger which is effected solely to change our jurisdiction of incorporation
and results in a reclassification, conversion or exchange of outstanding
shares of our common stock into solely shares of common stock.
However, a Change in Control will not be deemed to have occurred if either
(A) the closing price per share of our common stock for any five trading days
within the period of 10 consecutive trading days ending immediately after the
later of the Change in Control or the public announcement of the Change in
Control, in the case of a Change in Control relating to an acquisition of
capital stock, or the period of 10 consecutive trading days ending immediately
before the Change in Control, in the case of Change in Control relating to a
merger, consolidation or asset sale, equals or exceeds 105% of the conversion
price of the notes in effect on each of those trading days or (B) all of the
consideration (excluding cash payments for fractional shares and cash payments
made pursuant to dissenters' appraisal rights) in a merger or consolidation
otherwise constituting a Change of Control under clause (1) and/or clause (2)
above consists of shares of common stock traded on a national securities
exchange or quoted on the Nasdaq National Market (or will be so traded or
quoted immediately following such merger or consolidation) and as a result of
such merger or consolidation the notes become convertible into such common
stock.
For purposes of these provisions:
. the conversion price is equal to $1,000 divided by the conversion rate;
. whether a person is a "beneficial owner" will be determined in accordance
with Rule 13d-3 under the Exchange Act; and
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. ""person'' includes any syndicate or group that would be deemed to be a
"person" under Section 13(d)(3) of the Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of prescribed
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to you. We will
comply with this rule to the extent it applies at that time.
The definition of Change in Control includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. Accordingly, your ability to require
us to repurchase your notes as a result of conveyance, transfer, sale, lease or
other disposition of less than all of our assets may be uncertain.
The foregoing provisions would not necessarily provide you with protection
if we are involved in a highly leveraged or other transaction that may
adversely affect you.
Our ability to repurchase notes upon the occurrence of a Change in Control
is subject to important limitations. Some of the events constituting a Change
in Control could result in an event of default under our Senior Debt. Moreover,
a Change in Control could cause an event of default under, or be prohibited or
limited by, the terms of our Senior Debt. As a result, unless we were to obtain
a waiver, a repurchase of the notes in cash could be prohibited under the
subordination provisions of the Indenture until the Senior Debt is paid in
full. Although we have the right to repurchase the notes with our common stock,
subject to certain conditions, we cannot assure you that we would have the
financial resources, or would be able to arrange financing, to pay the
repurchase price in cash for all the notes that might be delivered by holders
of notes seeking to exercise the repurchase right. if we were to fail to
repurchase the notes when required following a Change in Control, an Event of
Default under the Indenture would occur, whether or not such repurchase is
permitted by the subordination provisions of the indenture. Any such default
may, in turn, cause a default under our Senior Debt. See "--Subordination".
Mergers and Sales of Assets by the Company
We may not consolidate with or merge into any other person or convey,
transfer, sell or lease our properties and assets substantially as an entirety
to any person, and we may not permit any person to consolidate with or merge
into us or convey, transfer, sell or lease such person's properties and assets
substantially as an entirety to us unless:
. the person formed by such consolidation or into or with which we are
merged or the person to which our properties and assets are so conveyed,
transferred, sold or leased, shall be a corporation, limited liability
company, partnership or trust organized and existing under the laws of
the United States, any State within the United States or the District of
Columbia and, if we are not the surviving person, the surviving person
assumes the payment of the principal of, premium, if any, and interest on
the notes and the performance of our other covenants under the Indenture,
and
. immediately after giving effect to the transaction, no Event of Default,
and no event that, after notice or lapse of time or both, would become an
Event of Default, will have occurred and be continuing.
Events of Default
The following will be Events of Default under the Indenture:
. we fail to pay principal of or any premium on any note when due, whether
or not the payment is prohibited by the subordination provisions of the
indenture;
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. we fail to pay any interest on any note when due and that default
continues for 30 days, whether or not the payment is prohibited by
subordination provisions of the indenture;
. we fail to provide the notice that we are required to give in the event
of a "change in control", whether or not such notice is prohibited by the
subordination provisions of the indenture;
. we fail to perform any other covenant in the indenture and that failure
continues for 60 days after written notice to us by the trustee or the
holders of at least 25% in aggregate principal amount of outstanding
notes;
. we or any of our significant subsidiaries fail to pay when due at final
maturity thereof, either at its maturity or upon acceleration, any
indebtedness under any bonds, debentures, notes or other evidences of
indebtedness for money borrowed, or any guarantee thereof, in excess of
$10.0 million if the indebtedness is not discharged, or the acceleration
is not rescinded or annulled, within 30 days after written notice to us
by the trustee or the holders of at least 25% in aggregate principal
amount of the outstanding notes; and
. events of bankruptcy, insolvency or reorganization with respect to us or
any of our significant subsidiaries specified in the indenture.
Subject to the provisions of the Indenture relating to the duties of the
trustee in case an Event of Default shall occur and be continuing, the trustee
will be under no obligation to exercise any of its. rights or powers under the
indenture at the request or direction of any holder, unless the holder shall
have offered reasonable indemnity to the trustee. Subject to providing
indemnification of the trustee, the holders of a majority in aggregate
principal amount of the outstanding notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee or exercising any trust or power conferred on the trustee.
If an Event of Default other than an Event of Default arising from events of
insolvency, bankruptcy or reorganization with respect to ONI Systems occurs and
is continuing, either the trustee or the holders of at least 25% in principal
amount of the outstanding notes may, subject to the subordination provisions of
the Indenture, accelerate the maturity of all notes. However, after such
acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of outstanding notes may,
under certain circumstances, rescind and annul the acceleration if all Events
of Default, other than the non-payment of principal of the notes which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture. If an Event of Default arising from events
of insolvency, bankruptcy or reorganization with respect to ONI Systems occurs,
then the principal of, and accrued interest on, all the notes will
automatically become immediately due and payable without any declaration or
other act on the part of the holders of the notes or the trustee. For
information as to waiver of defaults, see "--Meetings, Modification and
Waiver".
You will not have any right to institute any proceeding with respect to the
Indenture, or for any remedy under the Indenture, unless you give the trustee
written notice of a continuing Event of Default and the holders of at least 25%
in aggregate principal amount of the outstanding notes have made written
request, and offered reasonable indemnity, to the trustee to institute
proceedings, and the trustee has not received from the holders of a majority in
aggregate principal amount of the outstanding notes direction inconsistent with
the written request and shall have failed to institute such proceeding within
60 days. However, these limitations do not apply to a suit instituted by you
for the enforcement of payment of the principal of, premium, if any, or
interest, including Liquidated Damages, on your note on or after the respective
due dates expressed in your note or your right to convert your note in
accordance with the Indenture.
We will be required to furnish to the trustee annually a statement as to our
performance of certain of our obligations under the Indenture and as to any
default in such performance.
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Meetings, Modification and Waiver
The Indenture contains provision for convening meetings of the holders of
notes to consider matters affecting their interests.
Certain limited modifications of the Indenture may be made without the
necessity of obtaining the consent of the holders of the notes. Other
modifications and amendments of the Indenture may be made, and certain past
defaults by us may be waived, either (i) with the written consent of the
holders of not less than a majority in aggregate principal amount of the notes
at the time outstanding or (ii) by the adoption of a resolution, at a meeting
of holders of the notes at which a quorum is present, by the holders of at
least 66 2/3% in aggregate principal amount of the notes represented at such
meeting. The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the notes
at the time outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of such aggregate principal amount.
However, a modification or amendment requires the consent of the holder of
each outstanding note affected if it would:
. change the stated maturity of the principal or interest of a note;
. reduce the principal amount of, or any premium or interest on, any note;
. reduce the amount payable upon a redemption or mandatory repurchase;
. modify the provisions with respect to the repurchase rights of holders of
notes in a manner adverse to the holders;
. change the place or currency of payment on a note;
. impair the right to institute suit for the enforcement of any payment on
any note;
. modify our obligation to maintain an office or agency in New York City;
. modify the subordination provisions in a manner that is adverse to the
holders of the notes;
. adversely affect the right to convert the notes;
. reduce the above-stated percentage of the principal amount of the holders
whose consent is needed to modify or amend the Indenture;
. reduce the percentage of the principal amount of the holders whose
consent is needed to waive compliance with certain provisions of the
Indenture or to waive certain defaults; or
. reduce the percentage required for the adoption of a resolution or the
quorum required at any meeting of holders of notes at which a resolution
is adopted.
The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by us with certain restrictive provisions of the
Indenture by written consent. Holders of at least 66 2/3% of the principal
amount of notes attending a meeting may also waive compliance by us with
certain restrictive provisions of the Indenture by the adoption of a resolution
at the meeting if a quorum of holders are present and certain other conditions
are met. The holders of a majority in aggregate principal amount of the
outstanding notes also may waive by written consent any past default under the
Indenture, except a default in the payment of principal, premium, if any, or
interest.
Notices
Notice to holders of the registered notes will be given by mail to the
addresses as they appear in the security register. Notices will be deemed to
have been given on the date of such mailing.
Notice of a redemption of notes will be given not less than 30 nor more than
60 days prior to the redemption date and will specify the redemption date. A
notice of redemption of the notes will be irrevocable.
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Replacement of Notes
We will replace any note that becomes mutilated, destroyed, stolen or lost
at the expense of the holder upon delivery to the trustee of the mutilated
notes or evidence of the loss, theft or destruction satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity
satisfactory to the trustee and us may be required at the expense of the holder
of the note before a replacement note will be issued.
Payment of Stamp and Other Taxes
We will pay all stamp and other duties, if any, which may be imposed by the
United States or any political subdivision thereof or taxing authority thereof
or therein with respect to the issuance of the notes. We will not be required
to make any payment with respect to any other tax, assessment or governmental
charge imposed by any government or any political subdivision thereof or taxing
authority thereof or therein.
Governing Law
The Indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York, United States of America, without
regard to conflicts of laws principles.
The Trustee
If an Event of Default occurs and is continuing, the trustee will be
required to use the degree of care of a prudent person in the conduct of his
own affairs in the exercise of its powers. Subject to such provisions, the
trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any of the holders of notes, unless they
shall have offered to the trustee reasonable security or indemnity.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists 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 September 30, 2000, there were outstanding:
. 126,056,209 shares of common stock held by approximately 556 stockholders
of record, of which 7,399,641 shares were subject to our right of
repurchase;
. options to purchase 19,548,315 shares of common stock; and
. warrants to purchase 1,200,926 shares of common stock.
Common Stock
Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts that our board of directors may determine.
Voting rights. Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation. In addition, our certificate of incorporation and
bylaws require the approval of two-thirds, rather than a majority, of the
shares entitled to vote for certain matters. For a description of these
matters, see "--Anti-Takeover Provisions".
Cisco Systems, Inc., a holder of 4,493,148 shares of common stock as of
September 30, 2000, is subject to voting restrictions that provide that Cisco
and its affiliates must vote, in certain transactions, all shares owned by them
in the same proportion as other shares voted in the same class in a class vote,
or in the same proportion as all shares voted in a vote in which common stock
and preferred stock vote together as a single class. These transactions include
mergers, reorganizations, ONI Systems being acquired, or an underwritten public
offering of our securities. In addition, Cisco may not exercise any dissenter's
or appraisal rights. These restrictions have no termination date.
No preemptive or similar rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of ONI Systems, the holders of our common stock are entitled to
share ratably among themselves in all assets remaining after payment of all
liabilities and the liquidation preferences of any outstanding preferred stock.
Preferred Stock
Subject to the limitations imposed by Delaware law, we may issue preferred
stock in one or more series, establish from time to time the number of shares
to be included in each series, and 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,
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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 1,200,926 shares of common stock were outstanding as of
September 30, 2000.
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 our initial
public 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 seven 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 were
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". The finance company exercised these warrants, and we issued 233,468
shares of ONI Systems common stock to the finance company on August 14, 2000.
We did not receive any proceeds from the exercise of these warrants.
Registration Rights
Following this offering and based on shares held as of September 30, 2000,
the holders of approximately 79 million shares of common stock will be entitled
to rights with respect to the registration of these shares under the Securities
Act, as described below.
Demand registration rights. At any time after May 27, 2001, the holders of
at least 50% of the shares having registration rights can request that we
register all or a portion of their shares, so long as such registration covers
at least 33% of their shares or the total offering price of the shares to the
public is at least $5.0 million. See "Share Eligible for Future Sale--Lock-up
Agreements". We will only be required to file two registration statements in
response to their demand registration rights if both registration statements
have been declared effective. We may postpone the filing of a registration
statement for up to 120 days if we determine that the filing would be seriously
detrimental to us and our stockholders.
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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 923,000 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 are 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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Charter and Bylaw Provisions
Our certificate of incorporation and bylaws provide that:
. 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;
. the approval of holders of two-thirds of the shares entitled to vote at
an election of directors is 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;
. our board of directors is 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.
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
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "ONIS".
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income tax
considerations relevant to investors in the notes and common stock into which
the notes may be converted. This discussion is based upon the Internal Revenue
Code of 1986, Treasury Regulations, Internal Revenue Service rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. There can be no
assurance that the IRS will not challenge one or more of the tax consequences
described herein, and we have not obtained, nor do we intend to obtain, a
ruling from the IRS with respect to the U.S. federal income tax consequences of
acquiring or holding notes or common stock. This discussion does not purport to
deal with all aspects of U.S. federal income taxation that may be relevant to a
particular investor in light of the investor's circumstances (for example,
persons subject to the alternative minimum tax provisions of the Code). Also,
it is not intended to be wholly applicable to all categories of investors, some
of which (such as dealers in securities or currencies, traders in securities
that elect to use a mark-to-market method of accounting, banks, insurance
companies, tax-exempt organizations, and persons holding notes or common stock
as part of a hedging or conversion transaction or straddle or persons deemed to
sell notes or common stock under the constructive sale provisions of the Code)
may be subject to special rules. The discussion also does not discuss any
aspect of state, local or foreign law, or U.S. federal estate and gift tax law
as applicable to U.S. Holders (as defined below). In addition, this discussion
is limited to initial purchasers of notes who acquire the notes at their
original issue price within the meaning of Section 1273 of the Code, and who
will hold the notes and common stock as "capital assets" within the meaning of
Section 1221 of the Code.
All prospective purchasers of the notes are advised to consult their own tax
advisors regarding the federal, state, local and foreign tax consequences of
the purchase, ownership and disposition of the notes and the common stock in
their particular situations.
As used herein, the term "U.S. Holder" means a beneficial owner of a note or
common stock that for United States federal income tax purposes is (i) a
citizen or resident (as defined in Section 7701(b) of the Code) of the United
States, (ii) a corporation formed under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to U.S. federal income taxation regardless of its source and (iv) in general, a
trust subject to the primary supervision of a court within the United States
and the control of a United States person as described in Section 7701(a)(30)
of the Code.
Interest
Interest on the notes will generally be included in a U.S. Holder's gross
income as ordinary income for U.S. federal income tax purposes at the time it
is paid or accrued in accordance with the U.S. Holder's regular method of
accounting.
Conversion of Notes Into Common Stock
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock except to the extent the common stock is
considered attributable to accrued interest not previously included in income,
which is taxable as ordinary income. Cash received in lieu of a fractional
share of common stock will generally be treated as a payment in exchange for
such fractional share rather than as a dividend. Gain or loss recognized on the
receipt of cash paid in lieu of such fractional share generally will equal the
difference between the amount of cash received and the amount of tax basis
allocable to the fractional share. The adjusted basis of shares of common stock
received on conversion will equal the adjusted basis of the note converted,
reduced by the portion of adjusted basis allocated to any fractional share of
common stock exchanged for
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cash. The holding period of the common stock received on conversion will
generally include the period during which the converted notes were held prior
to conversion. However, a U.S. Holder's tax basis in shares of common stock
considered attributable to accrued interest as described above generally will
equal the amount of such accrued interest included in income, and the holding
period for such shares shall begin as of the date of the conversion.
The conversion price of the notes is subject to adjustment under certain
circumstances. Section 305 of the Code and the Treasury Regulations issued
thereunder may treat the U.S. Holders of the notes as having received a
constructive distribution, resulting in ordinary income (subject to a possible
dividends received deduction in the case of corporate holders) to the extent of
our current and/or accumulated earnings and profits, if, and to the extent that
certain adjustments in the conversion price, which may occur in limited
circumstances (particularly an adjustment to reflect a taxable dividend to U.S.
Holders of common stock), increase the proportionate interest of a U.S. Holder
of notes in the fully diluted common stock, whether or not such U.S. Holder
ever exercises its conversion privilege.
Sale, Exchange or Retirement of the Notes
Each U.S. Holder generally will recognize gain or loss upon the sale,
exchange (other than by exercise of the conversion privilege), redemption,
retirement or other disposition of notes measured by the difference (if any)
between (i) the amount of cash and the fair market value of any property
received, except to the extent that such cash or other property is attributable
to the payment of accrued interest not previously included in income, which
amount will be taxable as ordinary income and (ii) such U.S. Holder's adjusted
tax basis in the notes. Any such gain or loss recognized on the sale, exchange,
redemption, retirement or other disposition of a note will be capital gain or
loss and will generally be long-term capital gain or loss if the Note has been
held or deemed held for more than 12 months at the time of the sale or
exchange. Generally, the maximum long term capital gain rate for individuals is
20%. Capital gain that is not long term capital gain is taxed at ordinary
income rates. A U.S. Holder's initial basis in a note will be the amount paid
therefor.
Common Stock
Distributions, if any, paid on the common stock, to the extent made from our
current and/or accumulated earnings and profits, as determined for U.S. federal
income tax purposes, will be included in a U.S. Holder's income as ordinary
income (subject to a possible dividends-received deduction in the case of
corporate holders) as they are paid. Distributions in excess of our current and
accumulated earnings and profits will first be treated as a nontaxable return
of capital to the extent of the U.S. Holder's basis in the common stock and
thereafter as gain from the sale or exchange of a capital asset.
Gain or loss realized on the sale or exchange of common stock will equal the
difference between the amount realized on such sale or exchange and the U.S.
Holder's adjusted tax basis in such common stock. Such gain or loss will
generally be long-term capital gain or loss if the U.S Holder has held or is
deemed to have held the common stock for more than twelve months.
If there is not a full adjustment to the conversion ratio of the notes to
reflect a stock dividend or other event increasing the proportionate interest
of the U.S. Holders of outstanding Common Stock in our assets or earnings and
profits, then such increase in the proportionate interest of the U.S. Holder of
the common stock generally will be treated as a distribution to such U.S.
Holders, taxable as ordinary income, subject to a possible dividends received
deduction in the case of corporate holders to the extent of our current and/or
accumulated earnings and profits. Therefore, U.S. Holders may recognize income
in the event of a deemed distribution even though they may not receive any cash
or property.
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Information Reporting and Backup Withholding
A U.S. Holder of notes or common stock may be subject to "backup
withholding" at a rate of 31% with respect to certain "reportable payments",
including interest payments, dividend payments and, under certain
circumstances, principal payments on the notes. Backup withholding will
generally not apply, however, to a U.S. Holder who furnishes a correct taxpayer
identification number or who is otherwise exempt from backup withholding, such
as a corporation. Generally, a U.S. Holder will provide such certification on
Form W-9 (Request for Taxpayer Identification Number and Certification).
We will report to the U.S. Holders of notes and common stock and to the IRS
the amount of any "reportable payments" for each calendar year and the amount
of tax withheld, if any, with respect to such payments.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock, including shares
issued upon exercise of outstanding options and warrants, 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 and our concurrent offering, we will
have 131,702,852 shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
or warrants, based on shares outstanding as of September 30, 2000. Of these
shares,
. 8,000,000 shares to be sold by us and the selling stockholders in our
concurrent offering of common stock,
. 9,200,000 shares sold in our initial public offering and
. 24,153,289 other shares sold in the public market prior to this offering
or eligible for resale in the pubic market at the time of this offering
are 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 limitations described below. The remaining 90,349,563
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 such as the exemptions
provided under Rule 144, 144(k) or 701 promulgated under the Securities Act,
which rules are summarized below. As a result of the lock-up agreements
described below under "--Lock-up Agreements" 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>
1,588,011 On the third day following the release of our third quarter
financial results, if the closing price of the common stock has
been at least $50 for 20 of the 30 prior trading days, these
shares will be released from the lock-up agreement related to our
initial public offering.
4,128,828 On November 28, 2000, the 180-day lock-up relating to our initial
public offering terminates and these shares are saleable under
Rule 144 (subject in some cases to volume limitations), Rule
144(k) or Rule 701.
From December 22-30, 2000, these shares are saleable under Rule
3,259,539 144.
79,271,021 91 days from the date of this prospectus, the 90 day lock-up
relating to this offering 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).
339,000 On March 9, 2001, these shares are saleable under Rule 144.
969,697 On May 9, 2001, these shares are saleable under Rule 144.
233,468 On May 22, 2001, these shares are saleable under Rule 144.
560,000 On June 6, 2001, these shares are saleable under Rule 144.
</TABLE>
Some of the shares in the table above, listed as not being saleable until 91
days after the date of this prospectus may become saleable at a sooner date, as
described below.
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Lock-up Agreements
In connection with this offering, ONI Systems and holders of approximately
85.7% of our common stock, including each of our officers and directors, have
entered into lock-up agreements under which they have agreed not to 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 90-day period following the date of this offering, without the prior
written consent of Goldman, Sachs & Co. These restrictions will expire with
respect to 21,339,738 shares held by the holders subject to these lock-up
agreements on the date that is 60 days after the date of this offering,
provided the last reported sale price of our common stock is at least 125% of
the initial price to public of the shares sold in this offering for 20 of the
30 trading days preceding that date.
Our employees, other than our officers, have not entered into lock-up
agreements with the underwriters. However, under prior agreements these
employees have agreed with ONI Systems to be bound by the restrictions of the
lock-up agreements. These agreements with ONI Systems do not restrict
transactions by those shareholders to hedge their shares. However, hedging
transactions are not permitted by ONI Systems' insider trading policy. ONI
Systems has agreed with the underwriters that it will take reasonable steps to
enforce these agreements and this policy and that it will not amend or waive
these agreements or this policy without the underwriters' prior written
consent.
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".
For stockholders who have not agreed to the 90-day lock-up period described
above and who are not employees of ONI Systems, the 180-day restriction
relating to our initial public offering will expire as to 25% of their shares
subject to the restriction, an aggregate of 1,588,011 shares, on the third day
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 $50.00 per share.
Our insider trading policy prohibits employees from selling shares from the
first day of the last month of each quarter until the third day following the
release of financial results for the quarter. As a result, the release of
shares held by them under lock-up agreements, as reflected in the Shares
Eligible for Future Sale table, may be delayed until our insider trading policy
permits sales by employees. For example, as a result of our insider trading
policy, approximately one million shares will first become eligible for resale
on the third day following the release of our third quarter financial results
rather than September 6, 2000 or October 2, 2000.
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 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 1,317,029 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.
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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.
Stock Options
As of September 30, 2000, options to purchase a total of 19,548,315 shares
of common stock were outstanding. We filed Form S-8 registration statements
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 and based on shares held as of September 30, 2000,
subject to specified blackout periods, holders of approximately 79 million
shares of outstanding common stock will have two demand registration rights
with respect to their shares of our common stock, subject to the lock-up
arrangements described above, to require us to register their shares of our
common stock under the Securities Act, or rights to participate in any future
registration of securities by us. If the holders of these registrable
securities request that we register their shares, and if the registration is
effected, these shares will become freely tradable without restriction under
the Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Capital Stock--Registration Rights".
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UNDERWRITING
ONI Systems and the underwriters for the offering named below have entered
into an underwriting agreement with respect to the notes being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
aggregate principal amount of notes indicated in the following table.
<TABLE>
<CAPTION>
Principal
Amount of
Underwriters Notes
------------ ------------
<S> <C>
Goldman, Sachs & Co............................................ $180,000,000
Credit Suisse First Boston Corporation......................... 93,000,000
Robertson Stephens, Inc........................................ 18,000,000
Chase Securities Inc........................................... 9,000,000
------------
Total...................................................... $300,000,000
============
</TABLE>
If the Underwriters sell more notes than the total amount set forth in the
table above, the Underwriters have an option to buy up to an additional
$45,000,000 aggregate principal amount of notes from ONI Systems to cover such
sales. They may exercise that option for 30 days. If any notes are purchased
pursuant to this option, the Underwriters will severally purchase notes in
approximately the same proportion as set forth in the table above.
Notes sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
notes sold by the underwriters to securities dealers may be sold at a discount
from the initial price to public of up to 1.8% of the principal amount of the
notes. Any such securities dealers may resell any notes purchased from the
underwriters to certain other brokers or dealers at a discount from the initial
price to public of up to 0.01% of the principal amount of the notes. If all the
notes are not sold at the initial price to public, the underwriters may change
the offering price and the other selling terms.
The following table shows the per note 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 notes.
<TABLE>
<CAPTION>
Paid by ONI Systems
----------------------
No Full
Exercise Exercise
---------- -----------
<S> <C> <C>
Per note................................................. 3.00% 3.00%
Total.................................................... $9,000,000 $10,350,000
</TABLE>
ONI Systems and its directors, officers and some other stockholders, have
entered into lock-up agreements under which they 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 90 days after the
date of this prospectus, except with the prior written consent of Goldman,
Sachs & Co. These restrictions will expire with respect to 21,339,738 shares
held by the holder subject to these restrictions on the date that is 60 days
after the date of this offering, provided the last reported sale price of our
common stock is at least 125% of the initial price to public of the shares sold
in the concurrent public offering of common stock for 20 of the 30 trading days
preceding that date.
Our employees, other than our officers, have not entered into lock-up
agreements with the underwriters. However, under prior agreements these
employees have agreed with ONI Systems to be bound by lock-up restrictions
during this 90-day period. These agreements with ONI Systems do not restrict
transactions by those shareholders to hedge their shares. However, hedging
transactions
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are not permitted by ONI Systems' insider trading policy. ONI Systems has
agreed with the Underwriters that it will take reasonable steps to enforce
these agreements and policies and that it will not amend or waive these
agreements or policies without the Underwriters' prior written consent.
The notes are a new issue of securities with no established trading market.
The Company has been advised by the underwriters that the underwriters intend
to make a market in the notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the notes.
In connection with this offering, the underwriters may purchase and sell
notes 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
notes than they are required to purchase in the offering. "Covered" short sales
are sales made in an amount not greater than the underwriters' option to
purchase additional notes from ONI Systems. The underwriters may close out any
covered short position by either exercising their option to purchase additional
notes or purchasing notes in the open market. In determining the source of
notes to close out the covered short position, the underwriters will consider,
among other things, the price of notes available for purchase in the open
market as compared to the price at which they may purchase notes through the
overallotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
notes in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the notes in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the notes while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased notes sold
by or for the account of this underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes and common stock. As a result, the price
of the notes and 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 in the over-the-counter market or otherwise.
A prospectus in electronic format may be made available on the Internet web
sites maintained by one or more underwriters or securities dealers. The
underwriters may agree to allocate a number of notes to underwriters for sale
to their online brokerage account holders. Any Internet distributions will be
allocated by the underwriters that may make Internet distribution on the same
basis as other allocations. In addition, notes may be sold by the underwriters
to securities dealers who resell notes to online brokerage account holders.
ONI Systems estimates that its total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $750,000.
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, as of the date hereof, 3,255,885 shares of
our common stock. Chase Venture is offering for sale 200,000 shares of common
stock in our concurrent offering. Paul Johnson, a managing director of
Robertson Stephens, Inc., one of the Underwriters, beneficially owns
109,792 shares of our common stock.
94
<PAGE>
VALIDITY OF SECURITIES
Fenwick & West LLP, Palo Alto, California, will provide ONI Systems with an
opinion as to legal matters in connection with the notes and common stock
issuable upon conversion of the notes offered by this prospectus. 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. Winthrop, Stimson, Putnam & Roberts, New York, New York, will provide
ONI Systems with an opinion as to legal matters related to the laws of the
State of New York in connection with the notes. The validity of the notes and
the common stock issuable upon conversion of the notes will be passed upon for
the underwriters by Sullivan & Cromwell, Palo Alto, California.
EXPERTS
The consolidated financial statements 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 notes. For
further information with respect to us and our notes, 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.
ONI Systems is subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, and, in accordance with
the requirements of the Securities Exchange Act of 1934, files periodic
reports, proxy statements and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements and other
information are available for inspection and copying at the regional offices,
public reference facilities and web site of the Securities and Exchange
Commission referred to above.
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.
95
<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-29
Balance Sheet........................................................... F-30
Statements of Operations................................................ F-31
Statements of Cash Flows................................................ F-32
Statements of Shareholders' Equity...................................... F-33
Notes to Financial Statements........................................... F-34
Unaudited Pro Forma Combined Condensed Statement of Operations
Introduction to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-39
Unaudited Pro Forma Combined Condensed Statement of Operations.......... F-40
Notes to Unaudited Pro Forma Combined Condensed Statement of Operations. F-41
</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
F-2
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------- June 30,
1998 1999 2000
----------- ------------ ------------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $19,091,688 $ 80,022,591 $239,530,162
Accounts receivable................. 1,092,853 163,434 9,175,541
Inventory........................... -- 9,648,856 38,458,678
Prepaid expenses and other current
assets............................. 110,503 770,979 5,388,835
----------- ------------ ------------
Total current assets.............. 20,295,044 90,605,860 292,553,216
Property and equipment................ 1,016,698 5,314,990 29,725,293
Other assets.......................... 500 24,246 17,119
Intangibles........................... -- 737,500 533,750
Goodwill.............................. -- 4,259,879 2,839,919
----------- ------------ ------------
Total assets...................... $21,312,242 $100,942,475 $325,669,297
=========== ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................... $ 201,647 $ 2,594,555 $ 936,717
Accrued liabilities................. 426,365 6,086,784 19,846,105
Deferred revenue.................... -- -- 357,715
Current portion of capital lease
obligations........................ 40,002 166,612 174,798
----------- ------------ ------------
Total current liabilities......... 668,014 8,847,951 21,315,335
Capital lease obligations, less
current portion...................... 79,322 366,704 246,562
----------- ------------ ------------
Total liabilities................. 747,336 9,214,655 21,561,897
----------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.0001
par value per share, 61,786,664,
80,309,408 and 10,000,000 shares
authorized at December 31, 1998 and
1999 and June 30, 2000,
respectively; 50,580,190,
78,855,900 and zero shares issued
and outstanding at December 31,
1998 and 1999 and June 30, 2000,
respectively; aggregate liquidation
preference of $28,770,616,
$125,955,511 and $0 at December 31,
1998 and 1999 and June 30, 2000,
respectively....................... 5,058 7,885 --
Common stock, $0.0001 par value per
share, 112,000,000, 159,690,592 and
700,000,000 shares authorized at
December 31, 1998 and 1999 and June
30, 2000, respectively; 18,001,248,
31,279,590 and 126,143,466 shares
issued and outstanding at December
31, 1998 and 1999 and June 30,
2000, respectively................. 1,800 3,128 12,614
Additional paid-in capital.......... 34,955,432 186,781,010 530,823,085
Notes receivable from stockholders.. (122,585) (3,824,079) (8,249,615)
Services receivable from
stockholder........................ -- (85,164) (12,162)
Deferred stock compensation......... (5,223,575) (35,532,165) (89,299,713)
Accumulated deficit................. (9,051,224) (55,622,795) (129,166,809)
----------- ------------ ------------
Total stockholders' equity........ 20,564,906 91,727,820 304,107,400
----------- ------------ ------------
Total liabilities and
stockholders' equity............. $21,312,242 $100,942,475 $325,669,297
=========== ============ ============
</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, Six months ended June 30,
December 31, ------------------------- --------------------------
1997 1998 1999 1999 2000
------------ ----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 1,732,730 $ 3,033,995 $ 965,250 $ 13,117,146
Cost of goods sold..... -- 1,207,897 1,032,144 758,317 9,718,940
--------- ----------- ------------ ------------ ------------
Gross profit......... -- 524,833 2,001,851 206,933 3,398,206
--------- ----------- ------------ ------------ ------------
Operating expenses:
Research and
development,
excluding deferred
stock compensation
amortization amounts.. 38,865 4,008,489 24,857,708 7,126,211 24,344,692
Sales and marketing,
excluding deferred
stock compensation
amortization amounts.. 20,430 649,176 4,557,245 1,438,656 8,927,933
General and
administrative,
excluding deferred
stock compensation
amortization amounts.. 49,060 1,590,847 3,455,142 1,040,706 7,530,266
Amortization of
deferred stock
compensation*......... 89,249 3,310,368 11,421,739 2,945,487 32,064,705
Common stock warrant
expense............... -- -- 2,890,500 -- 4,544,842
Amortization of
goodwill and
intangibles........... -- -- 1,842,460 -- 1,873,710
In-process research
and development....... -- -- 170,000 170,000 --
--------- ----------- ------------ ------------ ------------
Total operating
expenses............ 197,604 9,558,880 49,194,794 12,721,060 79,286,148
--------- ----------- ------------ ------------ ------------
Operating loss....... (197,604) (9,034,047) (47,192,943) (12,514,127) (75,887,942)
Interest income
(expense), net......... (1,452) 182,705 622,972 413,773 2,399,189
Other income (expense),
net.................... -- -- -- (7,244) (52,761)
--------- ----------- ------------ ------------ ------------
Loss before income
taxes............... (199,056) (8,851,342) (46,569,971) (12,107,598) (73,541,514)
Income taxes............ -- 826 1,600 1,600 2,500
--------- ----------- ------------ ------------ ------------
Net loss............. (199,056) (8,852,168) (46,571,571) (12,109,198) (73,544,014)
Beneficial conversion of
preferred stock........ $ -- $ -- $ -- $ -- $ (4,242,424)
--------- ----------- ------------ ------------ ------------
Net loss attributable to
common
shareholders........... $(199,056) $(8,852,168) $(46,571,571) $(12,109,198) $(77,786,438)
========= =========== ============ ============ ============
Basic and diluted net
loss per share......... $ (0.77) $ (0.74) $ (2.58) $ (0.85) $ (0.73)
========= =========== ============ ============ ============
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257,017 11,918,628 18,043,188 14,309,564 106,359,436
========= =========== ============ ============ ============
--------
*Amortization of deferred stock compensation:
Cost of goods sold..... $ -- $ -- $ -- $ -- $ 3,781,215
Research and
development........... 32,012 2,509,473 8,142,230 2,316,354 16,712,971
Sales and marketing.... 16,828 160,179 1,583,211 257,373 5,898,696
General and
administrative........ 40,409 640,716 1,696,298 371,760 5,671,823
--------- ----------- ------------ ------------ ------------
$ 89,249 $ 3,310,368 $ 11,421,739 $ 2,945,487 $ 32,064,705
========= =========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 20,
1997
(inception)
to Year ended Year ended Six months ended June 30,
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) $(12,109,198) $(73,544,014)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... -- 289,265 2,806,047 292,196 4,717,710
Amortization of
deferred stock
compensation....... 89,249 3,310,368 11,421,739 2,945,487 32,064,705
Loss on disposal of
property and
equipment.......... -- -- 164,094 -- 33,508
Value of leased
facilities received
in exchange for
preferred stock.... -- -- 97,336 24,334 73,002
Purchased in-process
research and
development........ -- -- 170,000 170,000 --
Amortization of debt
financing costs.... -- -- 54,572 21,828 32,742
Common stock warrant
expense............ -- -- 2,890,500 -- 4,544,842
Stock-based
compensation for
non-employees...... -- -- 73,065 -- 240,773
Changes in operating
assets and
liabilities:
Accounts receivable. (91,162) (1,001,691) 1,569,976 721,144 (9,012,107)
Inventory........... -- -- (9,648,856) -- (28,809,822)
Prepaid expenses and
other current
assets............. -- (111,003) (533,915) (119,277) (4,617,856)
Other assets........ -- -- -- -- (25,615)
Accounts payable.... 29,440 172,207 2,392,876 590,076 (1,657,838)
Other accrued
liabilities........ 43,760 382,605 5,527,511 (30,650) 13,759,321
Deferred revenue.... -- -- -- 50,250 357,715
--------- ----------- ------------ ------------ ------------
Net cash used in
operating
activities....... (127,769) (5,810,417) (29,586,626) (7,443,810) (61,842,934)
--------- ----------- ------------ ------------ ------------
Cash flows used in
investing activities:
Purchase of property
and equipment........ -- (1,016,205) (4,858,824) (1,361,889) (27,537,811)
Acquisition of
Object-Mart, net of
cash acquired........ -- -- (1,744,645) (1,744,645) --
--------- ----------- ------------ ------------ ------------
Net cash used in
investing
activities....... -- (1,016,205) (6,603,469) (3,106,534) (27,537,811)
--------- ----------- ------------ ------------ ------------
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) (19,354) (111,956)
Proceeds from
issuance of
preferred stock, net
of issuance costs.... -- 27,015,177 96,889,288 7,264,193 21,960,696
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 64,307 227,039,576
--------- ----------- ------------ ------------ ------------
Net cash provided
by financing
activities....... 140,000 25,906,079 97,120,998 7,309,146 248,888,316
--------- ----------- ------------ ------------ ------------
Net increase in
cash and cash
equivalents...... 12,231 19,079,457 60,930,903 (3,241,198) 159,507,571
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 $ 15,850,490 $239,530,162
--------- ----------- ------------ ------------ ------------
Supplemental
disclosures of cash
flow information:
Interest paid during
year/period.......... $ -- $ 4,065 $ 15,747 $ 7,244 $ 18,159
========= =========== ============ ============ ============
Noncash investing and
financing
activities:
Equipment recorded
under capital
leases............. $ -- $ 132,975 $ 466,581 $ 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 $ -- $ 4,652,357
========= =========== ============ ============ ============
Issuance of
preferred stock in
exchange for leased
facilities......... $ -- $ -- $ 182,500 $ 182,500 $ --
========= =========== ============ ============ ============
Issuance of common
stock in connection
with Object-Mart,
Inc. acquisition... $ -- $ -- $ 5,874,677 $ 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 $ 2,945,487 $ 83,228,733
========= =========== ============ ============ ============
</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) six month period ended June 30, 2000
<TABLE>
<CAPTION>
Convertible Notes Services
preferred stock Common stock Additional receivable receivable Deferred
------------------ ----------------- paid-in from from stock Accumulated
Shares Amount Shares Amount capital stockholders 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) six month period ended June 30, 2000
<TABLE>
<CAPTION>
Convertible Notes Services
preferred stock Common stock Additional receivable receivable Deferred
----------------- ----------------- paid-in from from stock Accumulated
Shares Amount Shares Amount capital stockholders 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) six month period ended June 30, 2000
<TABLE>
<CAPTION>
Services
Convertible Notes receivable Deferred
preferred stock Common stock Additional receivable from stock
------------------- -------------------- paid-in from stock- stock- compen- Accumulated
Shares Amount Shares Amount capital holders holder sation deficit
----------- ------ ----------- ------- ------------ ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for cash
(unaudited)..... -- $ -- 2,675,699 $ 267 $ 903,710 $ -- $ -- $ -- $ --
Exercise of
options for
notes receivable
(unaudited)..... -- -- 2,675,860 268 4,652,089 (4,652,357) -- -- --
Issuance of
common shares in
exchange for
services
(unaudited)..... -- -- 18,002 2 57,501 -- -- -- --
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 310,000 31 -- -- 4,341,470 -- -- (2,380,800) --
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 29,000 3 -- -- 405,987 -- -- (222,720) --
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... -- -- -- -- -- -- 73,002 -- --
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... -- -- -- -- 3,000,242 -- -- -- --
Issuance of
warrants in
exchange for
services
(unaudited)..... -- -- -- -- 1,544,600 -- -- -- --
Deferred stock
compensation
(unaudited)..... -- -- -- -- 83,228,733 -- -- (83,228,733) --
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- 32,064,705 --
Issuance of
Series H shares
(unaudited)..... 1,333,333 133 -- -- 19,999,862 -- -- -- --
Repurchase of
common stock
(unaudited)..... -- -- (430,282) (43) (226,778) 226,821 -- -- --
Issuance of
common stock,
net of issuance
costs of
$17,864,401
(unaudited)..... -- -- 9,760,000 976 226,134,623 -- -- -- --
Conversion of
preferred stock
to common stock
(unaudited)..... (80,528,233) (8,052) 80,164,597 8,016 36 -- -- -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (73,544,014)
----------- ------ ----------- ------- ------------ ----------- -------- ------------ -------------
Balance at June
30, 2000
(unaudited)..... -- $ -- 126,143,466 $12,614 $530,823,085 $(8,249,615) $(12,162) $(89,299,713) $(129,166,809)
=========== ====== =========== ======= ============ =========== ======== ============ =============
<CAPTION>
Total
stock-
holders'
(deficit)
equity
-------------
<S> <C>
Exercise of
options for cash
(unaudited)..... $ 903,977
Exercise of
options for
notes receivable
(unaudited)..... --
Issuance of
common shares in
exchange for
services
(unaudited)..... 57,503
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)..... 73,002
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... 3,000,242
Issuance of
warrants in
exchange for
services
(unaudited)..... 1,544,600
Deferred stock
compensation
(unaudited)..... --
Amortization of
deferred stock
compensation
(unaudited)..... 32,064,705
Issuance of
Series H shares
(unaudited)..... 19,999,995
Repurchase of
common stock
(unaudited)..... --
Issuance of
common stock,
net of issuance
costs of
$17,864,401
(unaudited)..... 226,135,599
Conversion of
preferred stock
to common stock
(unaudited)..... --
Net loss
(unaudited)..... (73,544,014)
-------------
Balance at June
30, 2000
(unaudited)..... $304,107,400
=============
</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
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
(1) Description of Business and Significant Accounting Policies
(a) Description of Business
ONI Systems Corp. develops, markets and sells optical communications
equipment to communications service providers in the metropolitan and regional
area markets.
ONI was originally 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
research and development contracts with agencies of the United States
government. These contracts were completed in June 1999. ONI was reincorporated
in Delaware and changed its name to ONI Systems Corp. in April 2000. 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.
(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 June 30, 2000, cash equivalents totaled
$19,091,688, $79,004,976 and $238,499,905, respectively. Cash equivalents
consisted primarily of money market funds.
(f) Inventory
Inventories are stated at the lower of average cost or market.
F-9
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
(g) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years. Leasehold improvements and assets recorded
under capital leases are amortized on a straight-line basis over the lesser of
the related asset's estimated useful life or the remaining lease term.
(h) Intangibles
ONI has capitalized the cost of identifiable intangibles associated with the
acquisition of Object-Mart, Inc. These intangibles are amortized over their
estimated useful lives, not exceeding two years.
(i) Research and Development Costs
ONI's products are technical in nature and require a significant and
continuing research and development effort. All research and development costs
are expensed as incurred. Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", requires the capitalization of certain software
development costs incurred subsequent to the date technological feasibility is
established and prior to the date the product is generally available for sale.
The capitalized cost is then amortized over the estimated life of the product.
To date, ONI has not capitalized any software development costs because
capitalizable costs meeting the requirements of SFAS No. 86 have not been
significant.
(j) Revenue Recognition
ONI recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. When the arrangement
with the customer includes future obligations or obtaining customer acceptance,
revenue is recognized when those obligations have been met or customer
acceptance has been received.
ONI sells licenses for embedded software and application software. Revenue
from transactions involving ONI's software products is accounted for in
accordance with Statement of Position (SOP) 97-2, "Software Revenue
Recognition", SOP 98-4, "Deferral of Effective Date of SOP 97-2", and SOP 98-9,
"Software Revenue Recognition with Respect to Certain Arrangements".
Accordingly, ONI recognizes revenue from licenses of software products provided
that a purchase order has been received, the software and related documentation
have been shipped, collection of the resulting receivable is deemed probable,
and the fee is fixed or determinable.
Services revenue consists primarily of training and installation services.
Revenues from training and installation services are recognized as the services
are performed. To date 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
F-10
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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.
(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 six month period ended June 30, 2000, four
customers accounted for 26%, 22%, 18% and 12% of revenue and 41%, 31%, 16% and
12% of accounts receivable.
F-11
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
(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".
(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.
F-12
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
(r) Net Loss Per Share
Basic and diluted net loss per share have been computed in accordance with
SFAS No. 128, "Earnings per Share". Basic net loss per share has been 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
common shares have been excluded from the computation of diluted net loss per
share for all periods presented because the effect would be antidilutive. The
following table presents the calculation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Period from
October 20,
1997
(inception) Six months ended
to Year ended December 31, June 30,
December 31, ------------------------- --------------------------
1997 1998 1999 1999 2000
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss attributable to
Common stockholders.... $(199,056) $(8,852,168) $(46,571,571) $(12,109,198) $(77,786,438)
Basic and diluted:
Weighted-average shares
of stock outstanding... 257,017 17,140,923 21,873,721 18,628,237 115,065,815
Less: weighted-average
shares subject to
repurchase............. -- 5,222,241 3,830,533 4,318,673 8,706,379
Weighted-average shares
used in computing basic
and diluted net loss
per common share....... 257,017 11,918,682 18,043,188 14,309,564 106,359,436
Basic and diluted net
loss per common share.. $ (0.77) $ (0.74) $ (2.58) $ (0.85) $ (0.73)
</TABLE>
Diluted net loss per share does not include the effects of the following
potential common shares:
<TABLE>
<CAPTION>
Period from
October 20,
1997 Year ended Six months ended
(inception) to December 31, June 30,
December 31, --------------------- ---------------------
1997 1998 1999 1999 2000
-------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Shares issuable under
stock options.......... 1,078,220 8,789,776 17,548,724 17,957,026 20,249,990
Shares of unvested stock
subject to repurchase.. -- 5,992,684 8,587,699 4,318,673 9,097,575
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 58,782,014 --
</TABLE>
F-13
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
The weighted-average exercise price of stock options outstanding was $0.005,
$0.08, $0.29 and $2.60 as of December 31, 1997, 1998, 1999 and June 30, 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 $0.91 as of
December 31, 1998, 1999 and June 30, 2000, respectively. The exercise price of
warrants to purchase shares of convertible preferred stock remained $0.88 as of
December 31, 1999 and June 30, 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 June 30, 2000, respectively.
(s) 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 is its chief operating decision-maker. The
financial information that the CEO reviews is identical to the information
presented in the accompanying statements of operations. ONI has determined that
it operates in a single operating segment: development and sale of optical
networking equipment to communications service providers in the metropolitan
and regional area markets.
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. ONI's geographic
distribution of revenues for the six months ended June 30, 2000, is as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 2000
----------------
<S> <C>
North America............................................... 54%
Asia........................................................ 28%
Europe...................................................... 18%
</TABLE>
For the six month period ended June 30, 2000, export sales to Europe and
Asia were denominated in United States dollars.
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.
(t) Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (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.
F-14
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions involving
Stock Compensation--an Interpretation of Accounting Principles Board (APB)
Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and is
effective July 1, 2000. Management believes that FIN 44 will not have a
material effect on ONI's financial position or results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, and amendment to SFAS
No. 133". Statement No. 138 addresses a limited number of issues causing
implementation difficulties for companies that are required to apply SFAS No.
133. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-- Deferral of the effective date of SFAS No.
133", and SFAS No. 138 are effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. ONI has not determined the impact that
SFAS 133 and SFAS 138 will have on its financial statements and believes that
such determination will not be meaningful until closer to the date of initial
adoption.
(u) Reclassification
Certain prior period financial information has been reclassified to conform
to the current period presentation.
(2) Business Combination
On June 29, 1999, ONI acquired all of the outstanding common shares of
Object-Mart, Inc. in exchange for 4,569,276 shares of ONI's common stock and
approximately $3,222,000 in cash for a total purchase price of approximately
$9,096,677. Object-Mart was located in San Jose, California, and provided
software products and services to software development companies, software
providers and equipment manufacturers in the telecommunications industry. The
combination was accounted for using the purchase method and, accordingly, the
results of operations of Object-Mart have been included in ONI's consolidated
financial statements only since June 29, 1999. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $5,679,839 has
been recorded as goodwill and is being amortized on a straight-line basis over
two years. Identifiable intangibles are amortized on a straight-line basis over
periods not exceeding two years.
The amount of $170,000 allocated to purchased in-process research and
development was determined through established valuation techniques in the
high-technology communications industry and was expensed upon acquisition
because technological feasibility had not been established and no future
alternative uses existed.
F-15
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
The following unaudited pro forma financial information presents the
combined results of operations of ONI and Object-Mart as if the acquisition had
occurred as of the beginning of 1998 and 1999, after giving effect to certain
adjustments, including amortization of goodwill and other intangibles,
additional depreciation expense and related income tax effects. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had ONI and Object-Mart constituted a single entity
during these periods.
<TABLE>
<CAPTION>
Year ended December 31, Six months
-------------------------- ended June 30,
1998 1999 1999
------------ ------------ --------------
(unaudited)
<S> <C> <C> <C>
Revenue.......................... $ 3,665,811 $ 4,625,795 $ 2,557,050
Net loss......................... $(11,172,005) $(47,779,504) $(13,487,131)
Basic and diluted net loss per
share........................... $ (0.94) $ (2.65) $ (0.72)
</TABLE>
(3) Inventory
Inventory consists of:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
<S> <C> <C>
Raw materials....................................... $8,914,321 $12,030,648
Work in progress.................................... -- 15,992,441
Finished goods...................................... 734,535 9,227,743
Consignment inventory............................... -- 1,207,846
---------- -----------
$9,648,856 $38,458,678
========== ===========
</TABLE>
(4) Property and Equipment
Property and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Computers and equipment................... $1,050,541 $5,569,889 $28,182,147
Furniture and fixtures.................... 204,734 714,592 2,208,480
Leasehold improvements.................... 50,688 273,663 3,409,158
---------- ---------- -----------
1,305,963 6,558,144 33,799,785
Less accumulated depreciation and
amortization............................. 289,265 1,243,154 4,074,492
---------- ---------- -----------
$1,016,698 $5,314,990 $29,725,293
========== ========== ===========
</TABLE>
Equipment recorded under capital leases was $132,975, $541,580 and $452,763
as of December 31, 1998 and 1999 and June 30, 2000, respectively, and the
related accumulated amortization was $13,651, $57,976 and $146,793 as of
December 31, 1998 and 1999 and June 30, 2000, respectively. There was no
equipment recorded under capital leases as of December 31, 1997.
F-16
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
(5) Intangibles
A summary of intangibles is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ----------
<S> <C> <C>
Purchased technology and workforce................... $ 530,000 $ 530,000
Assembled workforce and non-compete agreements....... 630,000 630,000
Other intangibles.................................... -- 250,000
---------- ----------
1,160,000 1,410,000
Less accumulated amortization........................ 422,500 876,250
---------- ----------
$ 737,500 $ 533,750
========== ==========
</TABLE>
(6) Accrued Liabilities
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
<S> <C> <C>
Accrued Employee benefits.......................... $ 671,155 $ 2,484,388
Uninvoiced receipts................................ 4,307,740 11,457,333
Other.............................................. 1,107,889 5,904,384
---------- -----------
$6,086,784 $19,846,105
========== ===========
</TABLE>
(7) Related Party Transactions
On October 20, 1997, ONI was incorporated as a wholly-owned subsidiary of
Optivision, Inc. 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 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 six month period ended June 30, 2000, ONI received an additional $4,652,357
in promissory notes in exchange for common stock. In addition, ONI repurchased
430,282 shares of restricted common stock and cancelled $226,821 in notes
receivable from stockholders.
F-17
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
(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 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,
------------------------------------------------
1998 1999 June 30, 2000
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 -- $ --
Series C................ 2,733,332 2,733,332 2,049,999 2,733,332 2,049,999 -- --
Series D................ 4,969,148 4,969,148 4,380,428 4,969,148 4,380,428 -- --
Series E................ 26,284,024 18,082,200 16,500,008 26,284,024 23,984,172 -- --
Series F................ 8,249,468 -- -- 8,249,468 15,000,008 -- --
Series G................ 13,000,000 -- -- 11,824,418 74,700,723 -- --
---------- ---------- ----------- ---------- ------------ -------- -------
80,309,408 50,580,190 $28,770,616 78,855,900 $125,955,511 -- $ --
========== ========== =========== ========== ============ ======== =======
</TABLE>
In January 1998, 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.
F-18
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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 $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 was expensed
upon issuance of the shares in accordance with EITF 96-18. The Series G
preferred stock issued in March was issued to an employee, a director and
consultants as consideration for both services previously rendered as well as
for services to be rendered in the future. ONI recorded deferred stock
compensation of $2,603,520, for the difference between the purchase price of
the shares and the fair market value of the shares of $14.00 per share. This
amount is being amortized on an accelerated basis over the vesting period, or
the period in which the services were rendered if shorter, consistent with the
method described in FASB Interpretation No. 28. Amortization of deferred stock
compensation associated with these shares was $1,019,999 for the six months
ended June 30, 2000.
In May 2000, ONI sold 1,333,333 shares of Series H preferred stock to Sun
Microsystems, Inc., at a price per share of $15.00. In June 2000, concurrent
with the completion of ONI's initial public offering, or IPO, these shares of
preferred stock automatically converted into 969,697 shares of common stock and
ONI recorded a non-cash charge of $4,242,424 to accrete the value of the
preferred stock to its fair value. This non-cash charge was recorded in
additional paid-in capital.
Upon the completion of the IPO, all outstanding shares of Series B, C, D, E,
F and G preferred stock converted into an aggregate of 79,194,900 shares of
common stock.
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
F-19
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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 $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 six month period ended June 30, 2000, ONI issued 2,675,860
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 $4,652,357. 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
F-20
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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 warrant was nonforfeitable when issued, and becomes
exercisable on the ratio of the dollar volume of purchases of ONI's products by
the customer under the agreement to $30 million. Notwithstanding the above
formula, the warrant becomes fully exercisable on December 7, 2005, the date of
expiration of the warrant. 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 $3,000,242 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 warrant
was nonforfeitable when issued, and becomes exercisable on the ratio of the
dollar volume of purchases of ONI's products by the customer under the
agreement to $20 million. Notwithstanding the above formula, the warrant
becomes fully exercisable on February 14, 2007, the date of expiration of the
warrant. Under the terms of the Purchase and License Agreement, the customer
has the ability to terminate the agreement upon 120 days written notice, and
provided the customer purchased $1 million of product from ONI in fiscal 2000.
The customer is not obligated to purchase any of ONI's products as a condition
to exercising the warrant. Accordingly, the warrant was expensed upon issuance.
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 $1,544,600 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 upon issuance.
In June 2000, ONI completed its IPO in which it sold 9,200,000 shares of
common stock, including 1,200,000 shares in connection with the exercise of the
underwriters' over-allotment option, at $25 per share. Concurrently with the
completion of the IPO, ONI sold in two private placements an aggregate of
560,000 shares of common stock to Internet Initiative Japan Inc. and CCT
Telecom Holdings Limited for $25 per share. The net proceeds of the IPO and
private placements, after deducting underwriters' discount and other offering
expenses, were approximately $226.1 million. Subsequent to the IPO, ONI's
authorized capital consisted of 700,000,000 shares of common stock, $0.0001 par
value, and 10,000,000 shares of preferred stock, $0.0001 par value. There were
126,143,466 shares of common stock outstanding as of June 30, 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
F-21
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
consequently any options to purchase shares or restricted stock purchase offers
issued under the 1997 Plan did not qualify for an exemption from qualification
under California securities law. As a result, the Board of Directors terminated
the 1997 Plan in April 1998 and approved a repurchase offer for any holder of
options of shares under the 1997 Plan. The repurchase offer expired without any
shares being repurchased.
Options granted under the 1997 Plan may be designated as "Incentive Stock
Options" or "Nonstatutory Stock Options" at the discretion of 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.
2000 Equity Incentive Plan
On May 31, 2000, ONI's 2000 Equity Incentive Plan became effective. Under
the Plan 7,048,905 shares of ONI's common stock were reserved exclusively for
issuance under the plan. The terms of the 2000 Equity Incentive Plan are
substantially similar to those under the 1999 Plan.
2000 Employee Stock Purchase Plan
ONI's 2000 Employee Stock Purchase Plan became effective on June 1, 2000,
the first day on which price quotations were available for our common stock on
the Nasdaq National Market. ONI 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 the 2000 Employee Stock Purchase Plan will increase
automatically by a number of shares equal to 1% of the outstanding shares on
December 31 of the preceding year.
F-22
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
Except for the first offering period, each offering period under the 2000
Employee Stock Purchase Plan will be for two years and consists of four six-
month purchase periods. Offering periods and purchase periods will begin on
February 1 and August 1 of each year. Because the first day on which price
quotations for ONI's common stock was available on the Nasdaq National Market
was June 1, the length of the first offering period is more than two years, and
the length of the first purchase period is more than six months.
The 2000 Employee Stock Purchase Plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, and is subject to maximum purchase limitations. The
purchase price for common stock purchased under this plan will be 85% of the
lessor of the fair market value of ONI's common stock on the first day of the
applicable offering period or the last day of the applicable purchase period.
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....................... 12,760,676 --
Granted.......................... (8,850,927) 8,850,927 6.17 $15.45
Exercised........................ -- (5,369,561) 1.05
Cancelled........................ 780,100 (780,100) 2.07
Repurchased...................... 430,282 -- 0.53
----------- ----------
Balance as of June 30, 2000........ 6,962,777 20,249,990 $2.60
=========== ========== ======
</TABLE>
ONI granted 1,078,220, 10,885,796 and 20,178,438 options with exercise
prices less than fair value at date of grant for the periods ended December 31,
1997, 1998 and 1999, respectively. For the six months ended June 30, 2000, ONI
granted 8,166,002 options with exercise prices less than fair value at date of
grant, with a weighted average fair value of $14.00 per share. For the six
months ended June 30, 2000, ONI granted 684,925 options with exercise prices
equal to fair value at date of grant, with a weighted average fair value of
$32.70 per share.
F-23
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
The following table summarizes information with respect to stock options
outstanding as of June 30, 2000:
<TABLE>
<CAPTION>
Contractual
Exercise Options life Exercisable
price outstanding (years) Options
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 0.005 126,131 7.46 39,352
0.075 106,502 7.62 10,945
0.09 9,445,832 8.55 928,684
0.456 15,000 9.08 417
0.91 3,574,950 9.29 --
1.25 2,748,900 9.56 23,750
3.20 824,650 9.66 --
4.00 1,000,000 9.84 1,000,000
5.25 146,625 9.70 --
7.50 118,625 9.73 --
10.00 1,478,675 9.82 --
15.00 341,200 9.87 --
22.00 152,750 9.88 --
25.00 10,150 9.92 --
82.57 160,000 9.92 --
---------- ---------
$ 2.60 20,249,990 9.15 2,003,148
========== =========
</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 $83,228,733 of
deferred stock compensation was recorded for the six months ended June 30,
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 six months ended June 30, 1999 and 2000 was $2,854,887 and
$31,044,706, respectively.
In 1998, ONI's Chief Executive Officer purchased 717,624 shares of common
stock that were subject to repurchase pending the achievement of certain
milestones in 1998 and 1999. The shares were remeasured at each date the
milestones were achieved based on the fair value of the common stock at that
date, pursuant to the variable plan treatment ascribed under APB 25. All the
milestones stipulated in the employment agreement were met as of December 31,
1999. Accordingly, additional compensation expense of $836,929 was recorded in
1999, $90,600 of which was recorded in the six
F-24
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
months ended June 30, 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 Six months ended
October 20, 1997 December 31, June 30,
(inception) to ----------------------- ------------------------
December 31, 1997 1998 1999 1999 2000
----------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss--as reported... $199,056 $8,852,168 $46,571,571 $12,109,198 $73,544,014
Net loss--pro forma..... $199,056 $8,900,007 $46,917,722 $12,187,444 $75,093,476
Basic and diluted net
loss per share
--as reported.......... $ (0.77) $ (0.74) $ (2.58) $ (0.85) $ (0.73)
Basic and diluted net
loss per share
--pro forma............ $ (0.77) $ (0.75) $ (2.60) $ (0.85) $ (0.75)
</TABLE>
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. From January 1, 2000, to May
31, 2000, ONI estimated the fair value of options granted using the minimum
value method with the following weighted average assumptions: no dividend
yield, risk-free interest rate of 5.5% and an expected life of 5 years. From
June 1, 2000 to June 30, 2000, ONI estimated the fair value of options granted
using the Black-Scholes option pricing model, with the following assumptions:
no dividend yield, risk-free interest rate of 5.5%, volatility of 70% and
expected life of 5 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.
F-25
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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 June 30, 2000 are
as follows:
<TABLE>
<CAPTION>
Year ending Capital Operating
December 31, leases leases
------------ -------- -----------
<S> <C> <C>
6 months ended 2000..................................... $ 75,360 $ 1,746,350
2001.................................................... 186,524 10,221,241
2002.................................................... 151,060 9,763,855
2003.................................................... 62,941 12,588,618
2004.................................................... -- 13,097,135
Thereafter.............................................. -- 16,463,988
-------- -----------
Future minimum lease payments........................... $475,885 $63,881,187
===========
Less amount representing interest....................... 54,525
--------
Present value of future minimum lease payments.......... 421,360
Less current portion.................................... 174,798
--------
Long-term portion....................................... $246,562
========
</TABLE>
Total rent expense under the operating leases was $494,308, $908,115 and
$1,998,941 for the years ended December 31, 1998 and 1999 and the six months
ended June 30, 2000, respectively, and $0 for the period from October 20, 1997
(inception) to December 31, 1997.
(b) Contingencies
In March 2000, Nortel Networks 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 Networks, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. Nortel Networks is seeking preliminary and
permanent injunctions and damages against ONI in connection with these claims.
In April 2000, ONI filed a motion to dismiss Nortel Networks' claims for
misappropriation of trade secrets, unlawful business practices and common law
unfair competition. ONI 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. On June 23, 2000, the court dismissed one of
Nortel Networks' unfair competition claims and stayed its remaining claims for
trade secret misappropriation and unlawful business practices in California. On
July 14, 2000, Nortel Networks filed a Notice of Motion to lift the stay of the
trade secret misappropriation and unlawful business practices claims in the
California suit, which was granted in September 2000. 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 for damages, 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
F-26
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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 consists of current state tax of $826 and $1,600 for the
years ended December 31, 1998 and 1999, respectively, and current state tax of
$2,500 for the six months ended June 30, 2000.
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>
Six months
Period ended December 31, ended
----------------------------------- June 30,
1997 1998 1999 2000
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Income tax (benefit) at
statutory rate............. $(67,679) $(3,009,456) $(15,833,790) $(25,004,115)
State taxes net of federal
income tax benefit......... -- 826 1,600 2,500
Permanent differences....... 48 4,039 24,612 25,097
Stock Compensation.......... 53 417,762 3,161,650 8,360,400
Goodwill Amortization....... -- -- 482,780 455,586
Current year net operating
loss and temporary
differences for which no
benefit is recognized...... 67,578 2,587,655 12,164,748 16,163,032
-------- ----------- ------------ ------------
Total income tax expense.... $ -- $ 826 $ 1,600 $ 2,500
======== =========== ============ ============
</TABLE>
The effects of temporary differences that give rise to significant portions
of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------- June 30,
1998 1999 2000
----------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred state taxes................ $ -- $ 1,000 $ 1,000
Fixed assets........................ 39,000 141,000 88,000
Capitalized start-up and
organizational expense............. 343,000 236,000 155,000
Net operating loss carryforwards.... 2,011,000 14,707,000 26,865,000
Deferred stock compensation......... 930,000 3,502,000 8,138,000
Research and other credit
carryforwards...................... 394,000 2,047,000 1,944,000
Accrual amounts..................... 12,000 293,000 1,185,000
----------- ------------ ------------
Total gross deferred tax assets... 3,729,000 20,927,000 38,376,000
Valuation allowance................... (3,729,000) (20,682,000) (38,083,000)
----------- ------------ ------------
Total deferred tax assets......... -- 245,000 293,000
Deferred tax liabilities:
Intangibles........................ -- (245,000) (293,000)
----------- ------------ ------------
Net deferred tax assets, net of
deferred tax liabilities........... $ -- $ -- $ --
=========== ============ ============
</TABLE>
F-27
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited)
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 (unaudited)
In September 2000, the Board of Directors authorized the filing of
registration statements with the Securities and Exchange Commission that would
permit ONI and certain existing stockholders to sell shares of ONI's common
stock and ONI to sell convertible subordinated notes in a public offering.
F-28
<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-29
<PAGE>
OBJECT-MART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
ASSETS 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-30
<PAGE>
OBJECT-MART, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, June 29,
1998 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-31
<PAGE>
OBJECT-MART, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, June 29,
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-32
<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-33
<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. 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-34
<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-35
<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>
Six months
Year ended ended
December 31, June 29,
1998 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, June 29,
1998 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-36
<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., 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.
F-37
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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
-----------------
Weighted
average
Weighted grant
Shares Number average date
available of exercise fair
for grant shares price 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-38
<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-39
<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.......... 24,857,708 582,927 (101,108)(c) 25,339,527
Sales and marketing... 4,557,245 52,888 12,692 (d) 4,622,825
General and
administrative....... 3,455,142 105,524 -- 3,560,666
Amortization of
deferred stock
compensation......... 11,421,739 466,507 -- 11,888,246
Amortization of common
stock warrants....... 2,890,500 -- -- 2,890,500
Amortization of
goodwill and
intangibles.......... 1,842,460 -- 1,419,960(e) 3,262,420
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 statement of
operations.
F-40
<PAGE>
ONI SYSTEMS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(1) Unaudited Pro Forma Combined Condensed Statement of Operations
The pro forma combined condensed statement 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; and
(g) Adjustment to reverse income tax expense for the amount of the combined
company
F-41
<PAGE>
[LOGO OF ONI SYSTEMS]
<PAGE>
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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.............................................................. 9
Special Notice Regarding Forward-Looking Statements....................... 21
Use of Proceeds........................................................... 22
Price Range of Common Stock............................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 35
Management................................................................ 48
Related Party Transactions................................................ 61
Principal Stockholders.................................................... 66
Description of Notes...................................................... 69
Description of Capital Stock.............................................. 83
Certain United States Federal Income Tax Considerations................... 87
Shares Eligible for Future Sale........................................... 90
Underwriting.............................................................. 93
Validity of Securities.................................................... 95
Experts................................................................... 95
Where You Can Find Additional Information................................. 95
Index to Financial Statements............................................. F-1
</TABLE>
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$300,000,000
ONI Systems Corp.
5% Convertible Subordinated Notes due October 15, 2005
----------------
[ONI SYSTEMS LOGO]
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Goldman, Sachs & Co.
Credit Suisse First Boston
Robertson Stephens
Chase H&Q
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