As filed with the Securities and Exchange Commission on November 17, 2000
Registration No. 333-47770
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CIDRA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 3674 06-1461666
(Primary Standard (IRS Employer
(State or other Industrial Identification No.)
jurisdiction of Classification Code
incorporation or Number)
organization) ----------------
50 Barnes Park North
Wallingford, CT 06492
(203) 265-0035
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
F. Kevin Didden
President & Chief Executive Officer
CiDRA Corporation
50 Barnes Park North
Wallingford, CT 06492
(203) 265-0035
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
With copies to:
Frank J. Marco, Esq. Michael Grillo, Esq. Alan Dean, Esq.
Lewis J. Geffen, Esq. Gerard L. DePardo, Esq. Davis Polk & Wardwell
Mintz, Levin, Cohn, CiDRA Corporation 450 Lexington Avenue
Ferris, 50 Barnes Park North New York, NY 10017
Glovsky and Popeo, P.C. Wallingford, CT 06492 (212) 450-4000
One Financial Center (203) 265-0035
Boston, MA 02111
(617) 542-6000
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Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Securities to be Price Offering Registration
to be Registered Registered(1) Per Share(2) Price(2) Fee(3)
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Common Stock, $.001 par
value.................. 7,705,000 $16.00 $123,280,000 $32,546
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(1) Includes 1,005,000 shares subject to the underwriters' over-allotment
option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act.
(3) This fee was previously paid.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued November 17, 2000
6,700,000 Shares
[CiDRA logo]
COMMON STOCK
-----------
CiDRA Corporation is offering 6,700,000 shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $14.00 and
$16.00 per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "CIDC."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
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PRICE $ A SHARE
-----------
Underwriting
Price to Discounts and Proceeds to
Public Commissions CiDRA
-------- ------------- -----------
Per Share.................... $ $ $
Total........................ $ $ $
We have granted the underwriters the right to purchase up to an additional
1,005,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
CIBC WORLD MARKETS
UBS WARBURG LLC
THOMAS WEISEL PARTNERS LLC
RAYMOND JAMES & ASSOCIATES, INC.
, 2000
INSIDE FRONT COVER OF PROSPECTUS
[DESCRIPTION OF GRAPHICS]
Headline: WAVELENGTH MANAGEMENT SOLUTIONS
FOR NEXT-GENERATION NETWORKS
Illustration: The illustration depicts three of CiDRA's products over the
caption "AgileWave Components, Modules and Subsystems."
Emanating from the products is a series of four connected
circles that run from top to bottom on the page. The circles
decrease in size as they go down the page. Inside each circle is
a caption. From top to bottom, the captions in the four circles
read:
"ULTRA LONG HAUL"
"LONG HAUL"
"METRO"
"ACCESS"
These circles are intended to illustrate the different portions
of an optical network. To the right of the circles, and also
running from top to bottom, are four captions identifying the
functions that CiDRA's products can perform on optical signals.
From top to bottom the captions read:
"Signal Conditioning"
"Wavelength Management"
"Wavelength Routing"
"Wavelength Distibution"
Background: The illustration is set on a background that consists of the
globe and two lines of 1s and 0s running from left to right
across the page.
Logo: The CiDRA logo is located in the bottom right corner of the page.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Page
----
Business................................................................... 28
Management................................................................. 41
Related Party Transactions................................................. 49
Principal Stockholders..................................................... 52
Description of Capital Stock............................................... 54
Shares Eligible for Future Sale............................................ 57
Underwriters............................................................... 60
Legal Matters.............................................................. 63
Experts.................................................................... 63
Where You Can Find Additional Information.................................. 63
Index to Financial Statements.............................................. F-1
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
We were incorporated in Delaware on August 7, 1996. Our principal executive
offices are located at 50 Barnes Park North, Wallingford, Connecticut 06492,
and our telephone number is (203) 265-0035. Our web site address is
www.cidra.com. The information contained on our web site is not incorporated
by reference into this prospectus. We have included our web site address in
this prospectus only as an inactive textual reference and do not intend it to
be an active link to our web site. CiDRA, the CiDRA logo and AgileWave are our
trademarks. This prospectus also contains trademarks and trade names of other
entities.
Unless otherwise indicated, all information contained in this prospectus:
. assumes that the underwriters do not exercise their over-allotment
option;
. reflects a 2-for-1 split of our common stock effected on April 7, 2000;
and
. reflects the conversion of all of our outstanding shares of preferred
stock into 38,995,680 shares of common stock upon completion of this
offering.
3
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors."
CiDRA Corporation
We design, manufacture and market high-precision component, module and
subsystem products, based upon our proprietary technology, for next-generation
optical networks. Optical networks are communications networks that use
wavelengths of light to transmit voice and data signals through long fibers of
glass thinner than a human hair, or optical fibers. Our optical networking
products are designed to permit highly accurate control of optical signals to
enable new and enhanced features in optical networks, improve performance in
the transmission of optical signals and increase the ability to change the
configuration of optical networks. We use our proprietary technology to develop
and design products that are actively adjustable, or tunable, to work at
different frequencies of light. Our components serve as the building blocks for
our module and subsystem products, which can actively change the path of, or
route, evaluate the quality of, or monitor, and restore and maintain the
quality of, or condition, optical signals in real time. Our manufacturing
process is highly automated and is designed to allow us to build customized
products in high volumes. Our target customers include major suppliers of
equipment used in optical networks. As of November 2000, we had received
purchase orders from three large suppliers of optical networking equipment,
including Cisco Systems and Corvis Corporation.
Technological innovation and the widespread use of the Internet, Internet-
based applications and corporate data networks have propelled the rapid growth
in the volume of data traffic transmitted across communications networks.
According to Ryan, Hankin & Kent, Inc., a leading market research and
consulting firm, the transmission of data traffic is predicted to increase from
350,000 terabytes per month in 1999 to more than 16 million terabytes per month
in 2003. Advanced next-generation optical networks built using new optical
components, modules and subsystems will serve as a primary means of addressing
this new demand.
We are developing a family of AgileWave components, modules and subsystems
to enable service providers to build next-generation optical networks offering
the following features and functionality:
. High Channel Counts. Our products can enable tight spacing between
different wavelengths of light, or channels, thereby allowing a high
number of channels on a single optical fiber.
. Long Reach, High Transmission Rates. Our products are being developed to
enable optical signals to travel long distances at high speeds by
providing critical monitoring and conditioning of signal impairments
that degrade quality and system performance.
. Network Intelligence. Our AgileWave products are being developed to
bring intelligence to optical networks through increased use of embedded
software to allow communications service providers to better serve and
retain their customers.
. Stability and Reliability. We believe our products offer distinct
advantages over competing products in terms of stability of performance
over a range of temperatures, or thermal stability, and the limitation
of undesired movement of wavelengths, or drift, and can provide our
customers increased network uptime and service reliability.
. Cost-Effectiveness. We are developing the manufacturing capacity for
high-volume production and offer several different products featuring a
common or substantially similar packaging technology, thereby reducing
our production costs.
4
Our objective is to be a leading provider of cost-effective optical
components, modules and subsystems for the optical networking industry and to
enable a new level of network flexibility, reliability and intelligence for
next-generation optical networks. In order to achieve this objective, a key
element of our strategy is to leverage and expand our proprietary technology
platform to continue to develop precisely tunable, highly accurate and reliable
optical networking products. We will use this technology platform together with
our highly trained staff of optical engineers to rapidly respond to customer
requirements for customized solutions. We are also implementing an efficient
manufacturing process that we believe will enable us to deliver high quality
and reliable products while also enabling us to scale production to large
volumes.
THE OFFERING
Common stock offered................
6,700,000 shares
Common stock to be outstanding
after this offering.................
57,447,775 shares
Use of proceeds..................... We anticipate we will use the net
proceeds for general corporate
purposes, including capital
expenditures, product research and
development activities, working
capital and expansion of our sales
and marketing operations. See "Use
of Proceeds."
Proposed Nasdaq National Market
symbol.............................. CIDC
The information above is based on the number of shares of common stock
outstanding as of October 31, 2000 and assumes the conversion of all of our
preferred stock outstanding as of October 31, 2000 into 38,995,680 shares of
common stock upon the completion of this offering. It does not include:
. 3,475,164 shares of common stock issuable upon the exercise of stock
options outstanding as of October 31, 2000 at a weighted average
exercise price of $3.11 per share;
. 335,000 shares of common stock issuable upon the exercise of warrants
outstanding as of October 31, 2000 at an exercise price equal to the
initial public offering price;
. 1,680,245 shares of common stock reserved for future awards under our
stock plans; and
. 500,000 shares of common stock reserved for issuance under our 2000
Employee Stock Purchase Plan, which will become effective upon
completion of this offering.
5
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
Nine Months
Year Ended December Ended September
31, 30,
------------------------ ----------------
1997 1998 1999 1999 2000
------ ------- ------- ------- -------
(unaudited)
Statement of Operations Data:
Revenue........................... $ -- $ -- $ -- $ -- $ 468
Loss from operations.............. (2,418) (13,217) (21,491) 15,347 (25,494)
Net loss attributable to common
stockholders..................... (2,375) (12,715) (21,056) 15,026 (24,157)
====== ======= ======= ======= =======
Basic and diluted net loss per
share attributable to common
stockholders................... $ (.72) $ (3.33) $ (3.39) $ (2.53) $ (2.85)
====== ======= ======= ======= =======
Shares used in computing basic
and diluted net loss per share
attributable to common
stockholders................... 3,316 3,818 6,209 5,937 8,468
====== ======= ======= ======= =======
Pro forma basic and diluted net
loss per common share
(unaudited).................... $ (.59) $ (.56)
======= =======
Shares used in computing basic
and diluted pro forma net loss
per common share (unaudited)... 35,798 43,305
======= =======
The summary balance sheet data as of September 30, 2000 are presented:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all of our
outstanding preferred stock into 38,995,680 shares of common stock upon
the completion of this offering; and
. on a pro forma as adjusted basis to give effect to the receipt of the
estimated net proceeds from the sale of the 6,700,000 shares of common
stock in this offering at an assumed initial public offering price of
$15.00 per share after deducting underwriting discounts and commissions
and estimated offering expenses.
As of September 30, 2000
-------------------------
Pro
Pro Forma As
Actual Forma Adjusted
------- ------- --------
(unaudited)
Balance Sheet Data:
Cash, cash equivalents and marketable securities..... $86,454 $86,454 $178,869
Working capital...................................... 75,051 75,051 167,466
Total assets......................................... 114,491 114,491 206,906
Long-term debt, less current portion................. 2,250 2,250 2,250
Mandatorily redeemable convertible preferred stock... 150,540 -- --
Total stockholders' (deficit)/equity................. (54,704) 95,836 188,251
6
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing
us. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks, and you may lose all or
part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risks faced
by us described below and elsewhere in this prospectus.
Risks Related to Our Business
We have never been profitable and expect to incur losses for the foreseeable
future
We have never been profitable and expect to continue to incur losses for
the foreseeable future. We incurred net losses of $239,000 in the period from
our inception on August 7, 1996 through December 31, 1996, $2.4 million in
1997, $12.7 million in 1998, $21.1 million in 1999, and $24.2 million in the
nine months ended September 30, 2000. As of September 30, 2000, we had an
accumulated deficit of $60.5 million. To date, we have not achieved
profitability on a quarterly or annual basis. Due to lack of cash generated
from operations, we have funded our operations through the sale of equity
securities, bank borrowings and equipment lease financing. We have a large
amount of fixed expenses and we expect to continue to incur significant and
increasing manufacturing, sales and marketing, product development and
administrative expenses. We had no revenue for the period from our inception
on August 7, 1996 through December 31, 1999. For the nine months ended
September 30, 2000, our revenue of $468,000 was derived solely from the sale
of industrial optical sensing products and related services, which is no
longer the principal focus of our business. We will need to generate revenue
from optical networking products, the new focus of our business, while
containing our expenses, to achieve and maintain profitability. We cannot
assure you that we will ever generate sufficient revenue to achieve and
maintain profitability.
We have only recently shifted the focus of our business to optical networking
products therefore we have a limited operating history upon which you can
evaluate our business and prospects
We believe the market opportunity for our products in the telecommunication
industry is significantly greater than the opportunity in the oil and gas
industry. Accordingly, we recently shifted our business focus from the
development and sale of our industrial optical sensing products, which sense
changes in environmental conditions such as temperature and pressure in oil
and gas wells, to the development and sale of our optical networking products,
which are used in the transmission of communication signals over optical
fiber-based communication networks. As a result, we have only a limited
operating history upon which you can evaluate our business and prospects. We
find it difficult to forecast our prospects accurately, and we do not have
meaningful historical financial data upon which to plan future operating
expenses. We did not shift our focus to optical networking products until the
first quarter of 2000, and we do not expect to begin commercial production of
our first optical networking product until the end of the fourth quarter of
2000. We have not yet generated any revenue from optical networking products.
We face the risks and difficulties frequently encountered by early stage
companies in a new and rapidly evolving market. The revenue and income
potential of our products and business are, and the size of our market is,
unproven. Our ability to sell products and achieve success will depend on,
among other things, the level of demand for our products and our capacity to
meet demand.
7
We expect our quarterly revenue and operating results to fluctuate and the
price of our common stock could fall if quarterly results are lower than the
expectations of securities analysts and you may lose all or part of your
investment
We expect our revenue and operating results to fluctuate. As of September
30, 2000, all of our revenue had been derived from the sale of industrial
optical sensing products and related services. As we expand our business focus
on the development and sale of optical networking products, we expect that
revenue from the sale of industrial optical sensing products will represent an
increasingly smaller percentage of our revenue and that revenue from the sale
of optical networking products will eventually represent the substantial
majority of our total revenue. We anticipate that our revenue and operating
results are likely to vary significantly from quarter to quarter in the
future. It is likely that in future quarters our operating results may be
below the expectations of public market analysts or investors. If this occurs,
the price of our common stock will likely decrease. A number of factors, many
of which are discussed in other risk factors, may cause variations in our
results of operations, including:
. cancellations of orders and shipment rescheduling;
. our manufacturing capacity and yields;
. our ability to develop, introduce, manufacture and ship new and enhanced
products in a timely manner without defects;
. the mix of our products sold; and
. economic conditions and capital spending for optical networking
equipment in the communications and related industries.
A high percentage of our expenses, including those related to
manufacturing, engineering, sales and marketing, research and development and
general and administrative functions, are essentially fixed in the short term.
As a result, if we experience delays in generating and recognizing revenue,
our quarterly operating results are likely to be seriously harmed. As we
expand our manufacturing capacity, we will incur expenses for expansion in one
quarter that may not result in offsetting revenue until a subsequent quarter.
New product introductions can also result in a mismatching of research and
development expenses and sales and marketing expenses that are incurred in one
quarter with revenue that is not received until a subsequent quarter when the
new product is introduced. In addition, our quarterly results may be affected
by fluctuations in our manufacturing yields as we begin volume production of
our products. If growth in our revenue does not outpace the increase in our
expenses, our results of operations could be seriously harmed. Due to these
and other factors, we believe that quarter-to-quarter comparisons of our
operating results will not be meaningful. You should not rely on our results
for one quarter as any indication of our future performance.
We do not expect to begin commercially shipping the first of our optical
networking products until the end of the fourth quarter of 2000 and our
success depends on the commercial acceptance of this product and the other
optical products we have under development
We do not expect to begin commercial shipments of our first optical
networking product until the end of the fourth quarter of 2000. Until we are
able to diversify our sales by introducing other products, our optical
networking revenues will be derived solely from sales of our athermal channel
filter. Our success will depend on the commercial acceptance of this channel
filter and our ability to develop and find customers for the additional
optical networking products we have under development. In the near term, we
expect that substantially all of our optical networking revenues will be
derived from a small number of products.
We expect that we will rely on a limited number of customers and that sales to
any single customer may vary significantly from quarter to quarter, which may
cause our operating results to fluctuate
We expect that our customer base will be limited and highly concentrated.
We also expect that sales to any single customer may vary significantly from
quarter to quarter. All of our revenue to date has been derived from the sale
of industrial optical sensing products and related services to one customer,
BP Exploration & Oil Inc.
8
and Amoco Production Company. Customers in the optical networking industry
tend to order large quantities of products on an irregular basis. This means
that customers who account for a significant portion of our net revenue in one
quarter may not place any orders in the succeeding quarter. These ordering
patterns may result in significant quarterly fluctuations in our revenue and
operating results. We do not expect that our customers will have any minimum
purchase obligations, and they may stop placing orders with us at any time,
regardless of any forecast they may have previously provided. Accordingly, any
downturn in our customers' business could significantly decrease sales of our
products to these customers. If current and future customers do not place
significant orders, or if we lose key customers without a corresponding
increase from other customers, our operating results would be harmed.
If we are unable to implement full-scale manufacturing capabilities for
optical networking products or expand our manufacturing capacity in a timely
manner when needed, we may have insufficient capacity, which will seriously
harm our revenue
We are currently in the process of completing our manufacturing
capabilities for full-scale production of optical networking products in our
facilities located in Wallingford, Connecticut. In addition, we plan to devote
significant resources to expanding our manufacturing capacity for optical
networking products in the future. We have no experience in manufacturing
optical networking products in commercial volumes or in rapidly increasing our
manufacturing capacity. We will be required to hire, train and manage
significant numbers of additional manufacturing personnel in order to develop
and increase our production capacity. There are numerous risks associated with
implementing full-scale production capabilities and rapidly increasing
capacity, including:
. the inability to procure and install the necessary equipment;
. lack of availability of manufacturing personnel;
. lack of availability of additional manufacturing facilities in desirable
locations on commercially reasonable terms;
. difficulties in achieving adequate yields from new manufacturing lines;
and
. the inability to match future order volumes with capacity.
If we are unable to develop or expand our manufacturing capacity in a
timely manner, we may have insufficient capacity, which will seriously harm
our business.
Because we depend on single or limited sources of supply for some of the
materials, components and equipment used to manufacture our products, we could
encounter difficulties in meeting scheduled product deliveries to our
customers, which could cause customers to cancel orders
We currently purchase several key materials and components used in our
products from single or limited sources of supply. We have no guaranteed
supply arrangements for any of these materials or components, which we
generally purchase through purchase orders. As a result, these suppliers could
terminate the supply of these materials and components at any time without
penalty. Our failure to obtain these materials and components or other single
or limited-source materials and components could delay or reduce our product
shipments, which could result in lost orders, increase our costs, reduce our
control over quality and delivery schedules or require us to redesign our
products. If a significant supplier became unable or unwilling to continue to
manufacture or ship materials or components in required volumes, we would have
to identify and qualify an acceptable replacement. A delay or reduction in
shipments caused by a need to identify and qualify replacement suppliers or a
significant increase in our need for materials or components that cannot be
met on acceptable terms could cause customers to cancel orders and would harm
our business.
We also depend on a limited number of manufacturers and vendors that make
and sell the complex equipment that we use in our manufacturing process, such
as lasers. In periods of high market demand, the lead times from order to
delivery of this equipment could be as long as nine months. Delays in the
delivery of this equipment or increases in the cost of this equipment could
harm our operating results.
9
If we fail to manage our inventory levels for our manufacturing facilities
effectively, we could incur additional costs or experience manufacturing
delays
Because we experience long lead times for materials and are often required
to purchase significant amounts of these items far in advance of product
shipments, we may not effectively manage our inventory levels. It is very
important that we accurately predict both the demand for our products and the
lead times required to obtain the necessary components and materials. Lead
times for components and materials that we order vary significantly and depend
on factors such as specific supplier requirements, the size of the order,
contract terms and current market demand for the components or materials at a
given time. For substantial increases in production levels, some suppliers may
need six months or more lead time. If we overestimate our component and
material requirements, we may have excess or obsolete inventory, which would
increase our costs. If we underestimate our component and material
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers, resulting
in the loss of orders or customers.
If we do not achieve acceptable manufacturing yields in a cost-effective
manner or achieve sufficient product reliability, our ability to ship products
to our customers could be delayed and our revenue may suffer
The manufacture of our products involves complex and precise processes.
Changes in our manufacturing processes or those of our suppliers, or their
inadvertent use of defective materials, could significantly reduce our
manufacturing yields and product reliability. The majority of our
manufacturing costs are relatively fixed. Accordingly, manufacturing yields
are critical to our results of operations. Lower than expected production
yields could delay product shipments and impair our gross margins. We cannot
assure you that we will achieve acceptable manufacturing yields in the future.
In some cases, existing manufacturing techniques involving substantial
manual labor may not allow us to meet our production goals cost-effectively.
We will need to develop new manufacturing processes and techniques that will
involve higher levels of automation to increase our gross margins and achieve
the price levels acceptable to our customers. However, we cannot assure you
that we can achieve manufacturing cost levels that will fully satisfy our
customer demands.
Because we plan to produce many of our products to meet the specifications
of our customers and to introduce new products and product enhancements
regularly, we must effectively transfer production information from our
product development department to our manufacturing group and coordinate our
efforts with those of our suppliers. If we fail to effectively manage this
process or if we experience delays, disruptions or quality control problems in
our manufacturing operations, our shipments of products to our customers could
be delayed, which could result in the loss of orders or customers.
If our customers do not qualify our products to be designed into their
products and systems, we could lose significant customer sales and
opportunities and may not be successful
Optical networking equipment manufacturers often undertake extensive
qualification processes prior to placing orders for large quantities of
products like ours, because these products must function as part of a larger
system or network. Once they decide to use a particular supplier's product or
component, these customers design the product into their system. Suppliers
whose products or components are not designed into a company's system are
unlikely to make sales to that company until at least the adoption of a future
redesigned system. Even then, many companies may be reluctant to design
entirely new products into their new systems, as it could involve significant
additional redesign efforts. If we fail in a potential customer's
qualification process, we will lose the opportunity for significant sales to
that customer for a lengthy period of time.
10
If our customers do not qualify our manufacturing lines for volume shipments,
they may not purchase our products and our operating results would suffer
Generally, optical networking equipment manufacturers do not purchase
products like ours, other than in limited numbers of evaluation units, prior
to qualification of the manufacturing line for volume production. Our existing
manufacturing lines, as well as each new manufacturing line, must pass through
varying levels of qualification with our customers. We have received ISO 9001
certification. ISO 9001 is a quality assurance standard that is accepted and
recognized worldwide and applies to industries involved in the design and
development, manufacturing, installation and servicing of products and
services. However, customers may also require that we be registered under
other quality standards, such as TL 9000, which is a quality assurance
standard specifically developed by and for the telecommunication industry.
This customer qualification process determines whether our manufacturing lines
meet the customers' quality, performance and reliability standards. If there
are delays in qualification of our manufacturing lines, our customers may drop
the product from a long-term supply program, which would result in significant
lost revenue opportunity over the term of that program.
We expect a lengthy and variable qualification and sales cycle for our optical
networking products, which will make it difficult to predict the timing or
probability of a sale and may cause us to have excess manufacturing capacity
or inventory
We expect our customers to expend significant efforts in evaluating and
qualifying our products and manufacturing process. This evaluation and
qualification process, which can be as long as five months, will likely result
in a lengthy sales cycle. While potential customers are evaluating our
products and before they place an order with us, we may incur substantial
sales and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long-lead-time
supplies prior to receiving an order. Even after this evaluation process, it
is possible that a potential customer will not purchase our products. In
addition, product purchases are frequently subject to unexpected delays. If we
increase capacity and order supplies in anticipation of an order that does not
materialize, our gross margins will decline and we will have to carry or write
off excess inventory. Even if we receive an order, the additional
manufacturing capacity that we add to service the customer's requirements may
be underutilized in a subsequent quarter. Either situation could cause our
results of operations to be below the expectations of investors and public
market analysts, which could, in turn, cause the price of our common stock to
decline. Our expected long sales cycles, as well as the practice of optical
networking equipment manufacturers to sporadically place large orders with
short lead times, may cause our revenue and operating results to vary
significantly and unexpectedly from quarter to quarter.
If we are unable to commit to deliver sufficient quantities of our products to
satisfy major customers' needs, we may not attract or retain orders and
customers
Optical networking equipment manufacturers typically require that suppliers
commit to provide specified quantities of products over a given period of
time. If we are unable to commit to deliver sufficient quantities of our
products to satisfy a customer's anticipated needs, we will lose the order and
the opportunity for significant sales to that customer for a lengthy period of
time. We need to increase manufacturing capacity significantly to enable us to
commit to provide a large number of customers with specified quantities of
products.
Our success depends upon our ability to develop and successfully introduce new
and enhanced products that meet the needs of our customers in a timely manner
Our success depends on our ability to anticipate our customers' needs and
develop products that address those needs. The optical networking industry is
characterized by rapid technological changes, frequent new product
introductions, changes in customer requirements and evolving industry
standards. We must continue to develop state-of-the-art products and introduce
them commercially in order to be successful. Introduction of new products and
product enhancements will require that we effectively transfer production
processes from research and development to manufacturing and coordinate our
efforts with the efforts of our suppliers to rapidly achieve
11
volume production. If we fail to effectively transfer production processes,
develop product enhancements or introduce new products that meet the needs of
our customers as scheduled, our revenue may decline.
We must substantially expand our sales staff in order to increase market
awareness and sales of our products or our revenue may not increase
The sale of our products will require long and involved efforts targeted at
several key departments within our prospective customers' organizations and
will require the prolonged efforts of executive personnel and applications
engineers working together with a number of dedicated salespersons. Currently,
our sales organization is limited. We will need to expand our sales force in
order to increase market awareness and sales of our products. Competition for
these individuals is intense, and we might not be able to hire the kind and
number of sales personnel and applications engineers we need. In addition, new
hires will take time to reach full productivity. If we are unable to expand
our sales operations, we may not be able to increase market awareness or sales
of our products, which would prevent us from increasing our revenue.
Our optical networking products will be deployed in large and complex systems
and may have defects that are not detected until after they have been
installed, which could damage our reputation, cause us to lose customers and
result in substantial costs
Our optical networking products are designed to be deployed in large and
complex optical networks. Because of the nature of these products, they can
only be fully tested for reliability when deployed in networks for long
periods of time. These products may contain undetected defects when first
introduced or as new versions are released, and our customers may discover
defects in our products only after they have been fully deployed and operated
under peak stress conditions. In addition, our products are combined with
products from other vendors. As a result, should problems occur, it may be
difficult to identify the source of the problem. If we are unable to fix
defects or other problems, we could experience, among other things:
. loss of customers;
. loss of revenue;
. damage to our brand reputation;
. failure to attract new customers or achieve market acceptance;
. increased service, warranty and insurance costs;
. diversion of development and engineering resources; and
. legal actions by our customers.
Although we carry product liability insurance, our insurance may not cover
all claims brought as a result of defective products and it may not be
adequate to indemnify us for all liability that may be imposed as a result of
defective products.
If we fail to manage our growth effectively, our business may not succeed
Our ability to offer our products and successfully implement our business
plan in a rapidly evolving market requires an effective planning and
management process. We plan to continue to expand the scope of our operations
and have increased the number of our employees substantially in the past
twelve months. As of October 31, 1999 we had a total of 127 employees and as
of October 31, 2000, we had grown to a total of 312 employees. We plan to hire
a significant number of employees over the next few quarters. We currently
have facilities in Wallingford, Connecticut and Houston, Texas. If we outgrow
our current facilities, we will need to locate and obtain additional space.
The commercial real estate market is extremely competitive and we may not be
able to obtain additional needed space on reasonable terms, or at all. Our
failure to obtain additional space could adversely impact our ability to
expand our business and operations and increase our revenue. The increase
12
in employees and the growth in our operations, has placed, and will continue
to place, a significant strain on our management systems and resources. We
expect that we will need to continue to improve our financial and managerial
controls, reporting systems and procedures and continue to expand, train and
manage our work force. The failure to effectively manage our growth could
adversely impact our ability to manufacture and sell our products, which could
reduce our revenue.
We may experience increased competition, which could reduce our sales and
gross margins, or cause us to lose market share
Competition in the optical networking product market in which we compete is
intense. We face competition from many companies, including Avanex
Corporation, Corning Incorporated, JDS Uniphase Corporation, Lucent
Technologies Inc., New Focus, Inc. and Nortel Networks Corporation. Additional
competitors may enter the market, and we are likely to compete with new
companies in the future. Many of our competitors are large public companies
that have longer operating histories and significantly greater financial,
technical, marketing and other resources than we have. As a result, these
competitors are able to devote greater resources than we can to the
development, promotion, sale and support of their products. In addition,
several of our competitors have large market capitalizations or cash reserves,
and are much better positioned than we are to acquire other companies in order
to gain new technologies or products that may displace our product lines. For
example, JDS Uniphase Corporation recently acquired E-Tek Dynamics and
announced the acquisition of SDL, Inc. These and similar acquisitions could
give our competitors a strategic advantage. In addition, potential customers
may be acquired by our competitors, in which case they would be less likely to
purchase products from us. Alternatively, some of our competitors may spin-out
new companies in the optical networking components market. For example, Lucent
Technologies recently announced that it will spin-off its microelectronics
business, which includes the optoelectronics components and integrated
circuits division. These companies may compete more aggressively than their
former parent companies due to their greater dependence on our markets. Many
of our potential competitors have significantly more established sales and
customer support organizations than we do. In addition, many of our
competitors have much greater name recognition, more extensive customer bases,
better developed distribution channels and broader product offerings than we
have. These companies can take advantage of their customer bases and broader
product offerings and adopt aggressive pricing policies to gain market share.
We expect to encounter potential customers that, due to existing relationships
with our competitors, are committed to the products offered by these
competitors. As a result of the foregoing factors, competitive pressures may
result in price reductions, reduced margins and loss of market share.
We depend on a number of key personnel to manage our business effectively, and
if we are unable to hire additional qualified personnel or retain existing
personnel, our ability to sell our products could be harmed
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and
support personnel, particularly F. Kevin Didden, our President and Chief
Executive Officer, Faye A. Iseley, our Vice President, Chief Financial
Officer, Alan D. Kersey, Ph.D., our Vice President, Chief Technology Officer,
and John V. Viega, our Vice President, Operations. Although these officers
have entered into employment agreements, they may terminate these agreements
without notice. The loss of the services of any of these individuals or any of
our other senior management or key employees could seriously impair our
ability to operate.
In order to implement our business plan, we must hire a significant number
of additional employees, particularly engineering, sales and manufacturing
personnel. Our ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining whether we will be
successful. Competition for highly skilled personnel is intense. We may not be
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs, which could adversely impact our ability
to manufacture and sell our products.
13
If we are unable to protect and enforce our intellectual property rights, we
may be unable to compete effectively
Our ability to compete successfully and achieve future growth will depend,
in part, on our ability to protect our intellectual property rights relating
to our optical networking products. We attempt to protect our proprietary
technology by relying on patent, trademark, service mark, copyright and trade
secret laws. As of October 31, 2000, we owned two U.S. patents and had 30
pending U.S. patent applications and ten pending foreign patent applications
for technology related to our optical networking products. We cannot assure
you, however, that the patent applications that we have filed will be
approved, that any patents that may issue will protect our intellectual
property or that any patents issued will not be challenged by third parties.
Furthermore, other parties may independently develop similar or competing
technology or design around any patents that may be issued to us. We also rely
on confidentiality procedures and contractual provisions with our employees,
consultants and corporate partners. The steps we take to protect our
intellectual property may be inadequate, time consuming and expensive. Despite
our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property, which could harm our business.
Necessary licenses of third-party technology may not be available to us or may
be very expensive, making it difficult or impossible to develop new products
and product enhancements
In the future, we may be required to license technology from third parties
to sell existing products if it is determined that our existing products
infringe upon a third party's intellectual property. From time to time we may
also be required to license third-party technology to develop new products or
for product enhancements. We cannot assure you that third-party licenses will
be available to us on commercially reasonable terms, if at all. The inability
to obtain any required third-party license could require us to obtain or
develop substitute technology of lower quality or performance standards or at
greater cost, either of which could prevent us from operating our business.
We may become subject to intellectual property litigation, which could divert
management attention, cause us to incur significant costs and prevent us from
selling our products
There has recently been significant litigation in the United States
involving patents and other intellectual property rights. There has been, and
we expect that there will continue to be, an increasing amount of this
litigation in our industry. Many patent holders aggressively use their patent
portfolios to realize the value of their proprietary rights or to bring
infringement claims against their competitors. We have occasionally been
contacted by patent holders regarding our interest in licensing their patents,
and we may in the future receive claims that we are infringing on the patent
rights of third parties. As a result, third parties may bring litigation
against us alleging infringement of their intellectual property rights. These
claims and any resulting lawsuits, if successful, could subject us to
significant liability for damages and invalidation of our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming
and expensive to resolve and would consume management time and divert
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 commercially reasonable terms, or at all; or
. redesign the products so that they no longer use the challenged
technology.
If we are forced to take any of these actions, our business may be
seriously harmed. Although we believe we carry adequate general liability
insurance given the intellectual property risks to which we are exposed, we
cannot assure you that our insurance will be adequate to indemnify us for all
liability that may be imposed.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
14
We may face risks associated with international sales that could harm our
financial condition and results of operations
We plan to increase our international sales activities. Our international
sales will be limited if we cannot establish relationships with international
distributors, establish foreign sales operations and develop international
sales channel management, hire personnel and develop relationships with
international service providers. In addition, in the future we may choose to
expand our manufacturing capabilities by opening manufacturing facilities
overseas. Even if we are able to successfully establish international
operations, we may not be able to maintain or increase international market
demand for our products. Our international operations will be subject to the
following risks:
. greater difficulty in accounts receivable collection and longer
collection periods;
. difficulties and costs of staffing and managing foreign operations;
. the impact of recessions in economies outside the United States;
. unexpected changes in regulatory requirements;
. export restrictions;
. trade barriers;
. political instability; and
. potential adverse tax consequences.
While we expect our international revenue and expenses to be predominantly
in U.S. dollars, a portion of our international revenue and expenses may be
denominated in foreign currencies in the future. Accordingly, we could
experience the risks of fluctuating currencies and may choose to engage in
currency hedging activities to reduce these risks.
We may need additional financing for our future capital needs, which we may
not be able to obtain
Because of our expected negative cash flow, we may need to raise additional
funds in the future, which we may not be able to do. Based on our current
operating plans, we anticipate that the net proceeds from this offering,
together with available funds, will be sufficient to meet our anticipated
needs for at least 12 months following this offering. We may need additional
financing sooner if we:
. decide to expand faster than planned;
. develop new or enhanced products ahead of schedule;
. fail to achieve our anticipated levels of revenue;
. need to respond more quickly than anticipated to competitive pressures;
or
. decide to acquire complementary products, businesses or technologies.
We may not be able to raise additional funds on terms favorable to us, or
at all. If future financing is not available or is not available on acceptable
terms, we may not be able to fund our future needs, which would seriously harm
our business and results of operations. In addition, if we raise additional
funds through the sale of equity or convertible debt securities, your
percentage ownership will be reduced. These transactions may dilute the value
of the stock outstanding. We may also have to issue securities that have
rights, preferences and privileges senior to our common stock.
15
Risks Related to Our Industry
If the Internet does not continue to expand and next-generation optical
networks are not deployed to satisfy the increased bandwidth requirements as
we anticipate, demand for our optical networking products may decline
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communications, the continuing increase in
the amount of data transmitted over communications networks, and the emergence
of next-generation optical networks to meet the increased demand for
bandwidth. If the Internet does not continue to expand as a widespread
communications medium and commercial marketplace, the need for significantly
increased bandwidth across networks and the market for our optical networking
products may not develop. Future demand for our products is uncertain and will
depend to a great degree on the continued growth and upgrading of optical
networks. If this growth does not continue, demand for our products may
decline, which would adversely affect our revenue.
The optical networking product market is new and unpredictable, and if this
market does not develop and expand as we anticipate, demand for our optical
networking products may decline
The optical communications market is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is new, it
is difficult to predict its potential size or future growth rate. Widespread
adoption of optical networks is critical to our future success. Communications
providers and other end-users of networking equipment who have invested
substantial resources in their existing copper lines or other systems may be
reluctant or slow to adopt a new approach, like optical networks. Our success
in generating revenue in this emerging market will depend on:
. developing, maintaining and enhancing our relationships with customers;
. educating our potential customers about how our optical components can
be used to build next-generation optical networks; and
. our ability to accurately develop and manufacture our products to meet
industry standards.
The optical networking component, module and subsystem industry is
experiencing declining average selling prices, which could cause our gross
margins to decline and harm our operating results
The optical networking component, module and subsystem industry is
experiencing declining average selling prices as a result of increasing
competition and greater unit volumes as communications service providers
continue to deploy optical networks. We anticipate that average selling prices
will continue to decrease in the future in response to product introductions
by competitors, price pressures from significant customers and greater
manufacturing efficiencies achieved through increased automation in the
manufacturing process. These price declines may contribute to a decline in our
gross margins, which could harm our results of operations.
Risks Related to the Securities Markets and this Offering
There may be sales of a substantial amount of our common stock as soon as 90
days after this offering by our current stockholders, and these sales could
cause our stock price to fall
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Our executive
officers, directors and substantially all of our stockholders, who hold an
aggregate of shares of our common stock, or over % of our total
outstanding shares, have executed lock-up agreements that prevent them from
selling or otherwise disposing of our common stock for a period of 180 days
from the date of this prospectus, without the prior written approval of Morgan
Stanley & Co. Incorporated. When these lock-up agreements expire, an aggregate
of shares will be eligible for sale, in some cases subject only to the
volume, manner of sale and notice requirements of Rule 144 under the
Securities
16
Act. Morgan Stanley & Co. Incorporated, however, may in its sole discretion,
at any time without notice, release all or any portion of the shares subject
to lock-up agreements.
Notwithstanding the 180-day lock-up period, 25% of the locked-up shares,
excluding shares held by our executive officers but including shares held
by our directors, may be released from these restrictions beginning 90 days
from the date of this prospectus. This release will occur if the last reported
sale price of our common stock is at least two times the initial public
offering price per share for 20 of the 30 trading days (including the 30th
day) preceding the 90th day after the date of this prospectus. Of these shares
to be released, shares will be eligible for sale, in some cases subject
only to the volume, manner of sale and notice requirements of Rule 144. Sales
of a substantial number of shares of our common stock after this offering
could cause our stock price to fall. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional
stock.
Future issuances of preferred stock may dilute the rights of our common
stockholders
Our board of directors will have the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, privileges and
other terms of these shares. The board of directors may exercise this
authority without the approval of the stockholders. The rights of the holders
of common stock may be adversely affected by the rights of the holders of any
preferred stock that may be issued in the future.
Anti-takeover provisions of Delaware law and our charter could make a third-
party acquisition of us difficult
Because we are a Delaware corporation, the anti-takeover provisions of
Delaware law could make it more difficult for a third party to acquire control
of us, even if the change in control would be beneficial to stockholders. We
are subject to the provisions of Section 203 of the General Corporation Law of
Delaware. Section 203 will prohibit us from engaging in business combinations,
unless the business combination is approved in a prescribed manner.
Accordingly, Section 203 may discourage, delay or prevent someone from
acquiring or merging with us. In addition, our restated certificate of
incorporation and bylaws also contain provisions that may make a third party
acquisition of us difficult, including:
. a classified board of directors, with three classes of directors each
serving a staggered three-year term;
. the ability of the board of directors to issue preferred stock; and
. the inability of our stockholders to call a special meeting or act by
written consent.
Insiders will continue to have substantial control over us after this offering
and could delay or prevent a change in our corporate control, which may
negatively affect your investment
We anticipate that our executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
50.6% of our outstanding common stock following the completion of this
offering. These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by our stockholders, including
the election of directors and the approval of mergers or other business
combination transactions.
Our management will have broad discretion as to the use of proceeds from this
offering
Our management will have broad discretion in the application of the net
proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
17
There has been no prior market for our common stock and a public market for
our securities may not develop or be sustained, which could make it more
difficult for you to sell your stock
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the
initial public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade subsequent to
the completion of this offering. The initial public offering price will be
determined based on negotiations between us and the representatives of the
underwriters, based on factors that may not be indicative of future market
performance.
You will experience immediate dilution in the book value per share of the
common stock you purchase
Because the price per share of our common stock being offered is
substantially higher than the book value per share of our common stock, you
will suffer substantial dilution in the net tangible book value of the common
stock you purchase in this offering. Based on an assumed initial public
offering price of $15.00 per share, if you purchase shares of common stock in
this offering, you will suffer immediate and substantial dilution of $11.72
per share in the net tangible book value of the common stock. As a result, the
value of your investment based on the value of our net tangible assets,
recorded on our balance sheet will be $3.28 per share, which is substantially
less than you will pay for shares of common stock in this offering. See
"Dilution" for a more detailed discussion of the dilution you will incur in
this offering.
We expect to experience significant volatility in our stock price, which could
cause you to lose all or part of your investment
We expect the market price of our common stock to fluctuate significantly
in response to a number of company specific factors, some of which are beyond
our control, including:
. quarterly variations in our operating results;
. changes in financial estimates by securities analysts;
. changes in market valuations of optical networking companies;
. announcements by our competitors of new products or of significant
acquisitions, strategic partnerships or joint ventures;
. any loss by us of a major customer;
. additions or departures of key management or engineering personnel;
. any deviations in our net revenue or in losses from levels expected by
securities analysts;
. future sales of our common stock; and
. fluctuations in the trading volume of our common stock, which are
particularly common among highly volatile securities of optical
networking companies.
The market prices for stocks in optical networking companies, particularly
following an initial public offering, frequently increase to levels that bear
no relationship to their operating performance. If our common stock
experiences such an increase, the increase will likely not be sustainable and
our stock price can be expected to fluctuate significantly.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. These statements relate to future events or our future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. Those factors include, among
other things, those listed under "Risk Factors" and elsewhere in this
prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 6,700,000 shares of
common stock in this offering will be approximately $92.4 million after
deducting estimated offering expenses of approximately $1.1 million and
underwriting discounts and commissions and assuming an initial public offering
price of $15.00 per share. If the over-allotment option is exercised in full,
we estimate that our net proceeds will be approximately $106.4 million.
As of September 30, 2000, we had approximately $86.5 million in cash, cash
equivalents and marketable securities. The principal purposes of this offering
are to obtain additional capital to fund our expected future growth, to create
a public market for our common stock and to facilitate future access by us to
public equity markets. Accordingly, our management will have broad discretion
as to the use of proceeds from this offering. We currently anticipate that we
may use the proceeds of this offering for general corporate purposes,
including capital expenditures, product research and development activities,
working capital and expansion of our sales and marketing operations. We have
not determined the amounts we may spend on any of these purposes or the timing
of any expenditures, and we may allocate the net proceeds among these
purposes, or other purposes, as we deem necessary or appropriate. The amounts
that we actually expend for these and other purposes will vary significantly
depending on a number of factors, including future revenue growth, if any, and
the amount of cash that we generate from operations. A portion of the net
proceeds may also be used to acquire products, technologies or businesses that
are complementary to our current and future business and product lines. We
have no current plans, agreements or commitments for acquisitions of any
businesses, products or technologies. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
Since April 28, 2000, we have been obligated to pay a cash dividend of $.24
per year on each outstanding share of our Series A preferred stock. On
November 10, 2000, we paid a cash dividend of $130,800 for the period from
April 28, 2000 through September 30, 2000 pursuant to this obligation. This
obligation will end upon the completion of this offering, when all outstanding
shares of Series A preferred stock will be converted into common stock. We
have never paid or declared any cash dividends on our common stock. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We intend to retain all available funds and any future earnings to
fund the development and expansion of our business.
19
CAPITALIZATION
The following table presents the following information:
. our actual capitalization as of September 30, 2000;
. our pro forma capitalization reflecting the conversion of all
outstanding shares of preferred stock into 38,995,680 shares of common
stock upon the closing of this offering; and
. our pro forma as adjusted capitalization reflecting the sale of the
6,700,000 shares of common stock in this offering at an assumed initial
public offering price of $15.00 per share after deducting underwriting
discounts and commissions and estimated offering expenses.
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements
and notes to those financial statements appearing elsewhere in this
prospectus.
As of September 30, 2000
--------------------------
Pro
Pro Forma As
Actual Forma Adjusted
------- ------- --------
(in thousands, except
share data)
(unaudited)
Long-term debt (net of current portion)............ $ 2,250 $ 2,250 $ 2,250
------- ------- --------
Mandatorily redeemable convertible preferred stock,
$.01 par value; 7,020,000 shares authorized,
6,499,280 shares issued and outstanding actual;
7,020,000 shares authorized, no shares issued and
outstanding pro forma; no shares authorized,
issued and outstanding pro forma as adjusted...... 150,540 -- --
------- ------- --------
Stockholders' Equity:
Common stock, $.001 par value; 62,720,000 shares
authorized, 11,724,353 shares issued and
outstanding actual; 62,720,000 shares authorized,
50,720,033 shares issued and outstanding pro
forma; 300,000,000 shares authorized, 57,420,033
shares issued and outstanding pro forma as
adjusted.......................................... 12 51 58
Additional paid-in capital......................... 18,886 169,387 261,795
Loans to officers.................................. (1,075) (1,075) (1,075)
Deferred compensation.............................. (11,985) (11,985) (11,985)
Accumulated deficit................................ (60,542) (60,542) (60,542)
------- ------- --------
Total stockholders' (deficit) equity............. (54,704) 95,836 188,251
------- ------- --------
Total capitalization........................... $98,086 $98,086 $190,501
======= ======= ========
The outstanding share information excludes:
. 3,475,164 shares of common stock issuable upon the exercise of stock
options outstanding as of October 31, 2000 at a weighted average
exercise price of $3.11 per share;
. 335,000 shares of common stock issuable upon the exercise of warrants
outstanding as of October 31, 2000 at an exercise price equal to the
initial public offering price;
. 1,680,245 shares of common stock reserved for future awards under our
stock plans; and
. 500,000 shares of common stock reserved for issuance under our 2000
Employee Stock Purchase Plan, which will become effective upon
completion of this offering.
20
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share
of our common stock and the pro forma net tangible book value per share of our
common stock after this offering. We calculate pro forma net tangible book
value per share by dividing the net tangible book value, tangible assets less
total liabilities, by the number of outstanding shares of common stock.
Our pro forma net tangible book value at September 30, 2000, was $95.8
million, or $1.89 per share, based on 50,720,033 shares of our common stock
outstanding after giving effect to the conversion of all outstanding shares of
our preferred stock into common stock upon the closing of this offering. After
giving effect to the sale of 6,700,000 shares of common stock by us at an
assumed initial public offering price of $15.00 per share, less the
underwriting discounts and commissions and our estimated offering expenses,
our pro forma net tangible book value at September 30, 2000, would be $188.2
million, or $3.28 per share. This represents an immediate increase in the pro
forma net tangible book value of $1.39 per share to existing stockholders and
an immediate dilution of $11.72 per share to new investors purchasing shares
at an assumed initial public offering price of $15.00 per share. The following
table illustrates this per share dilution:
Assumed initial public offering price per share................... $15.00
Pro forma net tangible book value per share as of September 30,
2000........................................................... $1.89
Increase per share attributable to new investors................ 1.39
-----
Pro forma net tangible book value per share after this offering... 3.28
------
Dilution per share to new investors............................... $11.72
======
The following table shows on a pro forma basis at September 30, 2000, after
giving effect to the conversion of all outstanding shares of our preferred
stock into an aggregate of 38,995,680 shares of common stock upon the closing
of this offering the difference between the number of shares of common stock
purchased from us, the total consideration paid to us and the average price
paid per share by existing stockholders and by new investors purchasing common
stock in this offering:
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
Existing stockholders......... 50,720,033 88.3% $152,431,507 60.3% $ 3.01
New investors................. 6,700,000 11.7 100,500,000 39.7 $15.00
---------- ----- ------------ -----
Total....................... 57,420,033 100.0% $252,931,507 100.0%
========== ===== ============ =====
Assuming the underwriters' over-allotment option is exercised in full,
sales by us in this offering will reduce the percentage of shares held by
existing stockholders to 86.8% and will increase the number of shares held by
new investors to 7,705,000, or 13.2%. This information is based on shares
outstanding as of September 30, 2000. It excludes:
. 3,475,164 shares of common stock issuable upon the exercise of stock
options outstanding as of October 31, 2000 at a weighted average
exercise price of $3.11 per share;
. 335,000 shares of common stock issuable upon the exercise of warrants
outstanding as of October 31, 2000 at an exercise price equal to the
initial public offering price;
. 1,680,245 shares of common stock reserved for future awards under our
stock plans; and
. 500,000 shares of common stock reserved for issuance under our 2000
Employee Stock Purchase Plan, which will become effective upon
completion of this offering.
To the extent these options or warrants are exercised, there will be
further dilution to the new investors.
21
SELECTED FINANCIAL DATA
The selected statement of operations data for each of the years ended
December 31, 1997, 1998 and 1999, and the selected balance sheet data as of
December 31, 1998 and 1999, have been derived from the audited financial
statements included elsewhere in this prospectus, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected statement of
operations data for the nine months ended September 30, 1999 and 2000, and the
selected balance sheet data as of September 30, 2000, have been derived from
our unaudited financial statements included elsewhere in this prospectus. The
selected statement of operations data for the period from inception (August 7,
1996) through December 31, 1996 and the selected balance sheet data as of
December 31, 1996 and 1997 have been derived from our audited financial
statements not included in this prospectus. The selected balance sheet data as
of September 30, 1999 have been derived from our unaudited financial
statements not included in this prospectus. Our historical results are not
necessarily indicative of results to be expected for any future period. The
data presented below have been derived from financial statements that have
been prepared in accordance with generally accepted accounting principles and
should be read with our financial statements, including the related notes, and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this prospectus.
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
Period from
Inception
(August 7, 1996)
through
December 31, 1996 1997 1998 1999 1999 2000
----------------- ------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ -- $ 468
Operating expenses:
Production costs...... -- -- -- 136 -- 2,196
Research and
development.......... 95 1,484 9,270 15,773 11,662 14,606
Sales and marketing... -- 86 947 1,594 993 1,796
General and
administrative....... 144 848 3,000 3,414 2,381 4,594
Deferred
compensation......... -- -- -- 574 311 2,770
------- ------- -------- -------- -------- --------
Total operating
expenses........... 239 2,418 13,217 21,491 (15,347) 25,962
------- ------- -------- -------- -------- --------
Loss from operations.... (239) (2,418) (13,217) (21,491) (15,347) (25,494)
Other income, net....... -- 43 502 435 321 1,468
------- ------- -------- -------- -------- --------
Net loss................ (239) (2,375) (12,715) (21,056) (15,026) (24,026)
Dividends on preferred
stock.................. -- -- -- -- -- 131
------- ------- -------- -------- -------- --------
Net loss attributable to
common stockholders.... $ (239) $(2,375) $(12,715) $(21,056) $(15,026) $(24,157)
======= ======= ======== ======== ======== ========
Basic and diluted net
loss per share
attributable to
common stockholders.. $ (.04) $ (.72) $ (3.33) $ (3.39) $ (2.53) $ (2.85)
======= ======= ======== ======== ======== ========
Shares used in
computing basic and
diluted net loss per
share attributable to
common stockholders.. 6,308 3,316 3,818 6,209 5,937 8,468
======= ======= ======== ======== ======== ========
Pro forma basic and
diluted net loss per
common share
(unaudited).......... $ (.59) $ (.56)
======== ========
Shares used in
computing pro forma
net loss per common
share (unaudited).... 35,798 43,305
======== ========
As of
As of December 31, September 30,
------------------------------------ -----------------
1996 1997 1998 1999 1999 2000
------ ------- -------- --------- -------- -------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 18 $ 357 $ 4,497 $ 16,625 $ 22,434 $86,454
Working capital
(deficit).............. (223) (230) 3,645 12,940 20,615 75,051
Total assets............ 27 1,382 10,941 25,430 31,318 114,491
Long-term debt, less
current portion........ -- -- 3,691 2,116 5,734 2,250
Mandatorily redeemable
preferred stock........ -- 3,313 20,640 52,263 52,263 150,540
Total stockholders'
deficit................ (223) (2,598) (15,127) (35,461) (29,714) (54,704)
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data"
and our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may
differ materially from those anticipated in these forward-looking statements
as a result of factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this prospectus.
Overview
We design, manufacture and market high-precision component, module and
subsystem products, based upon our proprietary technology, for next-generation
optical networks. We were incorporated in August 1996. During the period from
our inception through December 31, 1999, we had no revenue. Our operating
expenses during this period related primarily to development of products,
building our corporate infrastructure and raising capital. From late 1996
until the first quarter of 2000 we focused on the development of industrial
optical sensing products for the oil and gas industry. The technology we
originally developed for these sensing applications, where stability and
tunability in demanding environments were critical factors, provided us the
platform to develop products for the optical networking industry. We believe
the market opportunity for our optical networking products in the
telecommunication industry is significantly greater than the opportunity for
our industrial sensing products in the oil and gas industry. Accordingly, in
the first quarter of 2000, we shifted the principal focus of our business to
the development of optical networking products to be sold to major suppliers
of optical networking equipment.
Revenue. We first recognized revenue during the nine months ended September
30, 2000 from the sale of industrial optical sensing products and related
services. From our inception through December 31, 1999, we had no revenue. In
the third quarter of 2000, we received three purchase orders for our optical
networking products. We expect that as we increase our focus on the
development and marketing of optical networking products, an increasing
percentage of our revenue will be derived from the sale of optical networking
products and eventually a substantial majority of our revenue will be derived
from the sale of these products.
Production Costs. Our production costs consist of raw materials, direct
labor and manufacturing overhead, including contract manufacturing. Production
costs also include general operating expenses related to the development and
set-up of the manufacturing process for our products.
Research and Development. Research and development expenses consist
primarily of salaries and related personnel costs, facilities costs, material
costs and other expenses related to the design, development, testing and
enhancements of our products. We expense our research and development costs as
they are incurred. We believe that a significant level of investment for
product research and development is critical to achieving current and future
product objectives. Accordingly, we expect to continue to devote substantial
resources to product research and development, and we expect our research and
development expenses to continue to increase over the near term.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related personnel costs, trade shows and other
marketing programs and events and travel expenses. We intend to expand our
sales and marketing operations for our optical networking products, both
domestically and internationally, in order to increase market awareness and to
generate sales of our products.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, accounting,
legal, and human resources personnel, allocated facilities expenses,
recruiting expenses, professional fees and other corporate expenses. We expect
general and administrative
23
expenses to increase as we add personnel and incur additional costs related to
the growth of our business and our operation as a public company.
Deferred Compensation. In connection with the grant of stock options to our
employees, directors and consultants, we recorded gross deferred compensation
of approximately $15.3 million through September 30, 2000, representing the
difference between the estimated fair market value of the common stock for
accounting purposes and the option exercise price of these options at the date
of grant. These amounts are being amortized using the accelerated attribution
method over the related vesting period of the stock options, which is
generally four years from the date of grant.
Other Income. Other income includes rental income and income from an equity
investment in an affiliate.
Since our inception we have incurred losses, and as of September 30, 2000
we had an accumulated deficit of approximately $60.5 million. In view of our
limited operating history, our recent focus on the development of optical
networking products and the rapidly changing nature of our business, we
believe that period-to-period comparisons of revenue and operating results are
not necessarily meaningful and should not be relied upon as indications of our
future performance. We cannot assure you that we will be successful in
generating sales of our optical networking products. Our prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies at an early stage of development, particularly companies in new and
rapidly evolving markets.
Results of Operations
Nine months ended September 30, 2000 compared to nine months ended September
30, 1999
Revenue. We had revenue of $468,000 for the nine-month period ended
September 30, 2000. We had no revenue in the nine months ended September 30,
1999. All of our revenue was generated from one customer and represented sales
of our industrial optical sensing products and related services. In the
future, we expect that revenue from the sale of our optical networking
products will represent an increasing percentage of our revenue and will
eventually represent the substantial majority of our revenue.
Production Costs. Production costs were $2.2 million for the nine-month
period ended September 30, 2000. We incurred no production costs for the nine
months ended September 30, 1999. The amounts in 2000 reflect costs associated
with manufacturing and delivering our optical sensing products and services.
We expect to incur production costs in excess of revenue in the near term
while we have excess manufacturing capacity and as we refine our manufacturing
processes.
Research and Development. Research and development expenses increased to
$14.6 million for the nine months ended September 30, 2000 from $11.7 million
for the nine months ended September 30, 1999. The increase in expenses was
primarily due to salary and benefits attributable to the hiring of additional
personnel related to the development of new optical networking products.
Sales and Marketing. Sales and marketing expenses increased to $1.8 million
for the nine months ended September 30, 2000 from $993,000 for the nine months
ended September 30, 1999. The increase was primarily attributable to salaries,
benefits and related costs due to the hiring of additional personnel and other
marketing related costs.
General and Administrative. General and administrative expenses increased
to $4.6 million for the nine months ended September 30, 2000 from $2.4 million
for the nine months ended September 30, 1999. This increase was due to an
increase in salaries, benefits and related costs due to the addition of
personnel and other administrative costs.
Deferred Compensation. We recognized deferred compensation expense of $2.8
million for the nine months ended September 30, 2000 and $311,000 for the nine
months ended September 30, 1999. As of September 30, 2000, we had an
unamortized deferred compensation balance of $12.0 million. The deferred
compensation expense relates to options awarded to employees, consultants and
directors.
24
Interest Income. Interest income increased to $2.1 million for the nine
months ended September 30, 2000 from $687,000 for the nine months ended
September 30, 1999. This increase was primarily due to increased cash, cash
equivalents and marketable securities balances as a result of investing the
proceeds from the issuance of our Series D preferred stock.
Interest Expense. Interest expense increased to $615,000 for the nine
months ended September 30, 2000 from $385,000 for the nine months ended
September 30, 1999. The increase is due to interest incurred on incremental
amounts borrowed in 2000.
Other Income. Other income increased from $19,000 for the nine months ended
September 30, 1999 to $24,000 for the nine months ended September 30, 2000.
The increase is due to increased equity earnings received from an affiliate.
Years ended December 31, 1997, 1998 and 1999
Revenue. We recognized no revenue in the years ended December 31, 1997,
1998 and 1999.
Production Costs. Production costs were $136,000 in 1999. These costs
represent expenses related to the development and set-up of the manufacturing
process for our products. We had no production costs in 1997 and 1998.
Research and Development. Research and development expenses increased from
$1.5 million in 1997 to $9.3 million in 1998 and to $15.8 million in 1999.
These increases were primarily due to salaries and related benefits, material
purchases and allocated facility expenses for our optical sensing products.
Sales and Marketing. Sales and marketing expenses increased from $86,000 in
1997 to $947,000 in 1998 and to $1.6 million in 1999. These increases were
primarily attributable to salaries, benefits and related costs due to the
hiring of additional personnel and travel expenses and other marketing related
costs.
General and Administrative. General and administrative expenses increased
from $848,000 in 1997 to $3.0 million in 1998 and to $3.4 million in 1999.
These increases were primarily due to an increase in salaries, benefits and
related costs due to the addition of personnel and other administrative costs.
Deferred Compensation. We recognized deferred compensation expense of
$574,000 in 1999 related to options awarded to employees, consultants and
directors. We recognized no deferred compensation expenses in 1997 and 1998.
Interest Income. Interest income increased from $50,000 in 1997 to $497,000
in 1998 and increased to $874,000 in 1999. The increase from 1997 to 1998 and
from 1998 to 1999 was due to earnings on a higher cash and cash equivalents
balance.
Interest Expense. Interest expense increased from $7,000 in 1997 to $80,000
in 1998 and to $513,000 in 1999. The increase from 1997 to 1998 and from 1998
to 1999 was due to an increase in outstanding debt.
Other Income. Other income increased from $0 in 1997 to $85,000 in 1998.
This increase is due to the receipt of equity earnings of an affiliate. Other
income decreased from $85,000 in 1998 to $74,000 in 1999. This decrease
results from lower equity earnings of an affiliate.
Liquidity and Capital Resources
Since inception we have financed our operations, capital expenditures and
working capital through private sales of convertible preferred stock, bank
debt and equipment financing. Our cash, cash equivalents and marketable
securities increased from $4.5 million as of December 31, 1998 to $16.6
million as of December 31, 1999 to $86.5 million as of September 30, 2000. The
increase was primarily due to cash generated from financing activities,
including the receipt of approximately $100 million in gross proceeds from the
sale of our Series D preferred stock on June 20, 2000.
25
Net cash used in operating activities was $2.0 million, $12.0 million and
$18.2 million for the years ended December 31, 1997, 1998 and 1999,
respectively, and $16.4 million for the nine months ended September 30, 2000.
This use of cash was primarily attributable to net losses in each period,
partially offset by an increase in accounts payable and accrued expenses and
depreciation and amortization.
Cash used in investing activities was $936,000, $3.5 million and $2.6
million in the years ended December 31, 1997, 1998 and 1999, respectively, and
$43.3 million in the nine-month period ended September 30, 2000. In each of
these periods, other than $30.8 million invested in marketable securities
during the nine months ended September 30, 2000, cash was used primarily to
purchase equipment.
Cash generated by financing activities was $3.3 million, $19.7 million and
$32.9 million for the years ended 1997, 1998 and 1999, respectively, and $98.7
million in the nine months ended September 30, 2000. In each of these periods,
cash was generated primarily from the sale of our preferred stock. In April
and August of 1997, we completed a private placement of 1,275,161 shares of
Series A preferred stock for an aggregate purchase price of $3.4 million. In
February 1998, we completed a private placement of 2,489,272 shares of Series
B preferred stock for an aggregate purchase price of $17.4 million. In April,
June and July of 1999, we completed a private placement of an aggregate of
1,624,225 shares of Series C preferred stock for an aggregate purchase price
of $31.7 million. In June 2000, we completed a private placement of 1,110,622
shares of Series D preferred stock for an aggregate purchase price of $100.0
million.
In December 1998, we entered into a $5.0 million revolving credit facility
with a bank, which bears interest at the bank's prime rate (9.5% at September
30, 2000) plus .125%. Under this facility, we are required to comply with
various financial and other covenants, including a requirement that we
maintain our account balances with this bank at least equal to the outstanding
principal under the loan. However, in the event that we maintain at least 90%
of our cash and cash equivalents in this bank, we shall only be required to
maintain account balances with this bank at least equal to 50% of the
outstanding principal amount under the loan. This facility is secured by all
of our tangible personal property and some intangible personal property,
subject only to the security interests under the master loan and security
agreement discussed below. No commitment fees are due on unused portions of
the facility. As of September 30, 2000, we owed $3.5 million under this
facility. Our right to borrow additional amounts under the facility ends
December 2000 and any then outstanding balance is repayable in equal monthly
installments ending in 2005.
In October 1998, we entered into a master loan and security agreement that
provides up to $5.0 million for capital equipment purchases. Individual notes
payable under the agreement have terms of 60 months and bear interest at fixed
annual rates ranging from 13.5% to 14.3%. The notes are secured by the
underlying equipment. As of September 30, 2000, we owed $2.3 million under
this agreement.
As of September 30, 2000, we also owed $734,000 under an equipment line of
credit/term loan, which bears interest at the bank's prime rate (9.5% as of
September 30, 2000) plus 1.5%. This loan is secured by the underlying
equipment. This loan is repayable in equal monthly installments ending in
December 2004.
Since our inception, we have significantly increased our operating
expenses. We anticipate that we will continue to experience significant
increases in our operating expenses through at least 2001, and that our
operating expenses and capital expenditures will constitute a material use of
our cash, cash equivalents and marketable securities. We expect to incur
significant expense increases as we expand our operations, develop new
products and increase our manufacturing capabilities. We expect to incur
approximately $30.0 million in capital expenditures over the next six months
to purchase equipment and expand our operations and manufacturing capacity. We
anticipate funding these expenditures with existing cash, cash equivalents and
marketable securities. We also expect to add personnel in all departments,
particularly sales and manufacturing, which will increase salary and benefit
and other personnel related expenses. In addition, from time to time we may
also utilize cash resources to fund acquisitions or investments in businesses,
technologies, products or services that are complementary to our business.
We believe that the anticipated net proceeds from this offering, together
with current cash, cash equivalents, scheduled maturities of marketable
securities and borrowings under our credit facilities, will be sufficient to
meet our
26
anticipated cash needs for working capital, capital expenditures and scheduled
debt retirement for at least the next 12
months. If cash generated from operations is insufficient to satisfy our long-
term liquidity requirements, additional financing will be necessary. In that
event, we may seek to sell additional equity or debt securities or to obtain
additional credit facilities. If additional funds are raised through the
issuance of debt securities, these securities could have rights, preferences
and privileges senior to holders of common stock, and the terms of any debt
facility could impose restrictions on our operations. The sale of additional
equity or debt securities could result in additional dilution to our
stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition and operating results.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
We maintain our cash and cash equivalents primarily in money market funds
and certificates of deposit. We do not have any derivative financial
instruments. As of September 30, 2000, all of our investments mature in less
than one year. Accordingly, we do not believe that our investments have
significant exposure to interest rate risk.
Exchange Rate Sensitivity
We operate primarily in the United States, and all sales to date have been
made in U.S. dollars. Accordingly, we currently have no material exposure to
foreign currency rate fluctuations. While we expect our future international
revenue and expenses to be denominated predominately in U.S. dollars, a
portion of our future international revenue and expenses may be denominated in
foreign currencies. Accordingly, we could experience the risks of fluctuating
currencies and may choose to engage in currency hedging activities to reduce
these risks.
Recent Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." The interpretation clarifies the application of APB Opinion
No. 25 in specified events, as defined. The interpretation is effective July
1, 2000, but covers certain events occurring during the period after December
15, 1998, but before the effective date. To the extent that events occur
during the period after December 15, 1998, but before the effective date, the
effects of applying this interpretation would be recognized on a prospective
basis from the effective date. Accordingly, upon initial application for the
final interpretation, no adjustments would be made to the financial statements
for the periods before the effective date and no expense would be recognized
for any additional compensation cost measured that is attributable to periods
before the effective date. The adoption of this interpretation has not had a
material effect on the accompanying financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulletin summarizes
views of the Staff on applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our current
revenue recognition policy complies with the guidelines in the bulletin.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which established accounting and reporting
standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, the
Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS 133 until fiscal years beginning after
June 15, 2000. We will become subject to SFAS No. 133 on January 1, 2001. We
do not currently hold any derivative instruments and do not engage in hedging
activities and therefore do not believe that the adoption of SFAS No. 133 will
have a material impact on our financial position or results of operations. We
may, however, engage in this type of investment in the future as our
operations expand domestically and abroad. We will evaluate the impact of
foreign currency exchange risk and other derivative instrument risk on our
results of operations when appropriate.
27
BUSINESS
Overview
We design, manufacture and market high-precision component, module and
subsystem products, based upon our proprietary technology, for next-generation
optical networks. Optical networks are communication networks that use
wavelengths of light to transmit voice and data signals through long fibers of
glass thinner than a human, or optical fibers. Our optical networking products
are designed to permit highly accurate control of optical signals to enable
new and enhanced features in optical networks, improve performance in the
transmission of optical signals and increase the ability to change the
configuration of optical networks. We use our proprietary technology to
develop and design products that are actively adjustable, or tunable, to work
at different frequencies of light. Our components serve as the building blocks
for our module and subsystem products, which can actively change the path of,
or route, evaluate the quality of, or monitor, and restore and maintain the
quality of, or condition, optical signals in real time. Our manufacturing
process is highly automated and is designed to allow us to build customized
products in high volumes. Our target customers include major suppliers of
optical networking equipment.
Industry Background
Increased Demand for Bandwidth
Technological innovation and the widespread use of the Internet, Internet-
based applications and corporate data networks have propelled the rapid growth
in the volume of data traffic transmitted across communications networks.
According to Ryan, Hankin & Kent, Inc., or RHK, a leading market research and
consulting firm, the increase in the volume of data transmitted, or bandwidth,
is likely to continue. RHK predicts that the transmission of data traffic will
increase from 350,000 terabytes per month in 1999 to more than 16 million
terabytes per month in 2003. The dramatic growth in data traffic has forced
communications service providers to upgrade their networks using optical
networking technologies. Optical networks significantly increase bandwidth and
enhance transmission quality relative to legacy copper wire systems.
Optical Components, Modules and Subsystems Industry
The development of next-generation optical networking systems to meet
increasing bandwidth requirements depends on innovations in optical
components, modules and subsystems. According to RHK, the worldwide optical
component market is expected to grow at a 48% compound annual growth rate from
$5 billion in 2000 to $24 billion in 2004. Historically, the majority of
optical products were made in-house by system vendors. As system vendors have
shifted their focus towards software, value-added services and additional
product offerings, merchant suppliers have accounted for a larger proportion
of system vendors' component, module and subsystem needs. However, the supply
of these optical products has not kept pace with demand. The complexity of the
technology, difficult and labor intensive manufacturing processes and the
shortage of skilled personnel have contributed to supply constraint in the
optical industry. This presents a significant market opportunity for optical
product suppliers with leading technologies and manufacturing capabilities
that can be scaled to meet high volume demands.
Next-Generation Optical Networks
To meet the needs of service providers, the optical networking industry is
developing a next generation of optical networking equipment to increase
bandwidth capacity and provide increased networking functionality. These next-
generation optical networks will place an increased emphasis on the ability to
quickly route and maintain the quality of the optical signals transmitted.
This in turn will place new demands on the development of optical components,
modules and subsystems that can route, condition and monitor optical signals.
The demand for next-generation optical networks is being driven by the
following factors:
Upgrade of Long-Haul Networks. Initial optical systems allowed for the
transmission of one wavelength of light, or channel, along a single optical
fiber. Dense wavelength division multiplexing, or DWDM, technology
significantly improved upon initial optical networks by enabling the
transmission of multiple channels
28
on a single optical fiber, thereby further increasing bandwidth capacity. DWDM
technology has been especially advantageous in long distance, or long-haul,
networks, which are principally devoted to point-to-point communications where
added bandwidth capacity has reduced traffic bottlenecks between large
metropolitan areas. However, next-generation long-haul networks will deploy
systems with more channels per optical fiber over longer distances and
multiple paths, making it increasingly difficult to manage and maintain
optical signal quality.
Build-Out of Metro Networks. The upgrade of long-haul networks has outpaced
improvements in the metropolitan and local, or metro, networks, resulting in a
new bottleneck where the signal is routed from the long-haul network to the
metro network for delivery to the end user. A new generation of optical
networking systems is required to address the differing needs of metro
networks. The number of end users, or delivery points, is orders of magnitude
higher in the metro networks. Smaller streams of traffic are originated and
terminated at multiple points within metro networks, and service providers
must frequently change the locations at which a particular customer's traffic
is added and dropped as they move within a network. Meanwhile, customers are
demanding the ability to add greater capacity at peak hours of the day and
carriers must be able to quickly change network capacity to meet the highly
variable flow of traffic and provide rapid, real-time provisioning of
services. Next-generation optical networking systems must address these metro
needs and be capable of re-routing optical signals across multiple paths and
reallocating channels to reconfigure the network to meet changing user needs.
These capabilities will require new optical components that can select and
redirect optical channels in real time while at the same time maintaining
signal quality.
Industry Deregulation. Industry deregulation has created an intensely
competitive market for service providers, which has lowered the rates they can
charge and has required service providers to maximize the capacity of their
installed optical fiber. To help carriers achieve this goal, equipment vendors
are demanding components that allow more channels per optical fiber and
increased transmission speeds and transmission distances. They are also moving
towards deployment of an all-optical network, attempting to avoid the need for
the conversion of the optical light signals to electrical signals and the
reconversion back to a light signal. This costly optical to electrical to
optical conversion is needed in today's optical networks to strengthen, or
regenerate, weakened optical signals and to route, or switch, optical signals
along different paths. Further, service providers are increasing the
complexity of network architectures to provide more efficient and timely
protection and restoration of optical signals. At the same time, service
providers are focused on increasing revenues by offering new high-bandwidth
applications and services such as streaming multimedia and video-on-demand.
Requirements and Challenges of Next-Generation Optical Networks
Next-generation optical networks impose a number of requirements and
challenges upon optical equipment manufacturers including:
High Channel Counts. Current DWDM networks commonly have up to 96 channels
per optical fiber. Next-generation networks will have 160 or more channels and
require much smaller spacing between channels. At these extremely tight
spacing levels, the likelihood of signal degradation, such as the interference
of one channel with another, or crosstalk, increases significantly. This
problem will be compounded as service providers begin to expand their use of
all available spectrum.
Long Reach. To avoid frequent signal regeneration, which requires costly
optical to electrical to optical conversion, equipment vendors are developing
optical systems with increased transmission distances. In addition, the new
network architectures require signals to be routed between various
intermediate destinations before reaching their ultimate destination, often
adding to transmission distances. These longer transmission distances cause
optical signals to weaken, or attenuate, and also cause other serious signal
distortion.
High Transmission Rates. Current networks transmit data up to 10 gigabits
per second on each channel. Next-generation optical networks are now being
designed for even greater speeds of 40 gigabits per second. At these higher
speeds, signal impairments are much more likely to degrade the quality of the
optical signal.
29
Network Intelligence. Next-generation optical systems will need to quickly
deploy and distribute bandwidth to multiple points within the network. This
increased provisioning complexity will require network elements that can be
easily reconfigured and that have built-in intelligence through embedded
software, to provide control closer to the physical layer. Added intelligence
in optical components and modules that resides in the physical layer will
reduce the complexity of the network software required to control and optimize
the optical network.
Stability and Reliability. Consumers are increasingly unwilling to tolerate
service problems and are more likely to turn to a growing number of competing
service providers. In order to avoid losing customers, service providers need
extremely reliable and stable systems. Next-generation optical networks, with
increased intelligence, longer reach, higher channel counts and greater
transmission rates, place even greater emphasis on wavelength management and
on stability and reliability of components.
Cost-Effectiveness. Government deregulation of the telecommunications
industry has fueled intense price competition among service providers,
resulting in the need for solutions that reduce overall network costs. At the
same time, next-generation optical networks require new and enhanced features,
improved performance in the transmission of optical signals and increased
ability to route optical signals. Service providers face the challenge to
further drive down network costs while providing significantly improved
functionality to the network.
Our Solution
We design, manufacture and market high-precision optical products for next-
generation optical networks under our AgileWave brand. Our products are based
upon our proprietary technology that enables high stability in extreme
environments and expanded functionality within optical networks. In addition,
our proprietary technology has enabled us to develop precisely tunable
products, which can function across a number of different wavelengths, unlike
fixed wavelength products that function at a single wavelength only. We
believe our components, modules and subsystems offer several key competitive
advantages and benefits, including the following:
High Channel Counts. Our products enable precise filtering of optical
signals, which allows a high number of channels to be transmitted on each
optical fiber. The majority of DWDM systems deployed today use spacings
between channels of 100 gigahertz or more. Our athermal channel filters
presently enable channel spacings of 50 gigahertz, thereby allowing higher
channel counts within the same spectrum. As the industry demands even greater
capacities, we believe the stability of our filters and the precise tuning
capability, or tunability, of our AgileWave devices will enable our technology
to manage the increasingly dense channel configurations.
Long Reach and High Transmission Rates. Our products are being developed to
enable long reach and high transmission rates for optical signals by providing
critical signal monitoring and conditioning to detect and correct signal
impairments that degrade quality and system performance. Our tunable bandpass
selector can precisely tune across an entire wavelength band to route selected
channels for optical performance monitoring and optical diagnostic testing.
Customized derivatives of this module can be used to control signal
impairments to maintain the quality of routed signals. We are also developing
a dynamic gain equalization filter that adjusts the varying signal strength of
routed signals to maintain uniform signal strength across all channels.
Network Intelligence. Our tunable bandpass selectors can bring intelligence
to the optical layer by quickly routing individual channels to local
monitoring and diagnostic equipment. Our reconfigurable optical add-drop
multiplexers can enable network operators to more effectively manage traffic
by allowing optical wavelengths to be routed without the need to convert the
optical signal into an electrical signal and then back to an optical signal.
Systems using our products can allow communications service providers to more
flexibly deliver bandwidth and accelerate the provisioning of network services
to better serve and retain their customers.
Stability and Reliability. Our family of AgileWave network products is
based upon our proprietary technology, which allows extreme stability over a
wide range of environmental conditions. Our athermal channel filters and gain
flattening filters feature compact packaging with a demonstrated wide range of
operating
30
temperatures and limited undesired movement of wavelengths, or drift. We
believe our products feature stable operation over a wide range of
temperatures, or thermal stability, and long-term drift characteristics that
are equal to or better than competing products. We believe our products can
provide our customers increased network uptime and service reliability.
Cost-Effectiveness. We are developing the manufacturing capacity for high-
volume production and offer several unique products featuring a common or
substantially similar packaging technology, thereby reducing our production
costs. Our family of AgileWave network products are widely configurable or
tunable across a range of wavelengths, providing network flexibility, reduced
network complexity and dynamic functionality with single devices that
otherwise would require multiple optical components to implement.
Although we believe our technology and products have key advantages over
alternative optical networking technologies and products in terms of
tunability, stability and reliability, our products are not applicable to all
network functions required in next generation systems. For example, our
technology is not well suited for large-scale optical cross-connects, where
many tens, hundreds or even thousands of wavelengths get interchanged.
Additionally, when compared to products using some other technologies, such as
thin-film filter technology, which is widely utilized at the current time in
optical networks, the dispersion levels in our products can be higher.
Our Strategy
Our objective is to be a leading provider of cost-effective optical
components, modules and subsystems to the optical networking industry to
enable a new level of network flexibility, reliability and intelligence for
the next-generation optical network. To achieve this objective we will:
Continue to Leverage our Innovative Technology Platform. We have been
developing optical products and systems since 1996. In that time, we have
developed a proprietary technology that provides a platform for precisely
tunable, highly accurate and reliable optical networking products. We have
used this technology platform as a building block for developing a family of
components, modules and subsystems, from tunable filters to reconfigurable
add-drop multiplexers. We intend to continue to leverage this technology to
build other components, modules and subsystems, such as tunable lasers,
dynamic gain equalization filters, dynamic dispersion compensation modules and
optical amplifiers.
Continue to Expand our Technology Platform. In addition to our existing
technology platform, we intend to develop and/or acquire additional technology
platforms that will serve as building blocks for enhanced or new product
offerings. We intend to closely monitor our customers' needs and perform
market analysis to identify new products to develop and markets to enter. We
have also established a technology acquisition team that is dedicated to the
review and assessment of potential technology to meet our current and future
needs.
Provide Customer-Tailored Solutions. We are working closely with our
existing and potential customers to develop customized solutions for their
optical networking product needs. We have a dedicated and highly trained staff
of engineers who work with customers to develop unique solutions. With this
approach, we believe we will increase product performance and decrease time to
market for our customers.
Expand Manufacturing Capacity and Improve Efficiency. The demand for
products in the optical networking industry has consistently outpaced
manufacturing capacity. Accordingly, we are leveraging our resources,
production processes and infrastructure to enable us to quickly scale our
capacity to meet growing industry needs. Our manufacturing strategy includes:
. increasing overall manufacturing capacity, including facilities,
equipment and labor in advance of anticipated demand to provide for
higher throughput than we forecast will be necessary;
. creating manufacturing processes that allow us to build multiple devices
along the same production lines and allows us to customize the
performance of devices for customers without changing the manufacturing
line;
. investing in new equipment that provides higher volume batch
manufacturing; and
. automating processes with proprietary methodologies to maximize yields
and throughput.
31
We believe that our manufacturing process will enable us to achieve high
quality and reliability in our products and to scale production to large
volumes.
Build a Substantial Intellectual Property Portfolio. Our intellectual
property strategy is to obtain broad patent protection on both products and
processes. Our intellectual property team works closely with our product
development teams prior to product release to identify patentable technology.
As of October 31, 2000, we owned two U.S. patents and had 30 pending U.S.
patent applications for technology relating to optical networking products. We
also seek to obtain international patent coverage in selected foreign
countries while seeking to balance costs. As of October 31, 2000, we had ten
pending foreign patent applications for technology relating to optical
networking products.
Technology
We initially developed industrial optical sensing products to survive in
the extremely harsh environment of an oil well. This environment includes
temperatures that can exceed 400 degrees Fahrenheit and pressures greater than
15,000 pounds per square inch. We developed a proprietary technology that is
based upon optical waveguides, which are devices through which wavelengths of
light are transmitted and guided within the device. Our optical waveguide
technology is particularly well suited to providing precise control and
measurement in harsh environments. We have leveraged the thermal stability and
reliability of this optical waveguide technology to provide the basis for a
family of tunable, highly accurate and reliable products for optical
networking, where thermal reliability and stability is required. We have
initially applied our optical waveguide technology to widely accepted and
industry proven Bragg grating based filters to develop tunable products that
accurately control optical signals over a wide range of environmental
conditions. Our optical waveguide technology platform may also be applied to
other optical technologies that address the wide range of optical filtering
and signal conditioning requirements of our customers.
Optical Waveguide Technology and Tunable Bragg Gratings. We have applied
our optical waveguide technology to Bragg grating based filters to develop
tunable products that accurately control optical signals over a wide range of
wavelengths with highly stable performance over a wide temperature range. We
have also developed a proprietary technology that, when combined with our
optical waveguide technology, provides the ability to precisely control and
tune our tunable products to operate at a selected wavelength without the need
for a separate device to check or reference whether our tunable products
operate at the desired wavelength. This tuning capability has led to a tunable
channel filter product that may be tuned over a wide range of wavelengths to
filter many channels. This product has high tuning accuracy, and excellent
stability and reliability over a wide range of environmental conditions, which
enables a wide variety of functions to be implemented in the optical
waveguide. This technology also forms a fundamental building block for
developing other components and modules that are critical for realizing the
full potential of next-generation all-optical networks.
Specific advantages of our optical waveguide technology as it applies to
tunable Bragg gratings include:
. the optical filter is formed in the optical waveguide, thereby improving
optical performance by reducing the degradation of an optical signal
typically associated with attachment to other devices as well as
degradation of the signal through the device;
. our optical filters are particularly well suited for applications
involving optical systems with small spacing between channels;
. the tunable Bragg grating filter can be easily customized and adapted
for specific applications, such as optical channel filtering, gain
equalization, and other signal conditioning applications;
. our optical waveguide technology allows for highly reliable, precise and
repeatable tuning; and
. our optical waveguide technology is easily coupled with other existing
complementary optical technologies.
We believe that our customers will benefit from the enhanced optical
functionality our optical waveguide platform provides for next-generation
optical networks.
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Products
Optical Networking Products
The AgileWave family of products that we are developing includes a range of
components, modules and subsystems for optical networking systems providers
that will enable them to meet the demands of next-generation optical networks.
Our products address three important aspects of optical wavelength management:
. routing of wavelength channels;
. optical signal conditioning; and
. optical signal monitoring.
The following tables set forth these products and their capabilities. These
tables also indicate whether a product is (1) being shipped to customers, (2)
in alpha testing, which refers to products in early stages of internal product
testing or customer evaluation testing or (3) under development.
Routing:
Product Description Benefits Status
- ---------------------------------------------------------------------------------------------------
Athermal Channel Filter Filter that separates . High channel counts Shipping
or combines signals . Passive, meaning it Fourth Quarter
requires no electronic 2000
or active control
- ---------------------------------------------------------------------------------------------------
Tunable Grating Module Filter that maintains . Enables new services Alpha Testing
a channel within its . Cost-effective
assigned wavelength range
- ---------------------------------------------------------------------------------------------------
Optical Add/Drop Device that adds or drops . Completely passive, Alpha Testing
Multiplexer pre-selected channels requires no electronic
or active controls
. Enables the interconnection
of optical networks
. Enables new services
- ---------------------------------------------------------------------------------------------------
Reconfigurable Optical Programmable device . Enables remote Alpha Testing
Add/Drop Multiplexer that adds or drops reconfiguration of the
a selected or desired network to adjust to
channel or channels changing traffic patterns
. Enables the interconnection
of optical networks
. Enables new services
. Enables rapid delivery
of services
. Cost-effective
. Athermal Channel Filter. Channel filters reflect selected optical
channels while allowing other channels to pass and are used throughout
optical systems, primarily for combining or separating optical signals.
Conventional filters are sensitive to temperature and undergo wavelength
drift with changes in temperature and typically require active thermal
controls to maintain wavelength stability. Active thermal controls
require the input of additional electrical power to maintain wavelength
stability with changes in temperature. Our athermal channel filter
passively, without the need for additional electrical power, stabilizes
the wavelength, thus eliminating the need for active thermal controls.
We have begun shipping limited quantities of our athermal channel filter
to one customer. This product has completed initial verification testing
and is currently undergoing full qualification and formal acceptance
testing with that customer. Our athermal channel filter is also
currently undergoing initial customer testing with a second customer.
33
. Tunable Grating Module. Tunable grating modules precisely tune, or set
to a desired wavelength, and are the enabling building blocks for
network elements that can be tuned to numerous wavelengths. These
devices maintain a channel within its assigned wavelength band. Our
tunable grating modules can be provided as standard channel filters or
can be customized for particular customer applications. The precise
tuning feature of our tunable grating modules can enable advanced signal
conditioning devices needed for maintaining the quality and performance
of high speed optical transmission systems. Our tunable grating module
is currently undergoing customer evaluation testing with three
customers.
. Optical Add/Drop Multiplexers. Optical add/drop multiplexers add or drop
preselected channels. These devices are used to route wavelength signals
and connect data transport links to subscriber networks. Our optical
add/drop multiplexers incorporate our stable athermal channel filters to
provide precise wavelength control and performance over temperature.
. Reconfigurable Optical Add/Drop Multiplexer. Our reconfigurable optical
add/drop multiplexer is a programmable wavelength routing device to add
or drop channels. This can provide wavelength control and routing of an
optical signal, without the need for costly optical to electrical to
optical conversion, which is typically needed to route signals.
Accordingly, it can enable remote reallocation of channels so service
providers can more quickly and efficiently adjust to changing traffic
patterns, and provision services on demand.
Conditioning:
Product Description Benefits Status
- ----------------------------------------------------------------------------------------------------------
Gain Equalization Filter Filter that equalizes optical . Long transmission of Alpha Testing
power levels across all signals
channels . Passive device, requires
no electronic or active control
- ----------------------------------------------------------------------------------------------------------
Dynamic Gain Filter with variable . Long transmission of Development
Equalization characteristics used to signals
Filter equalize optical power . Enables new services
levels across multiple . Enables network
channels of varying reconfiguration to adjust
signal strength to changing traffic patterns
- ----------------------------------------------------------------------------------------------------------
Dynamic Dispersion Tunable module that . Long transmission of Development
Compensation maintains quality of optical signals
Module signals . Enables high speed
transmission
. Enables new services
. Enables network
reconfiguration to adjust to
changing traffic patterns
- ----------------------------------------------------------------------------------------------------------
Tunable Laser Laser light source . Reduces maintenance cost Development
that can be adjusted to . Enables remote
a range of different optical reconfiguration of the
channels network to adjust to
changing traffic patterns
. Enables new services
. Enables rapid delivery of
services
. Cost-effective
- ----------------------------------------------------------------------------------------------------------
Optical Amplifier Module that amplifies . Long transmission Development
Module and maintains optical of signals
signal strength . Cost-effective
34
. Gain Equalization Filter. Optical amplifiers are used to boost weakened
optical signals transmitted across long distances. These amplifiers
generally do not amplify the signals for all channels equally.
Maintaining uniform channel power, however, is critical to the
performance of multi-channel DWDM systems. Accordingly, gain
equalization filters optically adjust the DWDM channels to equalize the
power level across all channels. These filters are typically sensitive
to temperature changes and require costly active thermal controls. Our
gain equalization filter, however, is being developed to eliminate the
need for such active thermal controls.
. Dynamic Gain Equalization Filters. Dynamic gain equalization filters are
used to adjust the output power of optical amplifiers, which are used to
boost the power of weakened optical signals. These devices are critical
in maintaining constant signal strength for all wavelength channels.
Dynamic gain equalization filters are a critical component to condition
and maintain performance of multiple signals of varying strength routed
to and from various destinations in next-generation optical networks.
. Dynamic Dispersion Compensation Module. Fixed dispersion compensators
are currently deployed in point-to-point DWDM systems to compensate for
the effects of chromatic dispersion, a signal distortion caused by
wavelengths traveling over optical fiber for long distances at different
speeds. As optical networks become interconnected, dispersion
compensation schemes must become reconfigurable to adjust to routing and
processing of wavelengths that have traveled over varying optical paths.
Our dynamic dispersion compensation modules are being developed in close
cooperation with customers to allow wide adjustment of dispersion to
compensate individual channels, or bands of channels.
. Tunable Lasers. Tunable lasers are a key component to enable next-
generation optical networks to be reconfigurable. Current DWDM systems
are based on fixed single-wavelength laser sources that generate and
transmit only one wavelength of light. This results in inventory and
maintenance issues for network operators because each channel requires a
separate laser. This problem is compounded as DWDM systems continue to
grow in channel count. We are developing tunable lasers that are
tunable/settable to generate a selected wavelength of light permitting
the laser to be used for multiple channels. We believe they will provide
immediate relief of this inventory problem and enable tunable
transmitters for future networks.
. Optical Amplifier Module. Optical amplifiers are used throughout optical
systems to amplify weakened optical signals. We are developing an
optical amplifier module that will provide for higher output power at a
lower cost than conventional technology.
Monitoring:
Product Description Benefits Status
- ------------------------------------------------------------------------------------------------
Tunable Bandpass Filter that will select and pass . Enables diagnosis and Alpha Testing
Selector a single channel verification of network
performance
. Cost-effective
- ------------------------------------------------------------------------------------------------
Optical Channel Diagnostic instrument . Enables diagnosis and Development
Analyzer that identifies optical channels verification of network
and signal strength of optical performance
signals carried in transmission line
. Long transmission of
signals
. Cost-effective
. Tunable Bandpass Selector. Tunable bandpass selectors are devices that
filter light transmissions, allowing a narrow wavelength of light to
pass, while rejecting all other wavelengths. These devices are
35
used to precisely select a single channel from a set of channels and may
be used for a variety of optical network applications. We expect one of
our customers to commence qualification testing of our tunable bandpass
selector in December 2000.
. Optical Channel Analyzer. An optical channel analyzer provides
management of optical channels across a broad spectrum of wavelengths.
Our optical channel analyzer is being developed to provide functions
including channel identification, power level measurement and optical
signal to noise measurement.
Industrial Optical Sensing Products
We are also a supplier of optical sensing products to the oil and gas
industry. Our optical sensing systems utilize optical fiber technology and
Bragg grating-based sensors to provide instantaneous information about oil and
gas reservoirs. Our optical sensing products offer an extended operating
lifetime over conventional electronics technology. We offer temperature and
pressure sensor systems based on optical fiber technology as a replacement to
traditional electronic gauges for monitoring of these critical parameters in
underground oil and gas reservoirs. We have also introduced monitors for
measuring the rate of fluid flow in a pipe and a meter for determining the mix
of oil and water flowing in a pipe to provide information to help optimize oil
production operations and yield. We are also developing a seismic system to be
implemented in wells that uses optical sensors to detect the reflection of
soundwaves to provide an image of underground formations.
Customers
Our target customer base for our optical networking products includes major
suppliers of DWDM optical networking equipment. To date we have not generated
any revenue from the sale of optical networking products. As of November 2000,
we have received purchase orders for optical networking products from three
large suppliers of optical networking equipment, including Cisco Systems and
Corvis Corporation, and we are currently in discussions with other large
suppliers of optical networking equipment to test and/or purchase our optical
networking products. Of these three purchase orders, two are non-cancellable
purchase commitments for a specified number of our products. The third
purchase order is a three-month rolling-forecast supply agreement for athermal
filters, without guaranteed minimum purchase requests but with specified
maximum limitations tied to the amount of product specified for delivery in
the previous month, with an initial two year term, renewable upon mutual
agreement. We will recognize revenue from sales under these purchase orders
when delivery has been made, collection is probable and, if contractually
required, a customer's product acceptance is received, provided that there are
no significant remaining obligations.
Our target customer base for our industrial optical sensing products
includes large oil and gas companies. We began recognizing revenue from the
sale of optical sensing products in the six months ended June 30, 2000. During
this period, one customer, BP Exploration & Oil Inc. and Amoco Production
Company, accounted for 100% of our revenues. We are currently in discussions
with other large oil and gas companies to test and/or purchase our industrial
optical sensing products.
Sales and Marketing
Our sales and marketing strategy is to work closely with prospective
customers to analyze their needs and to provide a customized solution using
our proprietary technology and products to meet those needs. We work directly
with the customer to establish and define technical requirements and product
evaluation criteria. After delivery of a prototype, we work closely with the
customer to draft product development, qualification and manufacturing
milestones. Our potential customer base is diverse in their particular
requirements for and capabilities of product integration. We have a dedicated
and highly trained staff of engineers who work with the customer to develop
customized solutions for their optical networking needs. With this approach,
we believe we will increase product performance and decrease time to market
for our customers.
36
We intend to implement our sales and marketing strategy through a direct
sales team that will coordinate all customer contact and support, generate
product release strategies for each product, and establish a product
distribution network and customer support function. During the initial
customer acquisition phase, a team of product engineers will be dedicated to
work along with the sales team through product development and qualification.
As we introduce new products and begin to increase manufacturing operations,
our ability to grow our business will depend to a large extent on our ability
to attract and retain qualified sales staff.
Manufacturing
We are currently in the process of completing manufacturing facilities for
full-scale production of optical networking products at our headquarters
located in Wallingford, Connecticut. In addition, as our business grows, we
intend to significantly expand our manufacturing capacity and hire significant
numbers of new manufacturing employees.
The optical communications industry has traditionally been capacity-
constrained. Demand for quality optical communications products has
consistently outpaced manufacturing capacity. Accordingly, we intend to invest
in manufacturing resources not only to meet our sales forecasts, but also to
meet possible excess demand. As part of our manufacturing strategy we plan to:
. Expand and Scale Manufacturing Capacity. We intend to spend the
necessary resources to expand our facilities, equipment and labor force
in advance of customer purchase commitments to provide for higher
throughput than our forecasts predict. We have designed our
manufacturing processes so that they can be scaled for higher capacity.
We have developed a systematic approach that will allow us to increase
manufacturing capacity quickly should demand exceed our forecasts.
. Invest in Automation and Batch Manufacturing. Many aspects of
manufacturing optical networking products are manually intensive and, as
a result, throughput is constrained. Wherever possible, we intend to
automate traditionally manually labor intensive processes to increase
yields and throughput. We also intend to take advantage of new
manufacturing technology by selecting and procuring the latest
production equipment to enable higher volume batch manufacturing to
produce higher yields and throughput.
. Leverage and Enhance our Quality Manufacturing Capability. In April
1999, we were granted ISO 9001 certification. ISO 9001 is an
internationally recognized standard that prescribes quality assurance
management. We believe that this certification enhances our competitive
position. We are also planning to implement the standards of TL 9000 and
apply for registration. TL 9000 is a new standard developed by leaders
in the telecommunications industry that serves to define a quality
system specifically for telecommunication component manufacturers. Some
major network service providers are beginning to mandate TL 9000
registration for suppliers.
. Train and Maintain a Quality Workforce. The manufacturing of high-
quality optical components requires the use of a highly skilled
workforce to perform such critical functions as optical assembly,
alignment, soldering and component integration. We have invested and
intend to continue to invest significant resources in training and
maintaining the quality of our manufacturing workforce.
. Leverage our Existing Infrastructure. We have made a significant
investment in infrastructure so that we can increase our ability to
rapidly scale production volumes. Since 1998, we have operated a
company-wide integrated enterprise resource planning system, which
includes inventory planning and management, manufacturing, and quality
modules. We maintain a supply chain management department that
identifies all elements in the supply chain and evaluates potential
risks associated with sources of supply and recommends appropriate
alternate sources. We are investing in a redundant advanced
manufacturing capability separate from our full-scale production
capability that will be used to fabricate and test pre-production
components and subassemblies, build pilot units, and refine tooling and
other aspects of the product. We believe this investment will help
eliminate manufacturing interruptions traditionally caused by the
introduction of new products into manufacturing.
37
As we develop our manufacturing capabilities and enter full-scale
production of our products, we will need to significantly increase our
manufacturing work force and acquire significant additional manufacturing
space. The competition for such personnel is intense and the availability of
industrial space that lends itself to scalable high technology, high volume
manufacturing is limited.
Product Development
We have assembled a team of engineers with significant experience in
optics, data networking and communications. As of October 31, 2000 we employed
98 optical, electrical and mechanical engineers and technicians. Our
engineering team possesses expertise in the areas of grating technology, fiber
optics, electro-optics, optical instrumentation, opto-mechanical engineering,
software engineering and packaging technology. Our product development efforts
focus on enhancing our initial optical networking products, developing
additional products and continuing to develop next-generation technology to
support the growth in network bandwidth requirements and the transition to the
next-generation optical networks.
As of October 31, 2000 we employed 115 people in research and development.
Of our engineers and manufacturing staff, 42 have advanced degrees. We have
made, and will continue to make, a substantial investment in research and
development. Our research and development expenses totaled $1.5 million for
1997, $9.3 million for 1998, $15.8 million for 1999, and $14.6 million for the
nine months ended September 30, 2000.
The optical networking product industry is characterized by very rapid
technological change, frequent new product introductions and enhancements,
changes in customer demands and evolving industry standards. While we have
developed, and expect to continue to develop, our optical networking products
through internal research and development efforts, we expect to continuously
evaluate external technologies as a basis for expanding our internally
developed technology foundation through licensing, partnerships or
acquisitions.
Competition
Competition in the market for optical networking products is intense. Some
of our competitors include Avanex Corporation, Corning Incorporated, JDS
Uniphase Corporation, Lucent Technologies Inc., New Focus, Inc. and Nortel
Networks Corporation. Some of our competitors, such as Lucent and Nortel, are
vertically integrated manufacturers of optical networking equipment that are
also potential customers. While we compete with these companies with respect
to the optical components, modules and subsystems that they develop, market
and sell to third parties, they are potential customers with respect to the
components, modules and subsystems that we manufacture and they do not.
Many of our competitors are large public companies that have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we have. As a result, these competitors are able to
devote greater resources than we can to the development, promotion, sale and
support of their products. In addition, many of our competitors have large
market capitalizations or cash reserves and are much better positioned than we
are to acquire other companies in order to gain new technologies or products
that may displace our product lines. Any of these acquisitions could give our
competitors a strategic advantage. Many of our potential competitors have
significantly more established sales and customer support organizations than
we do. In addition, many of our competitors have much greater name
recognition, more extensive customer bases, better developed distribution
channels, broader product offerings and greater manufacturing capacity than we
have. These companies can use their broader product offerings and adopt
aggressive pricing policies to maintain and broaden their customer base. As a
result, we expect to encounter potential customers that, due to existing
relationships with our competitors, are committed to the products offered by
these competitors. Additional competitors may enter the market and we are
likely to compete with new companies in the future.
The principal factors upon which we compete are:
. product features;
38
. ability to rapidly develop and introduce products that respond to
customer needs;
. product reliability;
. ability to deliver products in volume; and
. price.
We believe we compete favorably on each of these factors with other
traditional and emerging optical networking products and technologies that
compete with our products. While some of these technologies are more
established in the optical networking industry, they tend to be fixed in
wavelength and not readily tunable without the addition of other optical
components. Additionally, while more established technologies are widely used
in optical systems that do not require tight spacing between channels, they
are not well suited for next-generation networks with higher channel counts
and smaller spacings between channels.
With respect to our industrial optical sensing products, we face
competition primarily from providers of traditional electronic-based
industrial sensors to the oil and gas industry. In order to compete against
the vendors of these traditional sensors, we must demonstrate the advantages
of our optical fiber-based sensors, over this well-established technology. The
principal competitive factors in this industry include price and reliability.
We believe we compete favorably with respect to these factors, particularly
reliability of our products. Traditional electronic-based sensors are prone to
failure at the high temperature and high pressure environments typically found
in oil and gas wells. Our products are designed for high performance over a
long life in high temperature and pressure environments. Many of our
competitors, however, have longer operating histories and greater financial,
marketing and other resources than we have. As a result, they are able to
devote greater resources than we can to the promotion, sale and support of
their products. Accordingly, we cannot assure you that we will be able to
compete effectively with the makers of traditional electronic-based industrial
sensors.
Intellectual Property
Our success and ability to compete depend substantially upon our internally
developed technology. Our intellectual property strategy is to obtain broad
patent protection for this technology both domestically and abroad. As of
October 31, 2000, we owned 14 U.S. patents and had 67 pending U.S. patent
applications and 35 pending foreign patent applications. Our issued patents
expire between December 2016 and September 2018. Of these patents and
applications, two of the U.S. patents, which expire in November 2017 and July
2018, 30 of the pending U.S. patent applications and ten of the pending
foreign patent applications relate to technology applicable to optical
networking products. We also have exclusive and non-exclusive licenses to 39
patents, three of which relate to technology for optical networking products.
We intend to build a strong patent portfolio for our products and obtain the
broadest patent coverage possible. There can be no assurance that patents will
ever be issued for the patent applications we have filed. Furthermore, any
patents issued to us may be invalidated, circumvented or challenged. As a
result, patents may not provide us with competitive advantages or adequately
protect our proprietary rights.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, and frequent
product enhancements are essential to establishing and maintaining a
technology leadership position. We cannot assure you that others will not
develop technologies that are similar or superior to our technology.
We also generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our proprietary information. Despite these efforts to protect
our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Policing unauthorized use of our
products is difficult, and there can be no assurance that the steps taken by
us will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do
the laws of the United States.
39
Substantial litigation regarding intellectual property rights exists in the
optical networking industry, and we expect that optical networking products
may be increasingly subject to third-party infringement claims. Many patent
holders aggressively use their patent portfolio to realize the value of their
proprietary rights or to bring infringement claims against their competitors.
Our competitors may file patent applications covering aspects of their
technology on which they may claim our technology infringes. We can not make
any assurances that other third parties will not claim infringement by us with
respect to our products and our associated technology. Any infringement claims
asserted against us, with or without merit, could be time-consuming to defend,
result in costly litigation, divert management's attention and resources,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. A successful claim of product
infringement against us and failure or inability by us to license the
infringed or similar technology could seriously harm our business.
Employees
As of October 31, 2000, we employed a total of 312 full-time employees in
the following areas:
. 136 in manufacturing;
. 115 in research and development;
. 16 in sales and marketing; and
. 45 in administration.
In addition, as of October 31, 2000, 40 persons provided technical services
to us pursuant to consulting arrangements. To support our anticipated growth,
we expect that we will need to hire a significant number of additional
employees, particularly in manufacturing and sales and marketing. We cannot
assure you that we will be able to do so. None of our employees is represented
by unions, and we believe that our relations with our employees are good.
Facilities
As of October 31, 2000 we leased an aggregate of 117,861 square feet of
space in Wallingford, Connecticut pursuant to the following two leases:
. an 89,776 square feet lease that expires in April 2005, subject to
renewal for an additional five-year period; and
. a 28,085 square feet lease that expires in September 2010, subject to
renewal for an additional five-year period.
We use our Wallingford space for sales and marketing, research and
development, administration and manufacturing of our optical networking
products. We also lease 31,410 square feet of space in Houston, Texas pursuant
to a lease that expires in October 2007. We have the right to renew the lease
for an additional five-year period. Our Houston space is used as the primary
manufacturing facility for our industrial optical sensing products.
If we grow as anticipated, we expect that we will need additional space,
particularly manufacturing space. We cannot assure you that we will be able to
obtain suitable space on commercially reasonable terms, or at all.
Legal Proceedings
We are not currently involved in any material legal proceedings, nor, to
our knowledge, are any threatened.
40
MANAGEMENT
Executive Officers and Directors
The following table sets forth information concerning our executive
officers, directors and key employees as of October 31, 2000:
Name Age Position
---- --- --------
Executive Officers and Directors
F. Kevin Didden................. 40 President, Chief Executive Officer and
Director
Alan D. Kersey, Ph.D............ 44 Vice President, Chief Technology Officer
and Director
Faye A. Iseley.................. 44 Vice President, Chief Financial Officer
Michael Grillo.................. 39 Vice President, General Counsel
David R. Huber, Ph.D.(2)........ 49 Chairman of the Board
Will Honeybourne(1)(2).......... 49 Director
David F. Palmer(1)(2)........... 39 Director
Asmund Slogedal................. 63 Director
John B. Spirtos(1).............. 35 Director
Key Employees
Gerald L. DePardo............... 40 Vice President, Intellectual Property
Counsel
Keith R. Morley................. 49 Vice President and General Manager,
Optical Sensing Systems
Paul E. Sanders................. 44 Vice President, Business Development
John V. Viega................... 49 Vice President, Operations
- --------
(1) Member of our Audit Committee
(2) Member of our Compensation Committee
F. Kevin Didden has served as our President and Chief Executive Officer and
as a director since founding CiDRA in August 1996. From August 1995 through
August 1996, Mr. Didden was Managing Director of Trac, Inc., a technology
commercialization consulting firm. From 1992 to 1995, Mr. Didden was Manager
of Technology Applications for the United Technologies Corporation Technology
Center. Mr. Didden has over 10 years experience in technology management and
commercialization, along with extensive international technology joint venture
experience. Mr. Didden received a B.S. in Business Administration from the
University of Connecticut, an M.B.A. from Rensselaer Polytechnic Institute and
is completing an M.S. in Technology Management at Rensselaer Polytechnic
Institute.
Alan D. Kersey, Ph.D. has served as our Vice President, Chief Technology
Officer since joining CiDRA in June 1997, and as a director since June 2000.
From November 1984 to June 1997 he was with the Naval Research Laboratory,
Washington D.C., where he was involved in the application of fiber optics, and
particularly Bragg gratings, to both sensing and communications systems. Dr.
Kersey received a B.S. in Physics and Electronics from the University of
Warwick, and a Ph.D. from the University of Leeds. He has published
extensively in the area of fiber optics, and holds over 30 patents in the area
of fiber optic systems. Dr. Kersey was elected Fellow of the Optical Society
of America in 1993.
Faye A. Iseley has served as our Vice President, Chief Financial Officer
since August 1999. From May 1998 through July 1999, Ms. Iseley was the Chief
Financial Officer of SL Green Realty Corporation, a publicly-traded commercial
real estate company. From March 1996 through October 1997, Ms. Iseley was
Corporate Treasurer of Mass Mutual Life Insurance Company and from June 1994
through February 1996, she was Chief Financial and Operations Officer of
Connecticut Mutual Financial Services. In addition, Ms. Iseley held various
financial positions at The Mack Company, Time-Life Books, Inc., and COMSAT.
Ms. Iseley received an A.B. from Brown University and an M.B.A. from The
Darden School at the University of Virginia. Ms. Iseley is also a certified
public accountant.
41
Michael Grillo has served as our Vice President, General Counsel since
August 1998. From August 1997 to August 1998, Mr. Grillo was our Intellectual
Property Counsel. From April 1994 through August 1997, Mr. Grillo was a member
of the law firm of Ware, Fressola, Van Der Sluys and Adolphson in Monroe,
Connecticut. Mr. Grillo received a B.S. in Electrical Engineering from the
University of Delaware and a J.D. from the University of Connecticut School of
Law.
David R. Huber, Ph.D. has served as Chairman of the Board since April 1997.
Dr. Huber has 18 years of experience in the development of optical
communications systems. He is the founder of Corvis Corporation, a
manufacturer of optical networking equipment. He has served as the Chairman of
the Board, President and Chief Executive Officer of Corvis since June 1997.
From 1992 through April 1997, Dr. Huber served first as Chief Technology
Officer and later as Chief Scientist of Ciena Corporation, a company he
founded in 1992. From 1989 through 1992, Dr. Huber managed the Lightwave
Research and Development Program for General Instrument Corp. Prior to 1989,
Dr. Huber held positions in optical communications development at Rockwell
International Corp., Optelecom, Inc. and ITT Industries, Inc., formerly
International Telephone & Telegraph Corp. Dr. Huber holds 41 U.S. patents in
optics technology and has numerous additional patents pending. He received a
B.S. in Physics from Eastern Oregon State University and a Ph.D. in electrical
engineering from Brigham Young University.
Will Honeybourne has served as a director since April 1999. Mr. Honeybourne
has been a Managing Director of First Reserve Corporation since January 1999.
From September 1996 through December 1998, Mr. Honeybourne was Senior Vice
President for Western Atlas International, Inc. From September 1993 through
October 1995, he served as President and Chief Executive Officer of Computalog
Ltd. He also serves on the board of directors of Destiny Resource Services
Corp. and Canadian Crude Separators Inc., both publicly-traded companies. Mr.
Honeybourne also currently serves on the boards of directors of several
private companies. He received a B.S in Oil Technology and he is an Associate
of the Royal School of Mines, Imperial College, London University.
David F. Palmer has served as a director since February 1998. Mr. Palmer is
a partner of Vision Capital Partners, a merchant banking firm, which was
founded in 1997. In addition, he is the managing member of Velocity Capital
LLC, and VFP LLC. Prior to joining Vision Capital Partners, Mr. Palmer was a
founding partner of Velocity Capital LLC which was formed in July 1998 and he
was Vice President of FTL Investments from 1995 to July 1998. He is also
currently on the boards of several private companies. He received an A.B. in
Physical Chemistry from Hamilton College and an M.B.A. from the J. L. Kellogg
Graduate School of Management of Northwestern University.
Asmund Slogedal has served as a director since August 1997. Since 1990, Mr.
Slogedal has held several positions with Ventours Management KS, a Norwegian
venture capital firm, and he is currently a Managing Director. He also serves
on the board of directors of the Teknoinvest Fund V. He is Chairman of the
board of directors of Iterated Systems, Inc., and he also is on the boards of
directors of several private companies. Mr. Slogedal holds a B.S. in
Engineering from Perdue University.
John B. Spirtos has served as a director since April 1999. Mr. Spirtos has
served as the Vice Chairman of Optical Capital Group, a venture capital firm,
since its inception in May 2000. Mr. Spirtos was the General Counsel for HRLD
Corporation, which managed HRLD Venture Partners, from October 1998 to May
2000. From April 1994 to October 1998, Mr. Spirtos was an attorney with the
law firm Kirkpatrick and Lockhart, LLP. Mr. Spirtos serves on the boards of
directors of several private companies. He received a B.S. from the University
of California, a J.D. from Southwestern University and an L.L.M. and an M.B.A.
from Georgetown University.
Gerald L. DePardo has served as our Intellectual Property Counsel since
February 1998 and as Vice President since April 1999. From June 1994 through
February 1998, Mr. DePardo was an Intellectual Property Attorney for United
Technologies Corporation and was involved with portfolio management,
technology licensing, contracts and corporate law. Mr. DePardo received a B.S.
in Electrical Engineering from Northeastern University, an M.S. in Electrical
Engineering from Rensselaer Polytechnic Institute and a J.D. from the
University of Connecticut School of Law.
42
Keith R. Morley has served as our Vice President and General Manager,
Optical Sensing Systems since joining CiDRA in August 1999. Prior to joining
us, Mr. Morley spent 26 years in the oil and gas service industry. From July
1998 to August 1999, he served as President and Chief Executive Officer of
Diversified Energy Services Corporation, a consulting firm for the oil and gas
industry. From December 1995 to July 1998, he served as President and Chief
Operating Officer of both Phoenix Drilling Services Inc. and Phoenix Energy
Products Inc., subsidiaries of Phoenix Energy Services, LLC. Additionally, Mr.
Morley spent 18 years with various divisions of Baker Hughes Incorporated, a
major oilfield service, holding a broad range of operations, sales and
marketing, and executive management positions. Mr. Morley received a Joint
Honors B.S. from the University of London, England.
Paul E. Sanders joined CiDRA in March 1998, and has served as Vice
President, Business Development since June 1999. Mr. Sanders has over 20 years
of experience in the fiber optics industry. From December 1996 to March 1998,
Mr. Sanders was Business Development Manager at Uniphase Telecommunications
Products, now part of JDS Uniphase, and was responsible for marketing and
program management of new products serving the DWDM industry. From September
1982 through November 1996, he served in a number of engineering and business
development roles with 3M Corporation, and was a principal in launching 3M's
specialty optical fiber and Bragg grating business units. Mr. Sanders received
a B.S. in Chemistry from the University of Bridgeport.
John V. Viega has served as our Vice President, Operations since December
1997. From March 1979 through December 1997, he held various financial,
operations and management positions with Gerber Systems Corporation, a
manufacturer of high-precision imaging systems. From April 1994 to December
1997, he served as Vice President, Operations for Gerber Systems. From June
1991 to April 1994, he served as the Director of Manufacturing for Gerber
Systems. From August 1986 to June 1991, Mr. Viega was Controller for Gerber
Systems where he was responsible for all financial and operational accounting.
He received a B.A. in Economics from the University of Connecticut and an
M.B.A. from the University of Hartford.
Board Composition
Upon completion of this offering, our board of directors will consist of
seven members divided into three classes as nearly equal in number as
possible. Each year the stockholders will elect the members of one of the
three classes to a three-year term of office. Upon completion of this
offering, Messrs. Palmer and Slogedal will serve as the Class I directors,
whose term expires at the first annual meeting of stockholders after
completion of this offering; Dr. Kersey and Messrs. Honeybourne and Spirtos
will serve in as the Class II directors, whose term expires at the second
annual meeting of stockholders after completion of this offering; and Mr.
Didden and Dr. Huber will serve as the Class III directors, whose term expires
at the third annual meeting of stockholders after completion of this offering.
In addition, upon completion of this offering, the authorized number of
directors may be changed only by resolution of the board of directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. The classification of
our board of directors may have the effect of discouraging or making it more
difficult for a third party to acquire control of us.
Committees of the Board of Directors
Our board of directors has an audit committee and a compensation committee.
Audit Committee. The current members of our audit committee are Messrs.
Honeybourne, Palmer and Spirtos. Our audit committee reviews, acts on, and
reports to the board of directors with respect to various auditing and
accounting matters, including the selection of our independent auditors, the
scope of the annual audits, fees to be paid to the auditors, the performance
of our independent auditors and our accounting practices.
Compensation Committee. The current members of our compensation committee
are Dr. Huber and Messrs. Honeybourne and Palmer. Our compensation committee
determines the salaries and incentive compensation of our officers and
provides recommendations for the salaries and incentive compensation of our
other employees. The compensation committee also administers our stock option
plans.
43
Compensation of Directors
Our directors who are also our employees receive no compensation for
serving on the board of directors. We reimburse our non-employee directors for
all travel and other reasonable expenses incurred in attending board of
director and committee meetings. Our non-employee directors are eligible to
receive nonqualified stock option grants under our 2000 Employee, Director and
Consultant Stock Plan. We may in the future grant nonqualified stock options
to non-employee directors as an incentive to join or remain on the board of
directors.
Compensation Committee Interlocks and Insider Participation
The compensation committee of our board of directors consists of Dr. Huber
and Messrs. Honeybourne and Palmer, none of whom has been an officer or
employee of CiDRA at any time since our inception. No executive officer of
CiDRA serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of
our board of directors or compensation committee. In August 2000, we entered
into a purchase agreement with Corvis Corporation, of which Dr. Huber is
Chairman of the Board, President, Chief Executive Officer and a greater than
10% stockholder. See "Related Party Transactions--Purchase Agreement with
Corvis Corporation" for a further discussion of this affiliation. Prior to the
formation of the compensation committee, the board of directors as a whole
made decisions relating to the compensation of our executive officers.
Executive Compensation
The following table sets forth the total compensation paid or accrued
during the year ended December 31, 1999 to our Chief Executive Officer and our
two other most highly compensated executive officers who earned more than
$100,000 in salary and bonus during 1999. No other executive officer earned
more than $100,000 in salary and bonus during 1999. Faye A. Iseley, our Vice
President, Chief Financial Officer, joined us in August 1999 at an annual base
salary of $125,000.
Summary Compensation Table
Long-Term
Compensation
Awards
------------
Annual
Compensation Shares
------------------ Underlying All Other
Name and Principal Position Salary($) Bonus($) Options (#) Compensation ($)
- --------------------------- --------- -------- ------------ ----------------
F. Kevin Didden............... $125,000 $ 450 -- $ --
President and Chief Executive
Officer
Alan D. Kersey, Ph.D. ........ 125,612 8,891 -- --
Vice President, Chief
Technology Officer
Michael Grillo................ 125,000 5,000 -- 30,000(1)
Vice President, General
Counsel
- --------
(1) Consists of $30,000 paid to Mr. Grillo in 1999 for relocation expenses.
Mr. Grillo elected not to relocate and repaid this amount to us in 2000.
Option Grants in Last Fiscal Year
There were no stock options granted to the executive officers named in the
summary compensation table above during our fiscal year ended December 31,
1999.
44
Aggregate Option Exercises in 1999 and Year-End Option Values
The following table sets forth information with respect to option exercises
and the total value of options held by each executive officer named in the
summary compensation table above as of December 31, 1999. Because there was no
public trading market for the common stock as of December 31, 1999, the value
realized upon the exercise of options and the value of the unexercised in-the-
money options at year-end have been calculated using an assumed initial public
offering price of $15.00 per share, minus the applicable per share exercise
price.
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Acquired Options at Fiscal Year- the-Money Options at
on Value End Fiscal Year-End ($)
Exercise Realized ------------------------- -------------------------
Name (#) (#) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
F. Kevin Didden......... -- -- -- -- -- --
Alan D. Kersey, Ph.D.... -- -- 220,360 192,440 3,272,346 2,857,734
Michael Grillo.......... 50,000 745,000 43,333 66,667 643,495 990,005
Employment Agreements
We have entered into employment agreements with the following executive
officers named in the summary compensation table above. For each of the
agreements described below, "cause" means any act or omission by the officer
in the conduct of his duties and responsibilities which constitutes gross
negligence or willful misconduct, or any act of or omission by the officer
which involves dishonesty or criminal conduct. In addition, "good reason"
means that any of the following has occurred and not been cured within 15
days:
. the officer's compensation has been materially reduced;
. the officer's position, duties or responsibilities have been materially
reduced;
. the officer's primary place of employment is moved more than 60 miles;
or
. we have not paid the officer compensation that is due.
F. Kevin Didden. We have entered into an employment agreement dated October
3, 2000 with F. Kevin Didden to serve as our President and Chief Executive
Officer. This agreement has an initial term of three years and is
automatically extended for additional one-year periods unless Mr. Didden or we
give notice 90 days prior to the end of any term that the agreement will not
be extended. Mr. Didden's initial base salary is $220,000 per year, and he is
eligible for a bonus of up to 40% of his base salary, to be paid upon the
achievement of milestones to be determined by our compensation committee. Mr.
Didden is also entitled to receive any benefits we provide to similarly
situated executive officers. Under the agreement, if we terminate Mr. Didden
for cause or if Mr. Didden terminates his employment other than for a good
reason, we must pay him severance equal to three months compensation over a
three-month period. If we terminate Mr. Didden without cause, or if he
terminates his employment for good reason, we must pay him severance equal to
18 months compensation over a six-month period. In addition, if within 24
months of a change of control of CiDRA, Mr. Didden terminates his employment
with good reason he will receive 12 months compensation paid over a six-month
period and all unvested stock options will immediately vest. Mr. Didden has
also entered into an assignment of inventions and one year non-competition and
non-solicitation agreement.
Alan D. Kersey, Ph.D. We have entered into an employment agreement dated
October 3, 2000 with Alan D. Kersey, Ph.D to serve as our Vice President,
Chief Technology Officer. This agreement has an initial term of two years and
is automatically extended for additional one-year periods unless Dr. Kersey or
we give notice 90 days prior to the end of any term that the agreement will
not be extended. Dr. Kersey's initial base salary is $185,000 per year, and he
is eligible for a bonus up to 30% of his base salary, to be paid upon the
achievement of milestones to be determined by our compensation committee. Dr.
Kersey is also entitled to receive any benefits we provide to similarly
situated executive officers. Under the agreement, if we terminate Dr. Kersey
for cause or
45
if Dr. Kersey terminates his employment other than for a good reason, we must
pay him severance equal to three months compensation over a three-month
period. If we terminate Dr. Kersey without cause, or if he terminates his
employment for good reason, we must pay him severance equal to 12 months
compensation over a six-month period. In addition, if within 24 months of a
change of control of CiDRA Dr. Kersey terminates his employment with good
reason, he will receive six months compensation paid over a six-month period
and all unvested stock options will immediately vest. Dr. Kersey has also
entered into an assignment of inventions and one year non-competition and non-
solicitation agreement.
Michael Grillo. We have entered into an employment agreement dated October
3, 2000 with Michael Grillo to serve as our Vice President, General Counsel.
This agreement has an initial term of two years and is automatically extended
for additional one-year periods unless Mr. Grillo or we give notice 90 days
prior to the end of any term that the agreement will not be extended. Mr.
Grillo's initial base salary is $185,000 per year, and he is eligible for a
bonus of up to 30% of his base salary, to be paid upon the achievement of
milestones to be determined by our compensation committee. Mr. Grillo is also
entitled to receive any benefits we provide to similarly situated executive
officers. Under the agreement, if we terminate Mr. Grillo for cause or if Mr.
Grillo terminates his employment other than for a good reason, we must pay him
severance equal to three months compensation over a three-month period. If we
terminate Mr. Grillo without cause, or if he terminates his employment for
good reason, we must pay him severance equal to 12 months compensation over a
six-month period. In addition, if within 24 months of a change of control of
CiDRA Mr. Grillo terminates his employment with good reason, he will receive
six months compensation paid over a six-month period and all unvested stock
options will immediately vest. Mr. Grillo has also entered into an assignment
of inventions and one year non-competition and non-solicitation agreement.
Employee Benefit Plans
2000 Employee, Director and Consultant Stock Plan
Our 2000 Employee, Director and Consultant Stock Plan was approved by our
board of directors in October 2000, subject to stockholder approval. Under
this plan, we may grant incentive stock options and nonqualified stock
options. As of October 31, 2000, a total of 1,500,000 shares of common stock
had been reserved for issuance under this plan. No shares have been issued
pursuant to options granted under this plan, no shares are subject to
outstanding options and 1,500,000 shares are available for future grant. In
addition, there will be an annual increase in the number of shares reserved
for issuance under the plan beginning on January 1, 2002 equal to the lesser
of:
. 3,000,000 shares;
. 5% of the outstanding shares on the day before the date of the increase;
or
. a lesser amount determined by the board of directors.
Upon completion of this offering, this plan is to be administered by our
compensation committee. The compensation committee will determine the terms of
options granted pursuant to this plan, including:
. the exercise price and the number of shares subject to each option;
. the date on which the option becomes exercisable;
. the termination or cancellation provisions applicable to the options;
and
. the conditions relating to our right to reacquire shares subject to the
options.
The maximum term of options granted under this plan is ten years.
46
If we are acquired, the Compensation Committee will provide that
outstanding options under this plan shall be: (1) assumed by the successor or
acquiring company; (2) exercised within a specified number of days or the
options will terminate; or (3) terminated in exchange for a cash payment equal
to the value of the option at the time we are acquired. If we are acquired,
the Compensation Committee may also provide that all outstanding options fully
vest.
1997 Stock Option Plan
The 1997 Stock Option Plan was approved by our board of directors in
January 1997 and by our stockholders in April 1997. The plan was amended in
June 1997, December 1997, February 1998 and October 2000. The purpose of the
plan is to enhance our profitability and value for the benefit of our
stockholders by enabling us to offer stock-based incentives. The plan
authorizes the grant of options to purchase shares of common stock to our
employees and consultants. Under the plan, we may grant incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986
and non-qualified stock options. Incentive stock options may only be granted
to our employees. As of October 31, 2000, a total of 8,400,000 shares were
reserved for issuance under the plan, and 4,744,591 shares had been issued as
a result of the exercise of options, 3,475,164 shares were subject to
outstanding options, and 180,245 shares were available for future grants.
The plan is administered by our compensation committee. Subject to the
provisions of the plan, the compensation committee has authority to determine
the terms of options granted pursuant to this plan, including:
. the number of shares subject to an option;
. the date on which the option becomes exercisable;
. the option exercise price per share; and
. the duration of the option.
The plan provides that, in the event of our merger with or into another
corporation or a sale of substantially all of our assets, our board of
directors, or the board of directors of the acquiring corporation, will:
. provide that unexercised options will be assumed or an equivalent option
or right substituted by the acquiring corporation;
. provide notice that all unexercised options must be exercised within a
specific time period, after which all options will terminate; or
. purchase all unexercised options for the aggregate fair market value of
the shares subject to such options, less the aggregate exercise price.
If, following a change of control in which outstanding options under this plan
were assumed or substituted by the acquiring corporation, an option holder is
terminated without cause or terminates his or her employment for good reason,
all unvested options will vest immediately.
2000 Employee Stock Purchase Plan
In October 2000, subject to stockholder approval, our board of directors
adopted the 2000 Employee Stock Purchase Plan and reserved a total of 500,000
shares for issuance under the purchase plan. Generally, all employees that
work 20 hours or more per week, who have been continuously employed by us for
at least the three months immediately prior to any offering period, are
eligible to participate. However, any employee who would own more than five
percent of the total combined voting power of our stock immediately after a
grant under the Purchase Plan is not eligible to participate and no
participant may purchase more than $25,000 of our common stock in any one
calendar year.
47
The purchase plan is intended to qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986. The purchase
plan is implemented by a series of consecutive six-month offering periods. The
offering periods generally will start on April 1 and October 1 of each year,
except that the first offering period will start on the effective date of the
registration statement in connection with this offering and shall end on
September 28, 2001, with the option price on the first day of such offering
period equal to 85% of the initial public offering price.
We will deduct up to 10% of each participating employee's pay, not to
exceed $21,250 per year, beginning on the first day of each designated
offering period. On the first day of each offering period, each participating
employee will be granted an option to purchase shares of our common stock.
Unless a participating employee withdraws from the purchase plan prior to the
end of the offering period, on the last day of the offering period the option
will be automatically exercised for the purchase of a number of shares of our
common stock determined by dividing the participating employee's contributions
during the offering period by the lesser of (1) 85% of the fair market value
of our common stock on the first day of the offering period, or (2) 85% of the
fair market value of our common stock on the last day of the offering period.
Participating employees may end their participation at any time during an
offering period, at which time they will receive all amounts deducted pursuant
to the purchase plan for that offering period. Participation in the purchase
plan ends automatically upon termination of employment.
Our board of directors may amend or terminate the purchase plan at any time
and in any respect without stockholder approval unless stockholder approval is
required by law. The purchase plan will continue in effect for a term of ten
years, subject to the right of the Board of Directors to terminate the
purchase plan at any earlier time.
Limitation of Directors' Liability and Indemnification
The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to limitations, the personal liability of directors to
corporations and their stockholders for monetary damages for breach of their
fiduciary duties. Our certificate of incorporation limits the liability of our
directors to the fullest extent permitted by Delaware law.
We have obtained director and officer liability insurance to cover
liabilities our directors and officers may incur in connection with their
services to us, including matters arising under the Securities Act of 1933.
Our restated certificate of incorporation and bylaws also provide that we will
indemnify any of our directors and officers who, by reason of the fact that he
or she is one of our officers or directors, is involved in a legal proceeding
of any nature. We may repay expenses incurred by a director or officer in
connection with any civil or criminal action or proceeding, specifically
including actions by us or in our name (derivative suits). Such indemnifiable
expenses include, to the maximum extent permitted by law, attorney's fees,
judgments, civil or criminal fines, settlement amounts and other expenses
customarily incurred in connection with legal proceedings. A director or
officer will not receive indemnification if he or she is found not to have
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, our best interest.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification
48
RELATED PARTY TRANSACTIONS
Sales of Our Common Stock and Preferred Stock
The following executive officers, directors or holders of more than five
percent of our voting securities purchased our common stock and preferred
stock in the amounts as of the dates set forth below. Each share of our Series
A, Series B, Series C and Series D preferred stock is convertible into six
shares of our common stock. For more detail on the shares listed below, see
"Principal Stockholders."
Preferred Stock
--------------------------------------------------------
Directors and Executive Common
Officers Stock Series A Series B Series C Series D
- ----------------------- -------------- -------------- ------------- ------------- -------------
F. Kevin Didden(1)...... 4,008,534 -- -- -- --
Alan D. Kersey,
Ph.D.(2)............... 543,320 -- -- -- --
Faye A. Iseley(3)....... 200,000 -- -- -- --
Michael Grillo(4)....... 192,000 -- -- -- --
David R. Huber,
Ph.D.(5)............... -- 696,331 858,369 334,211 146,693
Will Honeybourne(6)..... -- -- -- 820,513 63,721
David F. Palmer(7)...... -- -- -- 76,923 24,223
Asmund Slogedal(8)...... -- 250,000 715,308 102,564 27,658
John B. Spirtos(9)...... -- -- 858,369 334,211 146,693
5% Stockholders
Connecticut Innovations,
Inc.(10)............... -- 290,141 250,358 134,154 45,600
Teknoinvest Management
AS..................... -- 250,000 534,865 97,166 8,729
First Reserve Fund...... -- -- -- 820,513 63,721
Price Per Share......... $.005-$.625 $3.00 and $.01 $6.99 $19.50 $90.00
Date(s) of Purchase..... August 7, 1996 April 27, 1997 Feb. 12, 1998 Apr. 13, 1999 June 20, 2000
through and June 28, 1999
Sep. 29, 2000 Aug. 11, 1997 and
July 30, 1999
- --------
(1) Consists of 4,008,534 shares purchased for $.005 per share.
(2) Consists of 40,000 shares acquired upon exercise of options at $.075 per
share, 412,800 shares acquired upon exercise of options at $.15 per share
and 90,520 shares acquired upon exercise of options at $.625 per share.
(3) Consists of 200,000 shares acquired upon exercise of options at $.625 per
share.
(4) Consists of 40,000 shares acquired upon exercise of options at $.075 per
share, 120,000 shares acquired upon exercise of options at $.15 per share
and 32,000 shares acquired upon exercise of options at $.625 per share.
(5) Includes 96,331 shares of Series A preferred stock sold for $.01 per
share on August 11, 1997 pursuant to anti-dilution provisions granted in
connection with the purchase of 600,000 shares of Series A preferred
stock for $3.00 per share on April 27, 1997. Also includes 858,369 shares
of Series B preferred stock, 334,211 shares of Series C preferred stock
and 146,693 shares of Series D preferred stock purchased by entities
affiliated with Dr. Huber.
(6) Consists of 820,513 shares of Series C preferred stock and 63,721 shares
of Series D preferred stock purchased by entities affiliated with Mr.
Honeybourne.
(7) Consists of 76,923 shares of Series C preferred stock and 24,223 shares
of Series D preferred stock purchased by entities affiliated with Mr.
Palmer.
(8) Consists of 250,000 shares of Series A preferred stock, 715,308 shares of
Series B preferred stock, 102,564 shares of Series C preferred stock and
27,658 shares of Series D preferred stock purchased by entities
affiliated with Mr. Slogedal.
(9) Consists of 858,369 shares of Series B preferred stock, 334,211 shares of
Series C preferred stock and 146,693 shares of Series D preferred stock
purchased by entities affiliated with Mr. Spirtos.
(10) Includes 40,141 shares of Series A preferred stock sold for $.01 per
share on August 11, 1997 pursuant to anti-dilution provisions granted in
connection with the purchase of 250,000 shares of Series A preferred
stock for $3.00 per share on April 27, 1997.
49
Purchasers of our Series D preferred stock also received warrants to
purchase an aggregate number of unregistered shares of common stock equal to
their pro rata share, based on a total of 1,110,622 shares of Series D
preferred stock issued and outstanding, of an aggregate of 335,000 shares of
common stock at an exercise price per share equal to the initial public
offering price.
Purchase Agreement with Corvis Corporation
In August 2000, we entered into a purchase agreement with Corvis
Corporation. This agreement has a term of two years and obligates Corvis to
purchase optical networking products from us based on a rolling forecast
provided to us by Corvis. To date, we have not shipped any products under this
agreement. David R. Huber, Ph.D., our Chairman of the Board, is the Chairman
of the Board, President, Chief Executive Officer and a greater than 10%
stockholder of Corvis. We believe that the terms of this transaction with
Corvis were at least as favorable as those we could have obtained from an
unaffiliated third party.
2000 Executive Loan Program
In August 2000, pursuant to our 2000 Executive Loan Program we lent an
aggregate of $600,000 to our four executive officers. These loans are secured
by a pledge of an aggregate of 200,000 shares of our common stock held by the
executive officers, based on a per share price of $3.00 per share. These loans
are payable in full on the earlier of (1) two years from the date the loan was
made, (2) 30 days after voluntary or involuntary termination of the executive
officer's employment with us or (3) 90 days after termination of the executive
officer's employment with us as a result of retirement, disability or death.
The outstanding principal balance of the loan will accrue interest at a rate
equal to the prime rate upon the earlier of the date the loan is due or upon
the expiration of the lock-up agreements entered into by the executive
officers in connection with this offering. The number of shares pledged by
each executive officer is subject to adjustment by the board of directors
based on changes in the fair market value of our common stock. We have loans
with the following executive officers in the amounts indicated:
Executive Officer Amount Date of Loan
- ----------------- -------- --------------
F. Kevin Didden......................................... $150,000 August 1, 2000
Alan D. Kersey, Ph.D.................................... $150,000 August 1, 2000
Faye A. Iseley.......................................... $150,000 August 1, 2000
Michael Grillo.......................................... $150,000 August 1, 2000
Connecticut Presence Requirement
Pursuant to the Preferred Stock Purchase Agreement dated June 20, 2000,
Connecticut Innovations, Inc., a greater than five percent stockholder, has
the right to require us to repurchase the 4,321,518 shares of common stock
owned by them, and their affiliated entities, if we do not (1) maintain our
principal place of business, (2) base a majority of our employees and (3)
conduct a majority of our operations in Connecticut. If this right is
triggered, they would have the right to require us to purchase these shares of
common stock at a per share price equal to the greater of:
. the initial purchase price plus a 25% rate of return compounded annually
from the date of purchase; or
. the fair market value of the share as mutually determined by us and
Connecticut Innovations.
The shares held by Connecticut Innovations and its related entities were
originally purchased in the form of Series A, Series B, Series C and Series D
preferred stock at the prices and on the dates set forth in "Related Party
Transactions--Sales of Our Common Stock and Preferred Stock." On an as
converted basis, the shares we would be required to repurchase under the
provision include:
. 240,846 shares of common stock at an initial purchase price of $.0017
per share;
50
. 1,500,000 shares of common stock at an initial purchase price of $.50
per share;
. 1,502,148 shares of common stock at an initial purchase price of $1.165
per share;
.804,924 shares of common stock at an initial purchase price of $3.25 per
share; and
.273,600 shares of common stock at an initial purchase price of $15.00 per
share.
This right terminates once all of the shares held by Connecticut Innovations
and its related entities are freely tradeable without registration under the
Securities Act of 1933.
Accelerated Exercise of Options
On September 20, 2000, our board of directors accelerated the
exercisability of all outstanding incentive stock options to make them
immediately exercisable. Employees who choose to exercise their options must
agree to execute a stock restriction agreement which grants us the right to
repurchase the restricted stock at the original purchase price. This right of
repurchase lapses according to the original vesting schedule of the option.
The following executive officers have chosen to exercise all or a portion of
their options:
. On September 28, 2000, Alan D. Kersey exercised options to purchase
82,070 shares of common stock at an exercise price of $0.15 per share
and options to purchase 90,520 shares of common stock at an exercise
price of $0.625 per share. Our right of repurchase with respect to these
shares completely lapses on June 7, 2004.
. On September 28, 2000, Faye A. Iseley exercised options to purchase
145,833 shares of common stock at an exercise price of $0.625 per share.
Our right of repurchase with respect to these shares completely lapses
on August 1, 2003.
. On September 25, 2000, Michael Grillo exercised options to purchase
36,667 shares of common stock at an exercise price of $0.15 per share
and options to purchase 32,000 shares of common stock at an exercise
price of $0.625 per share. Our right of repurchase with respect to these
shares completely lapses on June 7, 2004.
Future Transactions
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a
majority of the board of directors, including a majority of the independent
and disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
51
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 31, 2000, and as adjusted to
reflect the sale of our common stock offered by this prospectus by:
. the executive officers named in the summary compensation table;
. each of our directors;
. all of our current directors and executive officers as a group; and
. each stockholder known by us to own beneficially more than five percent
of our common stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Shares of common stock that may be acquired by
an individual or group within 60 days of October 31, 2000, pursuant to the
exercise of options or warrants, are deemed to be outstanding for the purpose
of computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table. Percentage of ownership is based on
50,747,775 shares of common stock outstanding on October 31, 2000, which
assumes the conversion of all outstanding shares of preferred stock into
common stock, and 57,447,775 shares of common stock outstanding after the
completion of this offering.
Except as indicated in footnotes to this table, we believe that the
stockholders named in this table have sole voting and investment power with
respect to all shares of common stock shown to be beneficially owned by them
based on information provided to us by such stockholders. Unless otherwise
indicated, the address for each director and executive officer listed is: c/o
CiDRA Corporation, 50 Barnes Park North, Wallingford, Connecticut 06492.
Percentage of
Common Stock
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Beneficial Owner Owned Offering Offering
---------------- ------------ -------- --------
Directors and Executive Officers
F. Kevin Didden (1)............................. 3,947,026 7.8% 6.9%
Alan D. Kersey, Ph.D. (2)....................... 532,903 1.0 *
Michael Grillo (3).............................. 192,833 * *
David R. Huber, Ph.D. (4)....................... 10,704,153 21.1 18.6
Will Honeybourne (5)............................ 5,324,624 10.5 9.3
David F. Palmer (6)............................. 2,413,516 4.8 4.2
Asmund Slogedal (7)............................. 5,771,739 11.4 10.0
John B. Spirtos (8)............................. 1,750,899 3.4 3.0
All current executive officers and directors as
a group
(9 persons) (9)................................ 29,086,794 57.3 50.6
5% Stockholders
Connecticut Innovations, Inc. (10).............. 4,335,272 8.5 7.5
Teknoinvest Management AS (11).................. 5,089,079 10.0 8.9
First Reserve Corporation (5)................... 5,324,624 10.5 9.3
- --------
* Represents beneficial ownership of less than 1% of the shares of Common
Stock.
(1) Includes 22,292 shares issuable pursuant to options exercisable within
60 days of October 31, 2000. Also includes 1,641,844 shares held by
Didden Investment, LLC, of which Mr. Didden is Manager. Mr. Didden
disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest in this entity.
(2) Includes 7,083 shares issuable pursuant to options exercisable within 60
days of October 31, 2000 and 165,987 shares subject to our right of
repurchase, which lapses over time. Also includes 20,000 shares held
52
in trust for Dr. Kersey's minor children and 5,000 shares owned by Dr.
Kersey's wife. Dr. Kersey disclaims beneficial ownership of these shares.
(3) Includes 5,833 shares issuable pursuant to options exercisable within 60
days of October 31, 2000 and 65,333 shares subject to our right of
repurchase, which lapses over time. Also includes 30,000 shares held in
trust for Mr. Grillo's minor children and 5,000 shares owned by Mr.
Grillo's wife. Mr. Grillo disclaims beneficial ownership of these
shares.
(4) Includes 38,415 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Includes 79,458 shares
held by The David R. Huber Grantor Retained Annuity Trust, 43,583 shares
held by HRLD Corporation, of which Dr. Huber is President, 154,330
shares held by HRLD LP, of which Dr. Huber is a limited partner and
1,552,986 shares held by Optical Capital Group, LLC, of which Dr. Huber
is Chairman. Dr. Huber disclaims beneficial ownership of shares held by
these entities except to the extent of his pecuniary interest in these
entities.
(5) Includes 19,220 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Consists of 1,597,386
shares held by First Reserve Fund VII, LP and 3,727,238 shares held by
First Reserve Fund VIII, L.P. Mr. Honeybourne is a Managing Director of
First Reserve Corporation which is the General Partner of the General
Partner of First Reserve Fund VII, L.P. and First Reserve
Fund VIII, L.P. Mr. Honeybourne disclaims beneficial ownership of shares
held by these entities except to the extent of his pecuniary interest in
these entities. First Reserve Corporation is located at 475 Steamboat
Road, Greenwich, Connecticut 06830.
(6) Includes 7,306 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Consists of 2,260,872
shares held by Velocity Capital, LLC, 35,011 shares held by VPF CiDRA
Investments, LLC and 117,633 shares held by VPF CiDRA Investments II,
LLC. Mr. Palmer is the Managing Member of each of these entities. Mr.
Palmer disclaims beneficial ownership of shares held by these entities
except to the extent of his pecuniary interest in these entities.
(7) Includes 8,343 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Includes 521,405
shares held by Venturos I DA and 92,855 shares held by Venturos Holding
AS. Venturos I DA is managed by Venturos Management KS, which is a
subsidiary of Venturos Holding AS. Mr. Slogedal is a Managing Director
of Venturos Management KS. Also includes 4,466,477 shares held by KS
Teknoinvest V and 622,602 shares held by Teknoinvest VI. Mr. Slogedal is
a director of each of these entities. Mr. Slogedal disclaims beneficial
ownership of shares held by all of these entities except to the extent
of his pecuniary interest in these entities.
(8) Includes 38,415 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Consists of 43,583
shares held by HRLD Corporation, of which Mr. Spirtos is General
Counsel, 154,330 shares held by HRLD LP, of which HRLD Corporation is
the General Partner, and 1,552,986 shares held by Optical Capital Group,
LLC, of which Mr. Spirtos is Vice Chairman. Mr. Spirtos disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest in these entities.
(9) See Notes 1 through 8 above. Also includes an additional 141,667 shares
subject to our right of repurchase, which lapses over time.
(10) Includes 13,754 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Includes 949,078
shares held by CII/NEV LLC and 70,017 shares held by Connecticut
Innovations/Webster LLC. Connecticut Innovations, Inc. is the Managing
Member of these entities. Connecticut Innovations, Inc. is located at
999 West Street, Rocky Hill, Connecticut 06067.
(11) Includes 2,633 shares issuable pursuant to the exercise of warrants
exercisable upon the completion of this offering. Consists of 4,466,477
shares held by KS Teknoinvest V and 622,602 shares held by KS
Teknoinvest VI. Teknoinvest Management AS is the manager of KS
Teknoinvest V and KS Teknoinvest VI. Teknoinvest Management AS is
located at Grev Wedels Plass 5, P.O. Box 556 Sentrum, 0151 Oslo, Norway.
53
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, we will be authorized to issue
300,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $.01 par value per share, and there will be
57,447,775 shares of common stock and no shares of preferred stock
outstanding. Assuming the conversion of our preferred stock, as of October 31,
2000, we had 50,747,775 shares of common stock outstanding held of record by
371 stockholders. As of October 31, 2000, there were outstanding options to
purchase 3,475,164 shares of common stock and outstanding warrants to purchase
335,000 shares common stock.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by our board of directors out of funds legally available for dividend
payments. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable. The holders of common
stock have no preferences or rights of conversion, exchange, pre-emption or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. In the event of any liquidation, dissolution
or winding-up of our affairs, holders of common stock will be entitled to
share ratably in our assets that are remaining after payment or provision for
payment of all of our debts and obligations and after liquidation payments to
holders of outstanding shares of preferred stock, if any.
Preferred Stock
The preferred stock, if issued, could have priority over the common stock
with respect to dividends and other distributions, including the distribution
of assets upon liquidation. Our board of directors has the authority, without
further stockholder authorization, to issue from time to time shares of
preferred stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series. Although we
have no present plans to issue any shares of preferred stock, the issuance of
shares of preferred stock, or the issuance of rights to purchase such shares,
could decrease the amount of earnings and assets available for distribution to
the holders of common stock, adversely affect the rights and powers, including
voting rights, of the common stock, and have the effect of delaying, deterring
or preventing a change in control of us or an unsolicited acquisition
proposal.
Warrants
As of October 31, 2000, we had outstanding warrants to purchase up to an
aggregate number of shares of common stock equal to five percent of the shares
sold to the public in this offering. The shares to be issued upon the exercise
of these warrants are not registered shares, but holders of these shares are
entitled to registration rights as set forth below. These warrants were issued
in connection with our Series D preferred stock financing and are exercisable
at a price equal to the initial public offering price. The warrants may be
exercised for a one-year period beginning on the day after the registration
statement in connection with this offering is declared effective by the
Securities and Exchange Commission.
Registration Rights
Holders of shares of our common stock are entitled to registration rights
with respect to those shares, as set forth below. These registration rights
are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in any
registration for an underwritten offering. All expenses incurred in connection
with registrations effected in connection with the following rights will be
borne by us.
54
Demand Rights. The holders of 44,051,320 shares of common stock and
1,180,000 shares of common stock issuable upon the exercise of outstanding
options and warrants will have rights to cause us to register those shares
under the Securities Act. We may be required to effect up to three such
registrations. Stockholders with these registration rights who are not part of
an initial registration demand are entitled to notice and are entitled to
include their shares of common stock in the registration.
Piggyback Rights. If at any time after this offering we propose to register
any of our equity securities under the Securities Act, other than in
connection with:
. a registration relating solely to our stock option plans or other
employee benefit plans, or
. a registration relating solely to a business combination or merger
involving us,
the holders of 44,051,320 shares of common stock and 1,180,000 shares of
common stock issuable upon the exercise of outstanding options and warrants
are entitled to notice of such registration and are entitled to include their
common stock in the registration.
Shelf Registration Rights. In addition, the holders of 44,051,320 shares of
common stock and 1,180,000 shares of common stock issuable upon the exercise
of outstanding options and warrants will have the right to cause us to
register these shares on a Form S-3, provided that we are eligible to use this
form. We may be required to effect up to three such registrations. We will not
be required to effect such a registration unless the aggregate offering price
of the shares to be registered is expected to be at least $5.0 million, and we
will only be required to effect one such registration in any twelve-month
period. Stockholders with these registration rights who are not part of an
initial registration demand are entitled to notice and are entitled to include
their shares of common stock in the registration.
Delaware Law and Our Charter and By-law Provisions
The provisions of (1) Delaware law, (2) our restated certificate of
incorporation and (3) our restated bylaws discussed below could discourage or
make it more difficult to accomplish a proxy contest or other change in our
management or the acquisition of control by a holder of a substantial amount
of our voting stock. It is possible that these provisions could make it more
difficult to accomplish, or could deter, transactions that stockholders may
otherwise consider to be in their best interests or in our best interests.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by the board of directors and to discourage transactions that may
involve an actual or threatened change of control of us. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal.
The provisions also are intended to discourage tactics that may be used in
proxy fights. Such provisions also may have the effect of preventing changes
in our management.
Delaware Statutory Business Combinations Provision. We are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes
of Section 203, a "business combination" is defined broadly to include a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and, subject to limited exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Classified Board of Directors. Our restated certificate of incorporation
provides that our board of directors will be divided into three classes as
nearly equal in number as possible. Each year, the stockholders will elect the
members of one of the three classes to a three-year term of office. All
directors elected to our classified board
55
of directors will serve until the election and qualification of their
respective successors or their earlier resignation or removal. The board of
directors is authorized to create new directorships and to fill such positions
so created and is permitted to specify the class to which any such new
position is assigned. The person filling such position would serve for the
term applicable to that class. The board of directors (or its remaining
members, even if less than a quorum) is also empowered to fill vacancies on
the board of directors occurring for any reason for the remainder of the term
of the class of directors in which the vacancy occurred. Members of the board
of directors may only be removed for cause. These provisions are likely to
increase the time required for stockholders to change the composition of the
board of directors. For example, in general, at least two annual meetings will
be necessary for stockholders to effect a change in a majority of the members
of the board of directors.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our restated bylaws provide that, for nominations to
the board of directors or for other business to be properly brought by a
stockholder before a meeting of stockholders, the stockholder must first have
given timely notice of the proposal in writing to our Secretary. For an annual
meeting, a stockholder's notice generally must be delivered not less than 45
days nor more than 75 days prior to the anniversary of the mailing date of the
proxy statement for the previous year's annual meeting. If the date of the
annual meeting is more than 30 days before or after the anniversary date of
the preceding year's annual meeting, or if there was no annual meeting in the
preceding year, notice must be delivered not less than the later of 60 days
prior to the meeting or ten days following public announcement of the meeting
and not more than 90 days prior to the meeting. For a special meeting, the
notice must generally be delivered by the later of 90 days prior to the
special meeting or ten days following the day on which public announcement of
the meeting is first made. Detailed requirements as to the form of the notice
and information required in the notice are specified in the restated bylaws.
If it is determined that business was not properly brought before a meeting in
accordance with our bylaw provisions, such business will not be conducted at
the meeting.
Special Meetings of Stockholders. Special meetings of the stockholders may
be called only by our board of directors pursuant to a resolution adopted by a
majority of the total number of directors.
No Stockholder Action by Written Consent. Our restated certificate of
incorporation does not permit our stockholders to act by written consent. As a
result, any action to be effected by our stockholders must be effected at a
duly called annual or special meeting of the stockholders.
Super-Majority Stockholder Vote Required. The Delaware General Corporation
Law provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate
of incorporation or bylaws, as the case may be, requires a greater percentage.
Our restated certificate of incorporation requires the affirmative vote of the
holders of at least 66 2/3% of our outstanding voting stock to amend or repeal
any of the provisions discussed in this section of this prospectus entitled
"Delaware Law and Our Charter and By-law Provisions" or to reduce the number
of authorized shares of common stock or preferred stock. This 66 2/3%
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any preferred stock that might
then be outstanding. A 66 2/3% vote is also required for any amendment to, or
repeal of, our bylaws by the stockholders. Our bylaws may be amended or
repealed by a simple majority vote of the board of directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be EquiServe
Trust Company, N.A.
Listing
We have applied to list our common stock on the Nasdaq National Market
under the symbol "CIDC."
56
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect market prices prevailing from time to time.
Furthermore, because only a limited number of shares will be available for
sale shortly after this offering due to existing contractual and legal
restrictions on resale as described below, there may be sales of substantial
amounts of our common stock in the public market after the restrictions lapse.
This may adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have 57,747,775 shares of common
stock outstanding, assuming the conversion of all outstanding shares of
preferred stock and no exercise of any options and warrants outstanding as of
October 31, 2000. Of these shares, the 6,700,000 shares sold in this offering
will be freely transferable without restriction or registration under the
Securities Act, except for any shares purchased by one of our existing
"affiliates," as that term is defined in Rule 144 under the Securities Act.
The remaining 50,747,775 shares of common stock existing are "restricted
shares" as defined in Rule 144. Restricted shares may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 of the Securities Act. As a result of the
contractual 180-day lock-up period described below and the provisions of Rules
144 and 701, these shares will be available for sale in the public market as
follows:
Number of Shares Date
---------------- ----
....................... On the date of this prospectus.
....................... After 90 days from the date of this prospectus.
....................... After 180 days from the date of this prospectus
(subject, in some cases, to volume limitations).
....................... At various times after 180 days from the date of
this prospectus (subject, in some cases, to
volume limitations).
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
this offering, a person, or persons whose shares are aggregated, who owns
shares that were purchased from us, or any affiliate, at least one year
previously, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of our then-outstanding shares
of common stock, which will equal approximately 574,478 shares immediately
after this offering, or the average weekly trading volume of our common stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice of the sale on Form 144. Sales under Rule 144 are also
subject to manner of sale provisions, notice requirements and the availability
of current public information about us. We are unable to estimate the number
of shares that will be sold under rule 144 since this will depend on the
market price for our common stock, the personal circumstances of the
stockholder and other factors.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who owns
shares within the definition of "restricted securities" under Rule 144 that
were purchased from us, or any affiliate, at least two years previously, would
be entitled to sell shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements described above.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
57
effective date of this offering is entitled to resell such shares 90 days
after the effective date of this offering in reliance on Rule 144, without
having to comply with the holding period requirements or other restrictions
contained in Rule 701.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, along
with the shares acquired upon exercise of such options, including exercises
after the date of this prospectus. Securities issued in reliance on Rule 701
are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than "affiliates," as defined in Rule 144, subject only
to the manner of sale provisions of Rule 144 and by "affiliates" under Rule
144 without compliance with its one-year minimum holding period requirement.
Registration Rights
Upon completion of this offering, the holders of 44,051,320 shares of
common stock and 1,180,000 shares of common stock issuable upon the exercise
of outstanding options and warrants or their transferees, will be entitled to
various rights with respect to the registration of these shares under the
Securities Act. Registration of these shares under the Securities Act would
result in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration, except
for shares purchased by affiliates.
Stock Options
As of October 31, 2000, options to purchase a total of 3,475,164 shares of
common stock were outstanding. All of the shares subject to options are
subject to lock-up agreements. An additional 1,680,245 shares of common stock
were available for future option grants under our stock plans.
Upon completion of this offering, we intend to file a registration
statement under the Securities Act covering all shares of common stock subject
to outstanding options or issuable pursuant to our 2000 Employee, Director and
Consultant Stock Plan, our 1997 Stock Option Plan and our 2000 Employee Stock
Purchase Plan. Subject to Rule 144 volume limitations applicable to
affiliates, shares registered under any registration statements will be
available for sale in the open market, beginning 90 days after the date of the
prospectus, except to the extent that the shares are subject to vesting
restrictions with us or the contractual restrictions described below.
Lock-up Agreements
Our officers, directors and substantially all of our stockholders, who hold
an aggregate of approximately shares of our common stock, have agreed,
subject to limited exceptions, not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of any shares of common stock or any
securities convertible into or exercisable or exchangeable for shares of
common stock for a period of 180 days after the date of this prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated.
58
If the reported last sale price of the common stock on the Nasdaq National
Market is at least twice the initial public offering price per share for 20 of
the 30 trading days (including the 30th day) ending on the last trading day
preceding the 90th day after the date of this prospectus, 25% of the shares of
our common stock subject to the 180-day restriction described above excluding
shares owned by our executive officers, or shares, will be released from
these restrictions. The release of these shares will occur on the later to
occur of:
. the 90th day after the date of this prospectus if we make our first
post-offering public release of our quarterly or annual earnings results
during the period beginning on the eleventh trading day after the date
of this prospectus and ending on the day prior to the 90th day after the
date of this prospectus, or
. on the second trading day following the first public release of our
quarterly or annual results occurring on or after the 90th day after the
date of this prospectus, if we do not make our first post-offering
public release as described in the preceding clause.
Of the shares to be released, shares will be eligible for sale, in some
cases subject only to the volume, manner of sale and notice requirements of
Rule 144. In addition, Morgan Stanley & Co. Incorporated may in its sole
discretion choose to release any or all of these shares from these
restrictions prior to the expiration of either the 90- or 180-day period.
59
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, CIBC World Markets Corp., UBS Warburg
LLC, Thomas Weisel Partners LLC and Raymond James & Associates, Inc. are
acting as representatives, have severally agreed to purchase, and we have
agreed to sell to them, severally, the number of shares of common stock set
forth opposite the names of these underwriters below:
Number of
Name Shares
- ---- ---------
Morgan Stanley & Co. Incorporated.....................................
CIBC World Markets Corp...............................................
UBS Warburg LLC.......................................................
Thomas Weisel Partners LLC............................................
Raymond James & Associates, Inc.......................................
---------
Total............................................................... 6,700,000
=========
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus
are subject to the approval of specified legal matters by their counsel and to
other conditions. The underwriters are obligated to take and pay for all of
the shares of common stock offered by this prospectus, if any such shares are
taken. However, the underwriters are not required to take or pay for the
shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and a portion to some dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share to other underwriters or to other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an aggregate of 1,005,000 additional shares of common stock at
the public offering price set forth on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares offered by this prospectus. To the
extent this option is exercised, each underwriter will become obligated,
subject to specified conditions, to purchase about the same percentage of
additional shares as the number set forth next to the underwriter's name in
the preceding table bears to the total number of shares set forth next to the
names of all underwriters in the preceding table. If the underwriters exercise
the over-allotment option in full, the total price to the public for this
offering would be $ , the total underwriting discounts and commissions would
be $ and the total proceeds to us would be $ before deducting estimated
offering expenses of $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have filed an application for our common stock to be quoted on the
Nasdaq National Market under the symbol "CIDC."
60
We, our directors and executive officers and substantially all of our
stockholders and option holders have each agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, we will not, directly or indirectly, during the period ending
180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other agreement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. This lock-up restriction
is subject, in specified circumstances, to earlier release. For a description
of the circumstances leading to this earlier release, please see "Shares
Eligible for Future Sale--Lock-up Agreements."
The restrictions described in the immediately preceding paragraph do not
apply to:
. the sale by us to the underwriters of the shares of common stock under
the underwriting agreement;
. the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of this offering.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may sell more shares
than they are obligated to purchase under the underwriting agreement, creating
a short position. A short sale is covered if the short position is no greater
than the number of shares available for purchase by the underwriters under the
over allotment option. The underwriters can close out a covered short sale by
exercising the over allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of
shares compared to the price available under the over allotment option. The
underwriters may also sell shares in excess of the over allotment option,
creating a naked short position. The underwriters must close out any naked
short position by purchasing shares 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 common stock in the open market after
pricing that could adversely affect investors who purchase in the offering. As
an additional means of facilitating the offering, the underwriters may bid
for, and purchase, shares of common stock in the open market to stabilize the
price of the common stock. The underwriting syndicate may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock to cover syndicate short positions or to stabilize the price of
the common stock. These activities may raise or maintain the market price of
the common stock above independent market levels or prevent or retard a
decline in the market price of the common stock. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
At our request, the underwriters have reserved up to shares of common
stock offered by this prospectus for sale at the initial public offering price
to some of our directors, officers, employees, customers and other business
associates. There can be no assurance that any of the reserved shares will be
purchased. The number of shares available for sale to the general public will
be reduced to the extent that these parties purchase
61
the reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus. Executive officers and business associates that
purchase reserved shares will be prohibited from selling, transferring,
assigning, pledging or hypothecating such shares for 180 days after the date
of this prospectus.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager
on 146 completed transactions, and has acted as a syndicate member in an
additional 128 public offerings of equity securities. Thomas Weisel Partners
does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
On June 20, 2000, Morgan Stanley Dean Witter Equity Funding, Inc.,
purchased shares of our Series D preferred stock convertible into 333,336
shares of common stock for an aggregate amount of $5.0 million, or $15 per
common share. In connection with its purchase of Series D preferred stock,
Morgan Stanley Dean Witter Equity Funding also received warrants entitling it
to purchase 16,758 shares of common stock at an exercise price per share equal
to the initial public offering price. Morgan Stanley Dean Witter Equity
Funding and Morgan Stanley & Co. Incorporated, which is an underwriter in this
offering, are wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the representatives of the underwriters. Among the factors to
be considered in determining the initial public offering price will be:
. our record of operations, our current financial position and future
prospects;
. the experience of our management;
. sales, earnings and our other financial and operating information in
recent periods; and
. the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
The estimated initial public offering price range set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.
62
LEGAL MATTERS
The validity of the common stock offered by us in this offering will be
passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts and for the underwriters by Davis Polk & Wardwell, New
York, New York.
EXPERTS
The financial statements of CiDRA Corporation as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered by this prospectus.
This prospectus, which is part of the registration statement, does not contain
all of the information set forth in the registration statement. For further
information pertaining to us and our common stock, reference is made to the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus as to the contents or
provisions of any documents referred to in this prospectus are not necessarily
complete, and in each instance where a copy of the document has been filed as
an exhibit to the registration statement, reference is made to the exhibit for
a more complete description of the matters involved.
You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC
at prescribed rates from the Public Reference Section of the SEC at such
address, and at the SEC's regional offices located at 7 World Trade Center,
13th Floor, New York, New York 10048, and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and other filings made with the SEC electronically are publicly
available through the SEC's web site at http://www.sec.gov. The registration
statement, including all exhibits and amendments to the registration
statement, has been filed electronically with the SEC.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file annual reports containing financial statements audited
by an independent public accounting firm, quarterly reports containing
unaudited financial data, current reports, proxy statements and other
information with the SEC. You will be able to inspect and copy such periodic
reports, proxy statements and other information at the SEC's public reference
room, and the web site of the SEC referred to above.
63
CIDRA CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1998 and 1999 and September 30, 2000
(unaudited).............................................................. F-3
Statements of Operations for each of the three years in the period ended
December 31, 1999 and
for the nine months ended September 30, 1999 (unaudited) and 2000
(unaudited).............................................................. F-4
Statements of Changes in Stockholders' Deficit for each of the three years
in the period ended December 31, 1999 and for the nine months ended
September 30, 2000 (unaudited)........................................... F-5
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999 and
for the nine months ended September 30, 1999 (unaudited) and 2000
(unaudited).............................................................. F-6
Notes to Financial Statements............................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CiDRA Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and cash flows present fairly,
in all material respects, the financial position of CiDRA Corporation (the
"Company") at December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America. 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 audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
March 6, 2000, except for the stock split described in Note 8 which is as of
April 7, 2000
F-2
CIDRA CORPORATION
BALANCE SHEETS
(in thousands, except share data)
September 30,
2000
Pro Forma
December 31, Stockholders'
------------------ September 30, Equity
1998 1999 2000 (Note 2)
-------- -------- ------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
(Note 2).................... $ 4,497 $ 16,625 $ 55,685
Marketable securities (Note
2).......................... -- -- 30,769
Restricted cash (Note 2)..... -- 1,906 3,626
Accounts receivable.......... -- -- 107
Inventories.................. 772 750 657
Other current assets......... 113 171 612
-------- -------- --------
Total current assets....... 5,382 19,452 91,456
Fixed assets, net (Note 3)..... 3,882 5,347 21,734
Restricted cash................ 1,367 440 848
Other assets (Note 4).......... 310 191 453
-------- -------- --------
Total assets............... $ 10,941 $ 25,430 $114,491
======== ======== ========
Liabilities, Mandatorily
Redeemable Convertible
Preferred Stock and
Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable............. $ 963 $ 1,093 $ 9,347
Accrued liabilities (Note 5)
............................ 531 1,459 2,735
Current portion of long-term
debt (Note 6)............... 243 3,960 4,323
-------- -------- --------
Total current liabilities.. 1,737 6,512 16,405
-------- -------- --------
Long-term debt (Note 6)........ 3,691 2,116 2,250
-------- -------- --------
Commitments and contingencies
(Note 11)
Mandatorily redeemable
convertible preferred stock,
(Note 7) $.01 par value,
7,020,000 shares authorized;
3,764,433, 5,388,658,
6,499,280 (unaudited), and 0
(unaudited) shares issued and
outstanding at December 31,
1998, December 31, 1999,
September 30, 2000 and
September 30, 2000 pro forma,
respectively (liquidation
preference of $21,225, $52,898
and $152,854 (unaudited) as of
December 31, 1998, December
31, 1999 and September 30,
2000, respectively)........... 20,640 52,263 150,540 --
Stockholders' (deficit) equity
(Note 8):
Common stock, $.001 par
value; 62,720,000 shares
authorized; 7,430,478,
8,292,030, 11,724,353
(unaudited) and 50,720,033
(unaudited) shares issued
and outstanding at December
31, 1998, December 31, 1999,
September 30, 2000 and
September 30, 2000 pro
forma, respectively......... 7 8 12 51
Additional paid-in capital... 195 2,567 18,886 169,387
Loans to officers............ -- -- (1,075) (1,075)
Deferred compensation........ -- (1,651) (11,985) (11,985)
Accumulated deficit.......... (15,329) (36,385) (60,542) (60,542)
-------- -------- -------- -------
Total stockholders'
(deficit) equity.......... (15,127) (35,461) (54,704) $95,836
-------- -------- -------- =======
Total liabilities,
mandatorily redeemable
convertible preferred
stock and stockholders'
(deficit) equity.......... $ 10,941 $ 25,430 $114,491
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
CIDRA CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(unaudited)
Revenue....................... $ -- $ -- $ -- $ -- $ 468
Operating expenses:
Production costs, exclusive
of stock compensation
expense of $0, $0, $84, $0
and $472, respectively..... -- -- 136 -- 2,196
Research and development,
exclusive of stock
compensation expense of $0,
$0, $211, $148, and $1,131,
respectively............... 1,484 9,270 15,773 11,662 14,606
Sales and marketing,
exclusive of stock
compensation expense of $0,
$0, $11, $5 and $200,
respectively............... 86 947 1,594 993 1,796
General and administrative,
exclusive of stock
compensation expense of $0,
$0, $268, $158 and $967,
respectively............... 848 3,000 3,414 2,381 4,594
Deferred compensation....... -- -- 574 311 2,770
------- -------- -------- -------- --------
Total operating expenses.. 2,418 13,217 21,491 (15,347) 25,962
------- -------- -------- -------- --------
Loss from operations.......... (2,418) (13,217) (21,491) (15,347) (25,494)
Interest income............... 50 497 874 687 2,059
Interest expense.............. (7) (80) (513) (385) (615)
Other income (Note 4)......... -- 85 74 19 24
------- -------- -------- -------- --------
Net loss.................. (2,375) (12,715) (21,056) (15,026) (24,026)
Dividends on preferred stock.. -- -- -- -- 131
------- -------- -------- -------- --------
Net loss attributable to
common stockholders........ $(2,375) $(12,715) $(21,056) $(15,026) $(24,157)
======= ======== ======== ======== ========
Basic and diluted net loss
per share attributable to
common stockholders........ $ (.72) $ (3.33) $ (3.39) $ (2.53) $ (2.85)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share attributable to common
stockholders................. 3,316 3,818 6,209 5,937 8,468
======= ======== ======== ======== ========
Pro forma basic and diluted
net loss per common share
(unaudited).................. $ (0.59) $ (0.56)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited).................. 35,798 43,305
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
CIDRA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(dollars in thousands)
Common Stock Additional
----------------- Paid in Deferred Loans to Accumulated
Shares Amount Capital Compensation Officers Deficit Total
---------- ------ ---------- ------------ -------- ----------- --------
December 31, 1996....... 6,307,504 $6 $ 10 -- $ -- $ (239) $ (223)
Net loss................ -- -- -- -- -- (2,375) (2,375)
---------- --- ------- -------- ------- -------- --------
December 31, 1997....... 6,307,504 6 10 -- -- (2,614) (2,598)
Share issued for
OptoPlan
investment (Note 4).... 700,000 1 157 -- -- -- 158
Options exercised....... 422,974 -- 28 -- -- -- 28
Net loss................ -- -- -- -- -- (12,715) (12,715)
---------- --- ------- -------- ------- -------- --------
December 31, 1998....... 7,430,478 7 195 -- -- (15,329) (15,127)
Options exercised....... 861,552 1 147 -- -- -- 148
Deferred compensation... -- -- 2,225 (2,225) -- -- --
Amortization of deferred
compensation........... -- -- -- 574 -- -- 574
Net loss................ -- -- -- -- -- (21,056) (21,056)
---------- --- ------- -------- ------- -------- --------
December 31, 1999....... 8,292,030 8 2,567 (1,651) -- (36,385) (35,461)
Options exercised
(unaudited)............ 3,432,323 4 1,515 -- -- -- 1,519
Issuance of warrants
(unaudited)............ -- -- 1,700 -- -- -- 1,700
Deferred compensation
(unaudited)............ -- -- 13,104 (13,104) -- -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- 2,770 -- -- 2,770
Loans to officers
(unaudited)............ -- -- -- -- (1,075) -- (1,075)
Dividends (unaudited)... -- -- -- -- -- (131) (131)
Net loss (unaudited).... -- -- -- -- -- (24,026) (24,026)
---------- --- ------- -------- ------- -------- --------
September 30, 2000
(unaudited)............ 11,724,353 $12 $18,886 $(11,985) $(1,075) $(60,542) $(54,704)
========== === ======= ======== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
CIDRA CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(unaudited)
Cash flows from operating
activities:
Net loss.................... $(2,375) $(12,715) $(21,056) $(15,026) $(24,026)
Depreciation and
amortization............... 39 508 1,164 803 1,592
Amortization of deferred
compensation............... -- -- 574 311 2,770
Accretion of Series D
preferred stock............ -- -- -- -- 75
Changes in operating assets
and liabilities:
Accounts receivable....... -- -- -- -- (107)
Inventories............... (29) (743) 22 (63) 93
Other current assets and
other assets............. (90) (171) 78 22 (703)
Accounts payable and
accrued expenses......... 417 1,077 1,058 1,076 3,930
------- -------- -------- -------- --------
Net cash used in
operating activities... (2,038) (12,044) (18,160) (12,877) (16,376)
------- -------- -------- -------- --------
Cash flows from investing
activities:
Purchases of fixed assets... (936) (3,488) (2,629) (2,206) (12,510)
Purchases of marketable
securities................. -- -- -- -- (30,769)
------- -------- -------- -------- --------
Net cash used in
investing activities... (936) (3,488) (2,629) (2,206) (43,279)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
debt....................... -- 4,042 2,475 2,265 967
Debt repayment.............. -- (358) (333) -- (470)
Restricted cash............. -- (1,367) (996) (996) (2,128)
Proceeds from exercise of
stock options.............. -- 28 148 79 1,519
Loan to officers............ -- -- -- -- (1,075)
Net proceeds from sale of
mandatorily redeemable
convertible preferred stock
and warrants............... 3,313 17,327 31,623 31,672 99,902
------- -------- -------- -------- --------
Net cash provided by
financing activities... 3,313 19,672 32,917 33,020 98,715
------- -------- -------- -------- --------
Net increase in cash and cash
equivalents.................. 339 4,140 12,128 17,937 39,060
Cash and cash equivalents at
beginning of period.......... 18 357 4,497 4,497 16,625
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 357 $ 4,497 $ 16,625 $ 22,434 $ 55,685
======= ======== ======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid during the year
for:
Interest paid............. $ 8 $ 74 $ 529 $ 330 $ 538
Noncash transactions disclosed in Notes 3, 4 and 7.
The accompanying notes are an integral part of these financial statements.
F-6
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Formation and Operations of the Company
CiDRA Corporation (the "Company") was incorporated in Delaware on August 7,
1996. The Company is engaged in the design, manufacture and marketing of high-
precision component, module and subsystem products, based upon proprietary
technology, for next-generation optical networks. The Company's products are
designed to permit highly accurate wavelength tuning to enable increased
functionality, flexibility and performance in optical networks.
The Company has funded its operations through the issuance of equity
securities, bank borrowings and equipment financing. During the first nine
months of 2000, the Company raised $99,862,000 from the sale of preferred
stock. Management believes the existing cash, cash equivalents and marketable
securities on hand at September 30, 2000 will be adequate to fund the
Company's cash requirements for the remainder of 2000 and into 2001.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Cash, cash equivalents, and restricted cash
The Company considers all highly liquid investments with original
maturities of three months or less at date of purchase to be cash equivalents.
The Company invests excess cash primarily in money market funds, certificates
of deposits and short-term repurchase agreements at financial institutions
which are subject to minimal credit and market risk.
Restricted cash of $4.5 million (unaudited) at September 30, 2000 and $2.3
million at December 31, 1999 is comprised of amounts restricted under the
Company's credit facilities. (See Note 5).
Marketble securities
The Company classifies its entire investment portfolio as available for
sale as defined in SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As of December 31, 1999 and September 30, 2000, the
Company's investment portfolio consisted of debt and equity securities. As of
September 30, 2000, the Company's marketable securities were held by two major
banking institutions and all mature within one year.
The cost basis, using the specific identification method, approximates fair
value and no unrealized gain or loss has been recognized.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
marketable securities and accounts receivable. The Company's cash and
investment policies limit investments to short-term investment grade
instruments.
One customer accounted for 100% of the revenue recognized during the nine-
month period ended September 30, 2000 (unaudited). This same customer accounts
for 100% of the accounts receivable balance at September 30, 2000 (unaudited).
F-7
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method. The components of inventories are (in
thousands):
December
31,
--------- September 30,
1998 1999 2000
---- ---- -------------
(unaudited)
Raw materials........................................ $528 $629 $219
Work in process...................................... 244 62 375
Finished goods....................................... -- 59 63
---- ---- ----
$772 $750 $657
==== ==== ====
Fixed assets
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets ranging from 3 to 7
years. Leasehold improvements are amortized over the shorter of the useful
life of the assets or the life of the lease term.
The Company periodically reviews the carrying value of its fixed assets
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets." No
impairment losses have been recognized to date.
Revenue recognition
The Company recognizes revenue from product sales when a purchase
commitment has been received, delivery has been made, collection is probable
and, if contractually required, a customer's product acceptance has been
received. Warranty costs are estimated and recorded at the time of product
revenue recognition.
The Company also receives payment pursuant to a professional services
arrangement. Under this arrangement, the Company recognizes revenue ratably as
the services are performed.
Stock compensation
The Company applies APB Opinion 25 ("APB 25") and related interpretations
in accounting for its stock option plan and stock awards. Under APB 25,
compensation expense is recognized to the extent that the fair market value of
the underlying stock on the date of grant exceeds the exercise price of the
employee stock option or stock award. Compensation so computed is then
recognized over the vesting period.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services." All transactions in which services are received for the issuance
of equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the fair value
of the equity instrument issued is the earlier of the date on which the
counterparty's performance is complete or the date on which it is probable
that performance will occur.
F-8
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and development
Research and development costs are expensed as incurred.
Income taxes
The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Unaudited interim financial information
The unaudited interim financial information as of September 30, 2000 and
for the nine months ended September 30, 2000 and 1999 have been prepared on a
basis consistent with the annual audited financial statements. In the opinion
of management, such information contains all adjustments, consisting of only
normal recurring adjustments, considered necessary for a fair presentation.
The operating results for any interim period are not necessarily indicative of
the results for the entire year or for any future periods.
Unaudited pro forma stockholders' equity
If the offering contemplated in this prospectus is consummated, all of the
mandatorily redeemable convertible preferred stock shares outstanding as of
September 30, 2000 will convert either automatically or upon the consent of
the preferred stockholders into 38,995,680 shares of common stock (the "Common
Stock"). The unaudited pro forma presentation of the September 30, 2000
mandatorily redeemable convertible preferred stock and stockholders' equity
(deficit) has been prepared assuming such conversion. Pro forma basic and
diluted net loss per common share have been computed assuming the conversion
of all outstanding shares of mandatorily redeemable preferred stock into
common stock as of the beginning of the periods presented or as of the date of
issuance, if later.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
restricted bank deposits, accounts receivable, prepaid expenses, and accounts
payable, are carried at cost which approximates their fair value because of
the short-term maturity of these financial instruments.
Net loss per share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic and diluted net loss per share
is computed by dividing net loss available for common stockholders by the
weighted average number of common shares outstanding during the period less
outstanding nonvested shares. Outstanding nonvested shares are not included in
the computation of weighted average shares outstanding until the time-based
vesting restrictions have lapsed.
F-9
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has excluded the impact of all convertible preferred stock,
common stock subject to repurchase, warrants for common stock and outstanding
stock options from the calculation of diluted loss per common share because
all such securities are antidilutive for all periods presented.
Segment information
Through September 30, 2000, the Company operated as one segment.
Comprehensive income (loss)
The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income." During the periods presented, comprehensive income was
not materially different from net income.
Recent accounting pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." The interpretation clarifies the application of APB Opinion
No. 25 in specified events, as defined. The interpretation is effective July
1, 2000, but covers certain events occurring during the period after December
15, 1998, but before the effective date. To the extent that events occurring
during the period after December 15, 1998, but before the effective date, the
effects of applying this interpretation would be recognized on a prospective
basis from the effective date. Accordingly, upon initial application for the
final interpretation, no adjustments would be made to the financial statements
for the periods before the effective date and no expense would be recognized
for any additional compensation cost measured that is attributable to periods
before the effective date. The adoption of this interpretation has not had a
material effect on the accompanying financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition." This bulletin, as
amended by SAB 101A and SAB 101B, summarizes views of the Staff on the
measurement and timing of revenue recognition in financial statements of
public companies. We believe that our current revenue recognition policy
complies with the guidelines in the bulletin.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which established accounting and reporting
standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, the
Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS 133 until fiscal years beginning after
June 15, 2000. The Company will become subject to SFAS No. 133 on January 1,
2001. The Company does not currently hold any derivative instruments and does
not engage in hedging activities. The adoption of SFAS No. 133 will not have a
material impact on our financial position or results of operations.
F-10
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Fixed Assets (in thousands):
December 31,
------------- September 30,
1998 1999 2000
------ ------ -------------
(unaudited)
Machinery and equipment.......................... $3,631 $5,842 $16,609
Furniture........................................ 288 487 571
Software......................................... 212 372 451
Leasehold improvements........................... 293 352 7,398
------ ------ -------
4,424 7,053 25,029
Less accumulated depreciation.................... 542 1,706 3,295
------ ------ -------
$3,882 $5,347 $21,734
====== ====== =======
Depreciation expense for the years ended 1997, 1998, 1999 and for the nine
months ended September 30, 2000 was $39,000, $503,000, $1,164,000 and
$1,592,000, respectively.
As of September 30, 2000, the Company has accrued $5,469,000 (unaudited)
related to the purchase of fixed assets and construction of leasehold
improvements.
4. Other Assets
On February 18, 1998, the Company entered into a stock purchase agreement
with OptoPlan A.S. ("OptoPlan"), a Norwegian corporation. OptoPlan was
organized to develop, produce and market an experimental single point quartz
resonant fiber optic pressure sensor to be used in the oil and petroleum
industry. In consideration for a 40% equity interest in OptoPlan, the Company
issued 700,000 shares of its Common Stock. The Company's investment in
OptoPlan was $220,000 at September 30, 2000 (unaudited) and $191,000 at
December 31, 1999. The investment is accounted for under the equity method of
accounting and is included within other assets.
As part of the stock purchase agreement with OptoPlan, the Company has the
right to purchase additional shares of OptoPlan common stock upon the
occurrence of a triggering event, defined as the authorization by the Board of
Directors to effect an initial public offering ("IPO") of the common stock of
the Company. If the Company should fail to effect an IPO, fail to become
acquired, or become insolvent, on or before the fourth anniversary of the
share purchase agreement, OptoPlan may repurchase the stock owned by the
Company for cash for a fixed purchase price denominated in a foreign currency.
The purchase price is approximately $389,000 at December 31, 1999. The Company
also has the right of first refusal with respect to the sale of any shares of
OptoPlan to a third party.
5. Accrued Liabilities
Accrued liabilities consists of the following (in thousands):
December
31,
----------- September 30,
1998 1999 2000
---- ------ -------------
(unaudited)
Accrued wages..................................... $116 $ 233 $ 291
Accrued royalties................................. 170 670 262
Accrued services.................................. -- -- 843
Accrued rent...................................... 116 158 172
Other accrued expenses............................ 129 398 1,167
---- ------ ------
$531 $1,459 $2,735
==== ====== ======
F-11
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Debt
In December 1998, the Company entered into a $5 million revolving credit
facility with a bank. At December 31, 1999, approximately $3.5 million of
notes payable were outstanding under this facility. The Company is required
under this facility to comply with various financial and other covenants,
including a requirement that the Company maintain account balances with the
bank at least equal to the outstanding principal amount under the loan.
However, in the event the Company maintains at least 90% of its funds in the
bank, the Company is only required to maintain account balances with the bank
at least equal to 50% of the outstanding principal amount under the loan. The
facility is secured by all of the Company's tangible personal property and
certain intangible personal property, subject only to security interests under
the master loan and security agreement discussed below. No commitment fees are
due on unused portions of the facility. Upon maturity of these notes in
December 2000, the Company has the option to extend the repayment date to
December 2005.
In August 1997, the Company entered into a $750,000 revolving equipment
line of credit/term loan with a bank to finance up to eighty percent of
capital equipment purchased. Interest is at the bank's prime rate plus 150
basis points. The loan is secured by the underlying equipment and also
requires the maintenance of similar account balances with the bank as
described above. Principal payments begin in January 2001 in 48 equal monthly
payments.
In October 1998, the Company entered into a master loan and security
agreement to provide up to $5 million for capital equipment purchases.
Individual notes payable under the agreement have monthly repayment terms of
sixty months and bear interest at annual fixed rates ranging from 13.5% to
14.3%. The notes are secured by the underlying equipment.
The following tables present information about the Company's debt balances
(in thousands):
December 31,
------------- September 30,
1998 1999 2000
------ ------ -------------
(unaudited)
Term notes payable under master loan and security
agreement........................................ $1,200 $1,842 $2,339
Term note payable to bank; interest at bank's
prime rate (9.5% at September 30, 2000 and 8.5%
at December 31, 1999) plus 1.5%; monthly
principal payments commencing January 2001 and
continuing through December 2004................. 734 734 734
Note payable to bank; interest at bank's prime
rate (9.5% at September 30, 2000 and 8.5% at
December 31, 1999) plus .125%; matures in
December 2000.................................... 2,000 3,500 3,500
------ ------ ------
3,934 6,076 6,573
Less current portion.............................. 243 3,960 4,323
------ ------ ------
Long-term debt.................................... $3,691 $2,116 $2,250
====== ====== ======
Future maturities of long-term debt as of December 31, 1999 are as follows
(in thousands):
2000.................................................................. $3,960
2001.................................................................. 678
2002.................................................................. 784
2003.................................................................. 443
2004.................................................................. 211
------
$6,076
======
F-12
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Mandatorily Redeemable Convertible Preferred Stock
On April 28 and August 11, 1997, the Company issued 1,133,333 shares of
Series A Cumulative Redeemable Convertible Voting Preferred Stock ("Series A
Preferred Stock") for $3.00 per share. Concurrent with the August 1997
issuance, in accordance with anti-dilution provisions, the April 1997
preferred stock purchasers were issued an additional 141,828 shares.
On February 12, 1998, the Company issued 2,489,272 shares of Series B
Cumulative Redeemable Convertible Voting Preferred Stock ("Series B Preferred
Stock") for $6.99 per share. The Series B Preferred Stock shares have the same
characteristics as the Series A Preferred Stock issued in 1997.
On April 13, June 28 and July 30, 1999, the Company issued 1,521,661,
51,282 and 51,282 shares, respectively, of Series C Cumulative Redeemable
Convertible Voting Preferred Stock ("Series C Preferred Stock") for $19.50 per
share. The Series C Preferred Stock shares have the same characteristics as
the Series A and Series B Preferred Stock.
On June 20, 2000, the Company issued 1,110,622 shares of Series D
Cumulative Redeemable Convertible Voting Preferred Stock ("Series D Preferred
Stock") for $90.00 per share (unaudited). The Series D Preferred Stock shares
have the same characteristics as the Series A, Series B and Series C Preferred
Stock, except that holders of Series D Preferred Stock also received warrants
to purchase up to an aggregate number of shares of common stock equal to 5% of
the shares sold to the public in an initial public offering. These warrants
are exercisable at a price equal to the initial public offering price. The
warrants may be exercised for a one-year period beginning on the day after the
registration statement in connection with this offering is declared effective
by the Securities and Exchange Commission ("SEC"). The warrants, which expire
June 20, 2001 if an initial public offering is not effected, have an aggregate
value of approximately $1,700,000 (unaudited) and have been recorded as a
component of additional paid in capital.
At the option of the preferred stockholders, shares are convertible 6 for 1
into Class A Common Stock, subject to adjustment for certain dilutive events
and issues. The Series A, Series B, Series C and Series D Preferred Stock
(collectively, the "Preferred Stock") will automatically convert into shares
of Class A Common Stock upon the public offering of the Company's Common Stock
if a minimum of $20 million is raised and the per share sales price is at
least $22.50 per share. The Preferred Stock has voting rights equivalent to
the number of shares of Common Stock into which it is convertible and also has
a liquidation preference over the common stockholders. At September 30, 2000,
the Company has reserved 38,995,680 (unaudited) shares of common stock for
conversion of the Preferred Stock.
Preferred Stock accrues dividends at 8% per annum of the initial purchase
price, cumulative beginning April 28, 2000, February 12, 2001, April 13, 2002
and April 13, 2002 for the Series A, Series B, Series C and Series D
(unaudited), respectively. Upon conversion of Preferred Stock to Common Stock,
unpaid dividends shall be paid either in cash or Common Stock (at the then
fair market value). Payments of Preferred Stock dividends are payable prior to
dividends on Common Stock. During the nine months ended September 30, 2000 the
Company accrued $131,000 (unaudited) of such dividends.
In the event of any voluntary or involuntary liquidation of the Company,
the preferred stockholders shall be entitled to the original per share
issuance price, plus any declared but unpaid dividends. Remaining assets, if
any, shall be distributed to the Preferred and Common stockholders on a pro
rata basis assuming full conversion of all such preferred stock. Under the
terms of the Certificate of Incorporation, any acquisition, merger or
consolidation which result in a majority ownership change will be deemed to be
a liquidation of the Company, resulting in the redemption of the remaining
preferred stockholder interest. Management does not consider any of the events
that would trigger redemption to be probable.
F-13
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Shares of Preferred Stock shall, at the election of no less than 75% of the
preferred stockholders, be redeemed by the Company, subject to the Company
having funds legally available. The Preferred Stock will be redeemed in equal
amounts on or about April 13, 2004, 2005 and 2006. The redemption price will
be equal to the initial purchase price of the Preferred Stock, plus any
accrued and unpaid dividends.
As a requirement of the Preferred Stock issued to Connecticut Innovations,
Inc. ("CII"), the Company must maintain its principal place of business, base
a majority of its employees and conduct the majority of its operations in
Connecticut. If the Company fails to maintain its Connecticut presence, CII
has the right to require the Company to redeem 290,141 shares of Series A
Preferred Stock, 250,358 shares of Series B Preferred Stock, 134,154 shares of
Series C Preferred Stock and 45,600 shares of Series D Preferred Stock at the
greater of (i) the fair market value of the shares, or (ii) an amount equal to
the initial purchase price plus an amount calculated to yield a 25% annually
compounded rate of return. CII's redemption rights are also available to other
preferred stockholders.
8. Stockholders' Deficit
Common stock
The Company has authorized 67,200,000 shares of Class A Common Stock (the
"Common Stock"), par value $.001.
In 1997, the Company declared a 283 for 1 stock exchange, whereby the
common stockholders received restricted Common Stock pursuant to Shareholder
Restriction and Exchange Agreements ("Agreements"). Generally, the restricted
common stock vests twenty-five percent on the first anniversary date of the
Agreement and monthly thereafter through the fourth year. The unvested
restricted shares are subject to repurchase by the Company at their original
purchase price. As of December 31, 1999, the Company has 983,062 shares of
restricted Common Stock subject to future vesting.
Effective April 7, 2000, the Company declared a 2 for 1 stock split. The
accompanying financial statements retroactively reflect these stock splits.
Common stock options
The Company's Board of Directors adopted the 1997 Stock Option Plan (the
"Plan") for directors, consultants and key employees. The Plan permits the
granting of incentive stock options and non-qualified stock options to
purchase up to 7,400,000 shares of Common Stock.
Options issued under the 1997 Stock Option plan vest twenty-five percent on
the first anniversary date and monthly thereafter through the fourth year. The
stock options are exercisable over a period of ten years from the date of
grant.
On September 20, 2000, the Company's Board of Directors accelerated the
exercisability of incentive stock options to make them immediately
exercisable. In return for such acceleration, each employee who elects to
exercise such options must execute a stock restriction agreement. Any stock
purchased under such options becomes subject to a stock restriction which
provides the Company an option to repurchase the stock at its original
purchase price (the employee's exercise price) if the employee leaves prior to
completion of their original vesting period. Such stock restriction expires
according to the employee's original vesting schedule. Generally all options
granted under the Plan after September 21, 2000 are immediately exercisable,
subject to this same stock restriction agreement.
F-14
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of stock option activity under the Plan is as follows:
Weighted
Average
Number of Shares Exercise Price
---------------- --------------
Outstanding at December 31, 1996
Granted.................................. 2,768,250 $0.1302
Exercised................................ -- --
Forfeited................................ -- --
----------
Outstanding at December 31, 1997........... 2,768,250 0.1302
Granted.................................. 1,644,000 0.2088
Exercised................................ (422,974) 0.0685
Forfeited................................ (86,824) 0.0256
----------
Outstanding at December 31, 1998........... 3,902,452 0.1723
Granted.................................. 1,035,000 0.6014
Exercised................................ (861,552) 0.1711
Forfeited................................ (185,624) 0.1524
----------
Outstanding at December 31, 1999........... 3,890,276 0.2877
Granted (unaudited)...................... 1,306,620 1.6949
Exercised (unaudited).................... (3,432,323) 0.4420
Forfeited (unaudited).................... (57,000) 0.4764
----------
Outstanding at September 30, 2000
(unaudited)............................... 1,707,573 1.0480
==========
In December 1997, all option holders were given the opportunity to convert
any non-vested, non-qualified stock options into incentive stock options with
an exercise price of $.15 per share. The vesting period for the options
converted remained unchanged. Options to purchase an aggregate of 2,312,250
shares of common stock were converted into incentive stock options in 1998.
All options granted from March 1, 1999 through December 31, 1999 and during
the nine months ended September 30, 2000, were granted with exercise prices
below fair market value. As a result, the Company has recorded unearned
compensation of $2,225,000, $1,716,000 (unaudited) and $13,104,000 (unaudited)
as of December 31, 1999, September 30, 1999 and September 30, 2000,
respectively. The Company amortizes unearned compensation related to employee
option grants over the vesting period of the stock options using the
accelerated attribution method. The Company has recognized amortization
expense of $574,000, $311,000 (unaudited) and $2,770,000 (unaudited) during
the year ended December 31, 1999 and the nine month periods ended September
30, 1999 and 2000, respectively.
Included in the above amounts are awards granted to non-employees. Unearned
compensation related to non-employee stock grants was $90,000 and $629,000
(unaudited) at December 31, 1999 and September 30, 2000, respectively. The
Company amortizes unearned compensation related to non-employee grants over
the related service period of the stock options using the accelerated
attribution method. The Company has recognized amortization expense of $0, $0
(unaudited) and $320,000 (unaudited) during the year ended December 31, 1999
and the nine month periods ended September 30, 1999 and 2000, respectively.
F-15
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes additional information about stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted
Number Average Weighted Number Weighted
Range Outstanding Remaining Average Exercisable Average
of at December 31, Contractual Exercise at December 31, Exercise
Exercise Prices 1999 Life Price 1999 Price
--------------- --------------- ----------- -------- --------------- --------
$ 0.0025-
0.225 2,916,276 8.18 $.151 945,704 $0.164
0.2260-0.625 974,000 9.53 .625 -- --
--------- -------
3,890,276 945,704 $0.164
========= =======
If compensation expense had been recognized based on the fair value of
options at their grant date, in accordance with Financial Accounting Standard
No. 123 ("FAS 123"), the results of operations would have been as follows:
1997 1998 1999
------- -------- --------
Net loss attributable to common stockholders
(in thousands):
As reported................................. $(2,375) $(12,715) $(21,056)
Pro forma under FAS 123..................... (2,404) (12,768) (21,217)
Basic and diluted net loss per share
attributable to common stockholders:
As reported................................. $(.72) $ (3.33) $ (3.39)
Pro forma under FAS 123..................... (.72) (3.34) (3.42)
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for options granted:
1997 1998 1999
----------- ----------- -----------
Risk free interest rate.................. 5.38%-6.86% 4.36%-5.56% 4.80%-6.38%
Expected dividend yield.................. None None None
Expected life of option.................. 7 years 7 years 7 years
Expected volatility...................... 0% 0% 0%
The weighted average fair value of options granted during 1997, 1998, and
1999 was $0.13, $0.21 and $2.77, respectively.
The above pro forma results are not necessarily indicative of future pro
forma results. Future option grants will be valued using a volatility factor
which will change the value of such options. At September 30, 2000 there were
2,683,151 shares (6,125,474 shares at December 31, 1999) of Common Stock
reserved for the exercise of stock options.
Loans to Officers
In August 2000, pursuant to our 2000 Executive Loan Program, the Company
lent an aggregate of $1,075,000 to eight officers. These loans are secured by
shares of our Common Stock held by the officers. These loans are payable in
full on the earlier of (1) two years from the date the loan was made, (2) 30
days after voluntary or involuntary termination of the executive officer's
employment with us or (3) 90 days after termination of the officer's
employment. The outstanding principal balance of the loans will accrue
interest at a rate equal to the prime rate upon the earlier of the date the
loan is due or upon the expiration of any lock-up agreements entered into by
the officers in connection with the Company's initial public offering of its
Common Stock. The number of shares pledged by each officer is subject to
adjustment by the board of directors based on changes in the fair market value
of our Common Stock.
F-16
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The Company's gross deferred tax assets and liabilities were as follows (in
thousands):
December 31,
---------------
1998 1999
------ -------
Gross deferred tax assets:
Carryforwards:
Net operating losses.................................... $6,284 $14,342
Research and development tax credits.................... 763 1,331
Other..................................................... -- 575
------ -------
7,047 16,248
------ -------
Gross deferred tax liability:
Depreciation.............................................. 309 375
------ -------
Net deferred tax asset...................................... 6,738 15,873
------ -------
Less: valuation allowance................................... (6,738) (15,873)
------ -------
$ -- $ --
====== =======
The Company has provided a valuation allowance for the full amount of the
deferred tax assets in excess of the deferred tax liability since management
has not determined that it is more likely than not that the future benefit
will be realized.
At December 31, 1999, the Company had approximately $35.4 million of
federal net operating loss carryforwards that begin to expire in the year
2012, approximately $34.6 million of state net operating loss carryforwards
that begin to expire in 2002 and federal and state research and development
tax credit carryforwards of approximately $1.3 million that begin to expire in
the year 2012.
The amount of the December 31, 1999 net operating loss and research and
development tax credit carryforwards that may be utilized annually to offset
future taxable income and tax liability will be limited as a result of a 1997
ownership change pursuant to Section 382 of the Internal Revenue Code. As a
result, net operating loss carryforwards and research and development tax
credit carryforwards of approximately $1.5 million and $66,000, respectively,
are subject to an aggregate annual utilization limitation of $330,000.
10. 401(k) Retirement Savings Plan
The Company has a 401(k) Retirement Savings Plan covering substantially all
of its employees, subject to certain eligibility requirements. Participants
have the option of contributing up to 15% of their annual compensation. The
Company did not make any matching contributions in 2000, 1999 or 1998.
11. Commitments and Contingencies
The Company leases facilities and certain equipment under operating leases
with varying terms, renewal options and expiration dates. Aggregate future
minimum lease payments under non-cancelable operating leases at December 31,
1999 are as follows (in thousands):
2000.................................................................... $578
2001.................................................................... 589
2002.................................................................... 601
2003.................................................................... 597
2004.................................................................... 614
Thereafter.............................................................. 156
F-17
CIDRA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense under non-cancelable operating leases for 1997, 1998 and 1999
was approximately $55,000, $416,000 and $554,000, respectively, and $583,000
for the nine months ended September 30, 2000.
In 1996, the Company entered into a Royalty License Agreement (the
"Agreement"), whereby the Company obtained the exclusive right to a patented
technology in exchange for 141,500 shares of the Company's Common Stock. Under
the Agreement, the Company is obligated for royalty payments of up to 10% of
the related product sales. The Company is obligated for minimum royalty
payments of $500,000 through December 31, 1999, and subsequently the Company
is obligated for minimum annual royalty payments of $350,000 for each calendar
year thereafter. The Agreement will terminate in the event that the Company
does not meet the minimum royalty payment requirements. Accrued royalties
totaled $170,000, $500,000 and $263,000 at December 31, 1998 and 1999 and
September 30, 2000, respectively.
In September 2000, the Company entered into a license agreement whereby the
Company obtained the exclusive right to certain patents in exchange for an
issue fee of $300,000. The Company is obligated to make royalty payments based
on future sales of products that incorporate this patented technology. As of
September 30, 2000, accrued royalties related to this agreement are $0
(unaudited).
As of September 30, 2000, the Company is obligated under two standby
letters of credit with a bank totaling $240,000 (unaudited). The beneficiaries
are the lessors of the Company's operating facilities.
In July 2000, the Company entered into an eighty-six month lease for
approximately 31,400 square of space in Houston, Texas for its optical sensing
operations. The lease requires annual rental payments commencing at $196,000
(unaudited) and increasing to $204,000 (unaudited) over the term of the lease.
The lease provides for a five-year renewal at the Company's option.
As of October 1, 2000, the Company entered into a ten-year lease for
approximately 28,000 square feet of manufacturing and administrative space at
property located adjacent to its present Wallingford, Connecticut facility.
This space will be used primarily for the Company's optical networking
operations. The lease contains escalating rental payments totaling
approximately $1.8 million and provides for a five-year renewal at the
Company's option.
12. Related Parties
During the nine months ended September 30, 2000 and the years ended
December 31, 1999 and 1998, the Company received consulting services and
purchased material from OptoPlan totaling $568,000, $941,000 and $666,000,
respectively.
As more fully described in Note 8, the Company granted loans to certain of
its officers pursuant to the 2000 Executive Loan Program.
In August 2000, the Company received a purchase agreement from Corvis
Corporation, whereby Corvis agreed to purchase optical networking products
from the Company over the next two years. As of September 30, 2000, the
Company had not shipped any products under this agreement. The Chairman of the
Company's Board of Directors is the Chairman of the Board of Directors,
President and Chief Executive Officer and a shareholder of Corvis.
13. Subsequent events (unaudited)
On October 3, 2000, the Company's Board of Directors increased the number
of shares authorized under the 1997 Stock Option Plan to 8,400,000 shares.
F-18
INSIDE BACK COVER OF PROSPECTUS
[DESCRIPTION OF GRAPHICS]
Headline: AgileWave Family of Products
Illustrations: This page has three illustrations running from the top to bottom
of the page.
The first illustration consists of a photograph of Cidra's
Passive Athermal Bragg Grating Filters. To the right of the
picture is text that reads:
Athermal Filters
-- Stabilizes optical wavelength with exceptional
performance and reliability
-- Eliminates the need for external heating and cooling
-- Standard or customized optical filters
The second illustration consists of a photograph of Cidra's
Tunable Grating Modules that are currently being tested. To the
right of the picture is text that reads:
Tunable Grating Modules
(In Alpha Test)
-- Precise tuning and setting of optical filter
-- Digitally programmable operation
-- Standard or customized optical filter
-- Enables wavelength routing and conditioning
The third illustration consists of a photograph of two of Cidra's
subsystem products that are currently being developed. To the
right of the picture is text that reads:
Subsystem Products
(Under Development)
-- Integrated board-level product customized for specific
applications
-- Complete with interface electronics and software for
ready installation/integration into customer equipment
-- High level of embedded software
logo: The CiDRA logo is located in the bottom right corner of the page.
[CiDRA logo]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of the various expenses, all
of which we will pay, in connection with the issuance and distribution of the
securities being registered. All of the amounts shown are estimated except the
SEC Registration Fee, The Nasdaq National Market Listing Fee and the NASD
Filing Fee.
SEC Registration Fee.......................................... $ 32,546
Nasdaq National Market Listing Fee............................ 90,000
NASD Filing Fee............................................... 15,500
Printing and Engraving Fees................................... 150,000
Legal Fees and Expenses....................................... 350,000
Accounting Fees and Expenses.................................. 350,000
Blue Sky Fees and Expenses.................................... 10,000
Transfer Agent and Registrar Fees............................. 10,000
Miscellaneous................................................. 41,954
----------
Total....................................................... $1,050,000
==========
Item 14. Indemnification of Directors and Officers.
Our restated certificate of incorporation provides that we shall indemnify,
to the fullest extent authorized by the Delaware General Corporation Law, each
person who is involved in any litigation or other proceeding because such
person is or was a director or officer of CiDRA Corporation or is or was
serving as an officer or director of another entity at our request, against
all expense, loss or liability reasonably incurred or suffered in connection
therewith. Our restated certificate of incorporation provides that the right
to indemnification includes the right to be paid expenses incurred in
defending any proceeding in advance of its final disposition, provided,
however, that such advance payment will only be made upon delivery to us of an
undertaking, by or on behalf of the director or officer, to repay all amounts
so advanced if it is ultimately determined that such director is not entitled
to indemnification. If we do not pay a proper claim for indemnification in
full within 60 days after we receive a written claim for such indemnification,
the restated certificate of incorporation and our restated bylaws authorize
the claimant to bring an action against us and prescribe what constitutes a
defense to such action.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any director or officer of the corporation against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director
or officer of the corporation, if such person acted in good faith and in a
manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action, (i.e., one brought by or on behalf of the
corporation), indemnification may be provided only for expenses actually and
reasonably incurred by any director or officer in connection with the defense
or settlement of such an action or suit if such person acted in good faith and
in a manner that he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that no indemnification shall be
provided if such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication
of liability.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article Tenth of our restated certificate of incorporation eliminates the
liability of a director to us or our stockholders for monetary damages for
such a breach of fiduciary duty as a director, except for liabilities arising:
. from any breach of the director's duty of loyalty to us or our
stockholders;
II-1
. from acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; and
. from any transaction from which the director derived an improper
personal benefit.
We carry insurance policies insuring our directors and officers against
certain liabilities that they may incur in their capacity as directors and
officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the underwriters of
CiDRA, our directors and officers who sign the Registration Statement and
persons who control CiDRA, under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this Registration Statement, we
have sold the following securities that were not registered under the
Securities Act. The following information gives effect to a 2-for-1 split of
our common stock effected on April 7, 2000.
(a) Issuances of Capital Stock and Warrants
The sale and issuance of the securities described in paragraphs (1), (2),
(3), (4) and (5) below were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) or Regulation D promulgated
thereunder.
(1) On April 28, 1997 and August 11, 1997, we sold and issued a total of
1,133,333 shares of Series A Convertible Preferred Stock for $3.00 per
share to four investors in a private placement. In connection with the
August sale, in accordance with anti-dilution provisions granted to
the purchasers in April, we sold and issued an additional 141,828
shares of Series A preferred stock to the three April purchasers for
$.01 per share. Each share of our Series A preferred stock is
convertible into six shares of common stock.
(2) On February 12, 1998, we sold and issued a total of 2,489,272 shares
of Series B Convertible Preferred Stock for $6.99 per share to ten
investors in a private placement. Each share of our Series B preferred
stock is convertible into six shares of common stock.
(3) On April 13, 1999, June 28, 1999 and July 30, 1999, we sold and issued
a total of 1,624,225 shares of Series C Convertible Preferred Stock
for $19.50 per share to 13 investors in a private placement. Each
share of our Series C preferred stock is convertible into six shares
of common stock.
(4) On June 20, 2000, we sold and issued a total of 1,110,622 shares of
Series D Convertible Preferred Stock for $90.00 per share to 65
accredited investors in a private placement. Each share of our Series
D preferred stock is convertible into six shares of common stock. In
addition, these investors also received warrants to purchase up to an
aggregate number of shares of common stock equal to five percent of
the shares sold to the public in this offering. These warrants are
exercisable at a price equal to the initial public offering price.
(5) On February 18, 1998, we issued 700,000 shares of our common stock to
one entity in exchange for a 40% equity interest in OptoPlan A.S., a
Norwegian company.
(b) Certain Grants and Exercises of Stock Options
The sale and issuance of the securities described below were deemed to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701.
II-2
Pursuant to our stock plans and certain stand-alone stock option agreements,
we have issued options to purchase an aggregate of 8,579,620 shares of common
stock. Of these options:
. options to purchase 359,865 shares of common stock have been canceled or
lapsed without being exercised;
. options to purchase 4,744,591 shares of common stock have been
exercised, of which 1,771,659 shares are subject to a right of
repurchase by us that lapses over time; and
. options to purchase a total of 3,475,164 shares of common stock are
currently outstanding, at a weighted average exercise price of $3.11 per
share.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
*1.1 Form of Underwriting Agreement.
+3.1 Fifth Restated Certificate of Incorporation of the Registrant.
*3.1.1 Certificate of Amendment to the Fifth Restated Certificate of
Incorporation of the Registrant.
*3.2 Restated Certificate of Incorporation of the Registrant to be filed
upon completion of this offering.
+3.3 Amended and Restated Bylaws of the Registrant.
*3.4 Restated Bylaws of the Registrant to be effective upon completion of
this offering.
*4.1 Form of Common Stock Certificate.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
counsel to the Registrant, with respect to the legality of
securities being registered.
*10.1 The Registrant's 2000 Employee, Director and Consultant Stock Plan.
+10.2 The Registrant's 1997 Stock Option Plan.
*10.3 The Registrant's 2000 Employee Stock Purchase Plan.
+10.4 Preferred Stock Purchase Agreement dated June 20, 2000 by and among
the Registrant and certain investors.
+10.5 Lease dated March 11, 1998, as amended on June 1, 1998, by and
between WEI Barnes Road, LLC and the Registrant.
+10.6 Lease effective as of October 1, 2000 by and between 6750 Main
Street, Inc. and the Registrant.
+10.7 Lease dated July 7, 2000, as amended, by and between D/S 16600 Park
Row, Ltd. and the Registrant.
+10.8 The Registrant's 2000 Executive Loan Program.
+10.9 Consulting Services Contract dated August 1, 2000 by and between BP
Exploration & Oil, Inc. and Amoco Production Company and the
Registrant.
10.10 Employment Agreement dated October 3, 2000 by and between the
Registrant and F. Kevin Didden.
10.11 Employment Agreement dated October 3, 2000 by and between the
Registrant and Alan D. Kersey.
10.12 Employment Agreement dated August 1, 1999 by and between the
Registrant and Ann Iseley.
10.13 Employment Agreement dated October 3, 2000 by and between the
Registrant and Michael Grillo.
**10.14 Purchase Agreement dated August 7, 2000 by and between Corvis
Corporation and the Registrant.
11.1 Statement of Computation of Loss Per Share
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1)
+24.1 Powers of Attorney
27.1 Financial Data Schedule
- --------
* To be filed by amendment.
+ Previously filed.
** Confidential treatment has been requested for a portion of this exhibit.
II-3
(b) Financial Statement Schedules
Financial Statement Schedules are omitted because the information is
included in our financial statements or notes to those financial statements.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Wallingford, Connecticut, on November 17, 2000.
CiDRA Corporation
/s/ F. Kevin Didden
By: _________________________________
F. Kevin Didden
President & Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons
in the capacities held on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ F. Kevin Didden President, Chief Executive November 17,
______________________________________ Officer and Director (principal 2000
F. Kevin Didden executive officer)
/s/ Faye A. Iseley Vice President and Chief November 17,
______________________________________ Financial Officer (principal 2000
Faye A. Iseley financial and accounting
officer)
/s/ Alan D. Kersey* Director November 17,
______________________________________ 2000
Alan D. Kersey
/s/ Will Honeybourne* Director November 17,
______________________________________ 2000
Will Honeybourne
/s/ David Huber* Director November 17,
______________________________________ 2000
David Huber, Ph.D.
/s/ David Palmer* Director November 17,
______________________________________ 2000
David Palmer
/s/ Asmund Slogedal* Director November 17,
______________________________________ 2000
Asmund Slogedal
/s/ John Spirtos* Director November 17,
______________________________________ 2000
John Spirtos
* By executing his name hereto, Michael Grillo is signing this document on
behalf of the persons indicated above pursuant to the powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
/s/ Michael Grillo
By: ________________________
Michael Grillo
Attorney-in-Fact
II-5
Exhibit
Number Description of Exhibit
------- ----------------------
*1.1 Form of Underwriting Agreement.
+3.1 Fifth Restated Certificate of Incorporation of the Registrant.
*3.1.1 Certificate of Amendment to the Fifth Restated Certificate of
Incorporation of the Registrant.
*3.2 Restated Certificate of Incorporation of the Registrant to be filed
upon completion of this offering.
+3.3 Amended and Restated Bylaws of the Registrant.
*3.4 Restated Bylaws of the Registrant to be effective upon completion of
this offering.
*4.1 Form of Common Stock Certificate.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
counsel to the Registrant, with respect to the legality of
securities being registered.
*10.1 The Registrant's 2000 Employee, Director and Consultant Stock Plan.
+10.2 The Registrant's 1997 Stock Option Plan.
*10.3 The Registrant's 2000 Employee Stock Purchase Plan
+10.4 Preferred Stock Purchase Agreement dated June 20, 2000 by and among
the Registrant and certain investors.
+10.5 Lease dated March 11, 1998, as amended on June 1, 1998, by and
between WEI Barnes Road, LLC and the Registrant.
+10.6 Lease effective as of October 1, 2000 by and between 6750 Main
Street, Inc. and the Registrant.
+10.7 Lease dated July 7, 2000, as amended, by and between D/S 16600 Park
Row, Ltd. and the Registrant.
+10.8 The Registrant's 2000 Executive Loan Program.
+10.9 Consulting Services Contract dated August 1, 2000 by and between BP
Exploration & Oil, Inc. and Amoco Production Company and the
Registrant.
10.10 Employment Agreement dated October 3, 2000 by and between the
Registrant and F. Kevin Didden.
10.11 Employment Agreement dated October 3, 2000 by and between the
Registrant and Alan D. Kersey.
10.12 Employment Agreement dated August 1, 1999 by and between the
Registrant and Ann Iseley.
10.13 Employment Agreement dated October 3, 2000 by and between the
Registrant and Michael Grillo.
**10.14 Purchase Agreement dated August 7, 2000 by and between Corvis
Corporation and the Registrant
11.1 Statement of Computation of Loss Per Share
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1)
+24.1 Powers of Attorney
27.1 Financial Data Schedule
- --------
* To be filed by amendment.
+ Previously filed.
** Confidential treatment has been requested for a portion of this exhibit.