<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 000-31581
OPLINK COMMUNICATIONS , INC.
(Exact name of registrant as specified in its charter)
Delaware No. 77-0411346
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3469 North First Street, San Jose, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 433-0606
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
CLASS OUTSTANDING AS OF OCTOBER 31, 2000
------------ ----------------------------------
Common Stock 157,390,396
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<PAGE>
OPLINK COMMUNICATIONS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -
September 30, 2000 and June 30, 2000...............................................................3
Condensed Consolidated Statement of Operations -
Three months ended September 30, 2000 and 1999.....................................................4
Condensed Consolidated Statement of Cash Flows -
Three months ended September 30, 2000 and 1999.....................................................5
Notes to Condensed Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................27
Item 2. Changes in Securities and Use of Proceeds.........................................................28
Item 3. Defaults Upon Senior Securities...................................................................29
Item 4. Submission of Matters to a Vote of Security Holders...............................................29
Item 5. Other Information.................................................................................29
Item 6. Exhibits and Reports on Form 8-K..................................................................29
SIGNATURES..................................................................................................30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPLINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------- ------------
2000 2000
------------- ------------
<S> <C> <C>
ASSETS (1)
Current assets:
Cash and cash equivalents $ 57,765 $ 26,665
Accounts receivable, net 18,417 10,100
Inventories 13,567 11,308
Prepaid expenses 6,166 3,974
Deferred tax assets 1,080 1,080
------------- ------------
Total current assets 96,995 53,127
Property and equipment, net 33,880 21,270
Intangible assets 19,228 20,600
Other assets 1,304 935
------------- ------------
Total assets $ 151,407 $ 95,932
------------- ------------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,050 $ 15,188
Accrued liabilities 10,712 6,767
Current portion of capital lease obligations 1,308 419
Borrowings under the line of credit 783 135
------------- ------------
Total current liabilities 27,853 22,509
Capital lease obligations, non current 2,814 1,267
Convertible note payable 50,000 -
Deferred tax liability 2,958 2,958
------------- ------------
Total liabilities 83,625 26,734
------------- ------------
Convertible Preferred Stock 58,373 58,373
------------- ------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common Stock 28 24
Additional paid-in capital 86,058 61,253
Deferred stock compensation (33,519) (17,986)
Accumulated deficit (43,158) (32,466)
------------- ------------
Total stockholders' equity 9,409 10,825
------------- ------------
Total liabilities, convertible preferred stock
and stockholders' equity $ 151,407 $ 95,932
============= ============
</TABLE>
(1) The June 30, 2000 consolidated balance sheet has been derived from audited
financial statements at that date.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
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OPLINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Revenues $ 32,277 $ 4,432
Cost of revenues 24,587 3,274
------------- ------------
Gross profit 7,690 1,158
------------- ------------
Operating expenses:
Research and development 3,619 218
Sales and marketing 2,368 311
General and administrative 2,693 719
Amortization of deferred compensation* 8,731 529
Amortization of goodwill 983 -
------------- ------------
Total operating expenses 18,394 1,777
------------- ------------
Loss from operations (10,704) (619)
Interest and other income, net 12 35
------------- ------------
Net loss $(10,692) $ (584)
------------- ------------
Basic and diluted net loss per share $ (0.40) $ (0.26)
------------- ------------
Basic and diluted weighted average shares outstanding 26,817 2,286
------------- ------------
Pro forma basic and diluted net loss per share $ - $ -
------------- ------------
Pro forma basic and diluted weighted average shares 138,104 90,147
------------- ------------
*Amortization of deferred compensation:
Cost of revenues $ 1,353 $ 156
Research and development 1,405 110
Sales and marketing 603 90
General and administrative 5,370 173
------------- ------------
$ 8,731 $ 529
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
OPLINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,692) $ (584)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and equipment 1,147 194
Amortization of goodwill and intangible assets 1,372 -
Amortization of deferred compensation 8,731 529
Donation of shares of common stock 100 -
Change in assets and liabilities:
Accounts receivable (8,317) (231)
Inventories (2,259) (2,604)
Prepaid expenses (2,192) (403)
Other assets (369) 21
Accounts payable (138) 28
Accrued liabilities 3,945 173
------------ ------------
Net cash used in operating activities (8,672) (2,877)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,125) (694)
------------ ------------
Net cash used in investing activities (11,125) (694)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Convertible Preferred Stock - 2,290
Proceeds from issuance of Common Stock upon the
exercise of options, net of repurchases 445 -
Proceeds from issuance of convertible note payable 50,000 -
Proceeds from borrowings under line of credit 648 135
Repayment of capital lease obligations (196) -
------------ ------------
Net cash provided by financing activities 50,897 2,425
------------ ------------
Net increase (decrease) in cash and cash equivalents 31,100 (1,146)
Cash and cash equivalents, beginning of year 26,665 4,757
------------ ------------
Cash and cash equivalents, end of year $ 57,765 $ 3,611
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest expense $ 54 $ 3
------------ ------------
Cash paid during the period for income taxes $ 1,080 $ -
------------ ------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital lease $ 2,632 $ -
------------ ------------
Deferred compensation related to Common Stock
option grants to employees $ 24,264 $ 1,213
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS. Oplink Communications, Inc. ("Oplink" or the
"Company") designs, manufactures and markets fiber optic components and
integrated optical modules that increase the performance of optical networks.
The Company provides a broad line of products to communications equipment
suppliers to enable bandwidth creation and management within an optical network.
The Company was incorporated in September 1995 and began shipping its products
for sale in 1996. In April 1999, the Company established manufacturing
operations in Zhuhai, China. In April 2000, the Company acquired Telelight
Communication Inc., a designer and manufacturer of passive fiber optic
components in Sunnyvale, California and Fuzhou, China. In May and September
2000, the Company established additional manufacturing operations in Beijing and
Shanghai, China, respectively. The Company conducts its business within one
business segment and has no organizational structure dictated by product,
service lines, geography or customer type.
2. BASIS OF PRESENTATION. The condensed consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations. The
financial statements presented herein have been prepared by management, without
audit by independent accountants who do not express an opinion thereon, and
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended June 30, 2000 included in the Company's
Registration Statement on Form S-1 declared effective by the SEC on October 3,
2000.
In the opinion of the management, these unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Company at September
30, 2000, and the results of its operations and its cash flows for the three
month periods ended September 30, 2000 and 1999. The results of operations for
the period presented are not necessarily indicative of those that may be
expected for the full year.
3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE. The Company computes net
loss per share in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin
("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net
loss per share is computed by dividing the net loss for the period by the
weighted average number of shares of common stock outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and common equivalent shares
outstanding during the period, if dilutive. Common equivalent shares are
composed of preference shares, warrants and the incremental common shares
issuable upon the exercise of stock options. Pro forma net loss per share is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of: (a) the
Company's Series A, B, C, D, and E redeemable convertible preferred stock as if
such conversion had occurred as of the later of the beginning of each period
presented or the date of issuance; and (b) the convertible promissory note
payable to Cisco Systems, Inc. into shares of the Company's common stock, as if
such conversion had occurred at the date of original issuance, August 28, 2000.
The actual conversions were effective upon the closing of Oplink's initial
public offering which occurred on October 10, 2000. The following is a
reconciliation of the numerators and denominators of the Basic and Diluted net
loss per share computations for the periods presented (in thousands, except per
share data):
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
NUMERATOR:
Net loss attributable to holders of Common Stock $ (10,692) $ (584)
============ ============
DENOMINATOR:
Weighted average shares outstanding 26,817 2,286
------------ ------------
Denominator for basic and diluted calculations 26,817 2,286
============ ============
Net loss per share:
Basic and diluted $ (0.40) $ (0.26)
============ ============
Antidilutive securities including options, warrants,
preferred shares and shares per convertible note payable
not included in net loss per share calculation 132,308 108,474
============ ============
PRO FORMA:
Shares used in computing basic and diluted calculations 26,817 2,286
Weighted average number of shares assumed upon
conversion of shares per convertible note payable and
conversion of redeemable convertible preferred stock 111,287 87,861
------------ ------------
Shares used in computing pro forma basic and diluted
net loss per share 138,104 90,147
============ ============
Pro forma basic and diluted net loss per share $ - $ -
============ ============
</TABLE>
4. INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- ------------
<S> <C> <C>
INVENTORIES:
Raw materials $ 4,394 $ 6,995
Work-in-process 7,581 3,038
Finished goods 1,592 1,275
------------- ------------
$ 13,567 $ 11,308
============= ============
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes new standards of accounting and reporting
for derivative instruments and hedging activities. SFAS No. 133 requires that
all derivatives be recognized at fair value in the statement of financial
position, and that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income (loss),
depending on the type of hedging relationship that exists.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 deferred the effective
7
<PAGE>
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 did not have a material impact on the Company's
operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes that the Company has complied with the
guidance of SAB 101.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of Opinion No. 25" for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The adoption of certain provisions of FIN 44 did not have a material
impact on the Company's financial position.
6. SUBSEQUENT EVENTS. On October 10, 2000, the Company sold 15,755,000 shares of
common stock in an underwritten initial public offering, including 2,055,000
shares of common stock issued through the exercise of the underwriter's
over-allotment option, resulting in net proceeds to the Company of approximately
$263.7 million, before offering expenses of approximately $1.2 million.
Simultaneously with the closing of the public offering, 110,103,344 shares of
convertible preferred stock were converted to shares of common stock on a
one-for-one-basis. In addition, the note payable to Cisco Systems, Inc. was
converted into 3,298,773 shares of common stock at a conversion price of $15.30
per share, or 85% of the public offering price of $18.00 per share.
7. CONTINGENCIES. In November 1999, a lawsuit was filed against the Company
alleging patent infringement related to the manufacture and sale of fiber optic
products which generated a majority of the Company's revenues for the quarters
ended September 30 and June 30, 2000 and the year ended June 30, 2000.
In June 2000, a lawsuit was filed against the Company and Telelight
Communication Inc., alleging patent infringement relating to the manufacture of
and offer to sell various fiber optic products.
In both lawsuits, the plaintiffs are seeking damages and injunctive relief.
An unfavorable ruling in these matters would have a material adverse effect on
the Company's financial condition and reported results of operations. The
Company, with the assistance of its legal counsel, intends to vigorously defend
its position in both matters. However, because of the considerable uncertainties
that exist, the impact, if any, on the Company cannot now be reasonably
estimated based on facts currently available to management. Accordingly, the
Company has determined that it would be inappropriate to book an accrual with
respect to these litigation matters in the consolidated financial statements.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions or future strategies that are signified by the
words "expect", "anticipate", "intend", "believe", or similar language. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. In evaluating our business,
you should carefully consider the information set forth below under the caption
"Risk Factors." We caution you that our businesses and financial performance are
subject to substantial risks and uncertainties.
Overview
We design, manufacture and market fiber optic components and integrated
optical modules that increase the performance of optical networks. We provide a
broad line of products to communications equipment suppliers to enable bandwidth
creation and management within an optical network. We were incorporated in
September 1995 and began shipping product for sale in the second half of 1996.
In April 1999, we established manufacturing operations in Zhuhai, China. In
April 2000, we acquired Telelight Communication Inc. ("Telelight"), a designer
and manufacturer of fiber optic components with operations in Sunnyvale,
California and Fuzhou, China. In May and September 2000, the Company established
additional manufacturing operations in Beijing and Shanghai, China,
respectively.
We generate revenues from the sale of fiber optic components and integrated
optical modules. To date, we have developed over 20 types of primary components.
In addition, we have integrated these components through various combinations
and are able to provide over 100 customized solutions to our customers. Our
products are generally categorized into the following four major groups:
wavelength expansion, optical amplification, wavelength performance monitoring
and protection, and optical switching. The vast majority of our revenues are
derived from our wavelength expansion products, in particular, dense wavelength
division multiplexers, or DWDMs, and noise reduction filters.
We have recorded aggregate deferred stock compensation of $57.9 million
through September 30, 2000, which represents the difference between the
exercise price of options granted through September 30, 2000 and the
estimated fair value of the underlying stock on the date of grant. We
expensed $3.0 million during the year ended June 30, 1999, $12.7 million
during the year ended June 30, 2000 and $8.7 million during the three months
ended September 30, 2000. The remaining $33.5 million will be expensed in
future periods generally over a four-year vesting period. While this expense
has increased our net loss, it has had no impact on our cash flows.
Results of Operations for the Three Months Ended September 30, 2000 Compared to
the Three Months Ended September 30, 1999
Revenues. Revenues increased $27.8 million, or 628%, from $4.4 million for
the three months ended September 30, 1999 to $32.3 million for the three months
ended September 30, 2000. This increase in revenues was primarily due to
increased shipments of our existing wavelength expansion products and optical
amplification products to existing customers and to a lesser extent shipments of
new products. This increase was partially offset by a decrease in the average
selling price of some of our products.
9
<PAGE>
Gross Profit. Gross profit increased $6.5 million, or 564%, from $1.2
million for the three months ended September 30, 1999 to $7.7 million for the
three months ended September 30, 2000. This resulted in a decrease in gross
margin from 26.1% to 23.8%. The decrease in our gross margin was primarily
due to decreases in the average selling price of some of our products,
additional excess and obsolete inventory reserves and manufacturing
inefficiencies associated with the rapid expansion of our manufacturing
capacity. Manufacturing overhead costs associated with the expansion of our
manufacturing operations both domestically and internationally increased
$4.7 million, excluding amortization of deferred compensation. The gross
margin decrease was partially offset by yield improvements and economies of
scale resulting from higher production volumes. We are implementing programs
both domestically and internationally to further improve yields for our
products. There can be no assurance that these programs will be successful in
increasing our gross margin. Additionally, we are planning continued rapid
expansion to support the anticipated growth in our worldwide markets.
Additional spending related to this expansion may offset any gross margin
improvement due to yield improvements and volume manufacturing efficiencies.
Research and Development. Research and development expenses increased $3.4
million, or 1560%, from $218,000 for the three months ended September 30, 1999
to $3.6 million for the three months ended September 30, 2000. The increase in
research and development expenses was primarily due to costs associated with the
substantial increase in personnel and personnel-related costs, an increase in
prototype expenses for the design and development of new products as well as
significant improvements to existing products and an increase in occupancy costs
due to expansion of facilities both internationally and domestically. Research
and development expenses, including amortization of deferred compensation,
increased $4.7 million, or 1432%, from $328,000 for the three months ended
September 30, 1999 to $5.0 million for the three months ended September 30,
2000. We expect our research and development expenses to increase in dollar
amounts but decrease as a percentage of revenues as we continue to develop new
products and improve existing products.
Sales and Marketing. Sales and marketing expenses increased $2.1 million,
or 661%, from $311,000 for the three months ended September 30, 1999 to $2.4
million for the three months ended September 30, 2000. The increase in sales and
marketing expenses was primarily due to costs associated with the substantial
increase in sales and marketing personnel and personnel-related costs,
commissions to our internal and external sales representatives and tradeshow,
advertising and other customer-related costs. Sales and marketing expenses,
including amortization of deferred compensation, increased $2.6 million, or
641%, from $401,000 for the three months ended September 30, 1999 to $3.0
million for the three months ended September 30, 2000. We expect our sales and
marketing expenses to increase in dollar amounts but decrease as a percentage of
revenues as we add additional sales personnel and related costs to support our
selling efforts. Additionally, we expect to record selling and marketing
expenses of $8.8 million in the second quarter of fiscal 2001, representing the
fair value of the discount feature of the convertible note payable to Cisco
Systems, Inc.
General and Administrative. General and administrative expenses increased
$2.0 million, or 275%, from $719,000 for the three months ended September 30,
1999 to $2.7 million for the three months ended September 30, 2000. The increase
in general and administrative expenses was primarily due to costs associated
with the substantial increase in personnel and personnel-related costs, start up
costs in China and occupancy costs. General and administrative expenses,
including amortization of deferred compensation, increased $7.2 million, or
804%, from $892,000 for the three months ended September 30, 1999 to $8.1
million for the three months ended September 30, 2000. We expect our general and
administrative expenses to increase in dollar amounts but decrease as a
percentage of revenues as we establish the infrastructure to support our growing
operations and due to the reporting requirements imposed on a public company.
10
<PAGE>
Amortization of Deferred Compensation. Through September 30, 2000, we had
recorded an aggregate of $57.9 million in deferred compensation. Amortization of
deferred compensation expenses increased $8.2 million, or 1550%, from $529,000
for the three months ended September 30, 1999 to $8.7 million for the three
months ended September 30, 2000.
Amortization of Goodwill. Amortization of goodwill of $1.0 million for the
three months ended September 30, 2000 represents charges incurred as a result of
our acquisition of Telelight in April 2000.
Interest and Other Income (Expense), Net. Interest and other income
(expense) for the three months ended September 30, 1999 was $35,000 of income as
compared to $12,000 of income for the three months ended September 30, 2000.
This decrease in income is due to larger cash balances from the proceeds of our
preferred stock financing in February 2000 and convertible note payable to Cisco
Systems in August 2000 offset by interest expense on the convertible note
payable.
Provision for Income Taxes. We have a net deferred tax asset of $1.1
million as of September 30, 2000, which is net of a valuation allowance that
reduces the gross deferred tax asset of $4.5 million to an amount that
management believes will more likely than not be realized. In assessing the
realizability of deferred tax assets, management recorded a valuation allowance
to the extent the Company does not have a carryback right. Based on the
Company's history of losses and uncertainty of generating future taxable income,
the realizable portion of the deferred tax assets is equal only to the amount of
income tax expected to be paid during fiscal 2001, which is related to a tax
liability incurred during fiscal 2000, and represents the amount that management
believes will more likely than not be realizable based on current available
objective evidence.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
venture capital and other issuances of our convertible preferred stock, which
totaled $58.4 million in aggregate net proceeds through June 30, 2000. In
August 2000, we received $50.0 million in connection with the issuance to
Cisco Systems of a convertible promissory note which automatically converted
into 3,298,773 shares of common stock upon the closing of our public offering
in October 2000. As of September 30, 2000, we had cash and cash equivalents
of $57.8 million and working capital of $69.1 million.
Our operating activities used cash of $8.7 million in the three months
ended September 30, 2000. Cash used in operating activities was primarily
attributable to a net loss incurred during the first quarter of fiscal 2001 of
$10.7 million, an increase in accounts receivable of $8.3 million, an increase
in inventories of $2.2 million, an increase in prepaid expenses of $2.2 million,
an increase in other assets of $369,000 and a decrease in accounts payable of
$138,000, partially offset by increases in accrued liabilities of $3.9 million,
depreciation and amortization expense of $2.5 million, non-cash stock-based
compensation amortization of $8.7 million and a non-cash donation of $100,000.
Our investing activities used cash of $11.1 million in the three months
ended September 30, 2000 primarily due to the purchase of property and
equipment. During the next 12 months, we expect to use approximately $60.0
million for the expansion of our manufacturing facilities worldwide. We expect
to use cash generated from our initial public offering for these expenditures.
Our financing activities provided cash of $50.9 million in the three
months ended September 30, 2000 primarily from the convertible promissory
note payable to Cisco Systems of $50.0 million, proceeds from the issuance
11
<PAGE>
of common stock of $445,000, borrowings under our line of credit of $648,000
partially offset by repayment of lease obligations of $196,000.
Our principal source of liquidity at September 30, 2000 consisted of $57.8
million in cash and cash equivalents. We believe that the proceeds from our
initial public offering in October 2000, together with our current cash and cash
equivalent balances and any cash generated from operations, will be sufficient
to meet our operating and capital requirements for at least the next 12 months.
However, it is possible that we may require additional financing within this
period. The factors described above will affect our future capital requirements
and the adequacy of our available funds. In addition, even if we raise
sufficient funds to meet our anticipated cash needs during the next 12 months,
we may need to raise additional funds beyond this time. We may be required to
raise those funds through public or private financings, strategic relationships
or other arrangements. We cannot assure you that such funding, if needed, will
be available on terms attractive to us, or at all. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants. Our failure to raise capital when
needed could harm our ability to pursue our business strategy and achieve and
maintain profitability.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income (loss), depending on the type of hedging relationship that
exists.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133
until fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133
did not have a material impact on the Company's operations or financial
position.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes that the Company has complied with the
guidance of SAB 101.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of Opinion No. 25" for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The adoption of certain provisions of FIN 44 did not have a material
impact on the Company's financial position.
Risk Factors
WE HAVE INCURRED SIGNIFICANT LOSSES, AND OUR FAILURE TO INCREASE OUR REVENUES
COULD PREVENT US FROM ACHIEVING PROFITABILITY.
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We have incurred significant losses since our inception in 1995 and expect
to incur losses in the future. We incurred net losses of $24.9 million for the
year ended June 30, 2000 and $10.7 million for the three months ended September
30, 2000. We have not achieved profitability on a quarterly basis. As of
September 30, 2000, we had an accumulated deficit of $43.2 million. We will need
to generate significantly greater revenues while containing costs and operating
expenses to achieve profitability. Our revenues may not continue to grow, and we
may never generate sufficient revenues to achieve profitability.
WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND ANY DECREASE IN REVENUES FROM, OR LOSS OF, THESE CUSTOMERS WITHOUT
A CORRESPONDING INCREASE IN REVENUES FROM OTHER CUSTOMERS WOULD HARM OUR
OPERATING RESULTS.
We depend upon a small number of customers for a substantial portion of our
revenues. Our top three customers together accounted for 68.9% of our revenues
in the year ended June 30, 2000. The same top three customers together accounted
for 69.8% of our revenues in the three months ended September 30, 2000. We
expect that we will continue to depend upon a small number of customers,
although potentially not the same customers, for a substantial portion of our
revenues.
Our revenues generated from these customers, individually or in the
aggregate, may not reach or exceed historic levels in any future period. For
example, we may not be the sole source of supply to our customers, and they may
choose to purchase products from other vendors. Furthermore, the businesses of
our existing customers could experience a downturn, which could result in
significantly decreased sales to these customers and harm our results of
operations. In this regard, Lucent has indicated that it may decrease and
eventually discontinue incorporating one of our optical components into some of
its products over the next two years. Lucent's purchases of this optical
component in the year ended June 30, 2000 and the three months ended September
30, 2000 accounted for 28.3% and 11.1% of our revenues, respectively. Lucent may
not introduce or sell significant quantities of other products that incorporate
this optical component. Additionally, another of our top three customers has
indicated that its rate of usage will significantly decline. These declines are
offset by significant new orders and forecasted orders from a new top customer.
Loss or cancellations of orders from, or any downturn in the business of, any of
our customers could harm our revenues. Our dependence on a small number of
customers may increase if the optical components industry and our target markets
continue to consolidate.
BECAUSE WE DID NOT COMMENCE SALES OF OUR PRODUCTS UNTIL LATE 1996 AND ONLY
RECENTLY BEGAN SELLING OUR PRODUCTS IN LARGE VOLUME, WE MAY BE UNABLE TO
ACCURATELY FORECAST OUR REVENUES, AND OUR QUARTERLY REVENUES AND OPERATING
RESULTS MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
We did not commence sales of our products until late 1996 and only recently
began selling our products in large volume. As a result, it is difficult to
forecast our revenues accurately. Moreover, our revenues, expenses and operating
results have varied significantly from quarter to quarter in the past and may
continue to fluctuate significantly in the future. The factors, many of which
are more fully discussed in other risk factors, that are likely to cause these
variations include, among others:
- fluctuations in demand for, and sales of, our products;
- cancellations of orders and shipment rescheduling;
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- our ability to significantly expand our manufacturing capacity at our
facilities in San Jose, California and China;
- the availability of raw materials used in our products and increases in
the price of these raw materials;
- the ability of our manufacturing operations in China to timely produce
and deliver products and components in the quantity and of the quality we
require;
- our ability to achieve acceptable production yields;
- the practice of communication equipment suppliers to sporadically place
large orders with short lead times;
- the mix of products and the average selling prices of the products we
sell;
- competitive factors, including introductions of new products and product
enhancements by competitors, entry of new competitors into the optical
networking components market and pricing pressures;
- our ability to develop, introduce, manufacture and ship new and enhanced
optical networking products in a timely manner without defects;
- costs associated with and the outcomes of any intellectual property or
other litigation to which we are, or may become, a party; and
- economic conditions specific to the communications and related industries
and the development and size of the markets for our products.
Due to the factors noted above and other risks discussed in this section,
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. Quarterly variations in our operations
could result in significant volatility in our stock price and the market price
for our common stock might fall below the initial public offering price. It is
likely that, in future quarters, our operating results may be below the
expectations of securities analysts or investors. If this occurs, the price of
our common stock is likely to decrease.
BECAUSE A HIGH PERCENTAGE OF OUR EXPENSES IS FIXED IN THE SHORT TERM, OUR
OPERATING RESULTS ARE LIKELY TO BE HARMED IF WE EXPERIENCE DELAYS IN GENERATING
AND RECOGNIZING REVENUES.
A high percentage of our expenses, including those related to
manufacturing, engineering, research and development, sales and marketing and
general and administrative functions, is fixed in the short term. As a result,
if we experience delays in generating and recognizing revenues, our quarterly
operating results are likely to be harmed. As we expand our manufacturing
capacity, we will incur expenses in one quarter relating to the expansion that
may not result in off-setting revenues 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
revenues that are not recognized until a subsequent quarter when the new product
is introduced. If growth in our revenues does not exceed the increase in our
expenses, our results of operations will be harmed.
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IF WE FAIL TO RAPIDLY EXPAND OUR MANUFACTURING CAPACITY, WE MAY NOT BE ABLE TO
DELIVER SUFFICIENT QUANTITIES OF PRODUCTS TO OUR CUSTOMERS IN A TIMELY MANNER,
WHICH WOULD HARM OUR OPERATING RESULTS.
We manufacture all of our products in our facilities in San Jose,
California and Zhuhai and Fuzhou, China and currently are expanding our
manufacturing capacity at our San Jose and Zhuhai facilities. In May and
September 2000, we established additional manufacturing operations in Beijing
and Shanghai, China, respectively. We must devote significant resources to
expand our manufacturing capacity, and our planned expansion will be expensive,
will require management's time and may disrupt our operations. Additional risks
associated with rapidly increasing manufacturing capacity include:
- a lack of availability of manufacturing personnel;
- difficulties in achieving adequate yields from new manufacturing lines;
- inability to quickly implement an adequate set of financial controls to
track levels of inventory;
- our failure to acquire additional facilities in desirable locations on
commercially reasonable terms; and
- our inability to procure the necessary raw materials and equipment.
We are just beginning to receive orders for significant quantities of
products while simultaneously increasing our manufacturing capacity.
Communications equipment suppliers typically require that their vendors commit
to provide specified quantities of products over a given period of time. We
could be unable to pursue many large orders if we do not have sufficient
manufacturing capacity to enable us to commit to provide customers with
specified quantities of products. 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. Furthermore, if we fail to fulfill orders
to which we have committed, we will lose revenue opportunities and our customer
relationships may be harmed.
IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID EXPANSION OF OUR OPERATIONS,
INCLUDING THE ANTICIPATED SIGNIFICANT INCREASE IN THE NUMBER OF OUR EMPLOYEES,
OUR OPERATING RESULTS COULD BE HARMED.
We currently operate facilities in San Jose, California and in China. We
are continuing to expand the scope of our operations domestically and
internationally and to increase the number of our employees significantly. We
plan to hire a significant number of employees over the next several quarters in
connection with the expansion of our manufacturing operations. The growth in
employees and our operations, combined with the challenges of expanding and
managing geographically-dispersed 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 will need to continue to expand, train and
manage our workforce worldwide. Any failure to effectively manage this expansion
could harm our operating results.
IF WE FAIL TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS, OUR OPERATING RESULTS
COULD BE HARMED.
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Because we experience long lead times for raw materials and are often
required to purchase significant amounts of raw materials far in advance of
product shipments, we may not effectively manage our inventory levels, which
could harm our operating results. If we underestimate our requirements, we may
have inadequate inventory, which could result in delays in shipments and loss of
customers. If we purchase raw materials in anticipation of orders that do not
materialize, we will have to carry or write off excess inventory and our gross
margins will decline. Even if we receive these orders, the additional
manufacturing capacity that we add to meet customer requirements may be
underutilized in a subsequent quarter. We are in the early stages of
implementing automated manufacturing management systems, and at present most of
the data, including some inventory levels, are tracked manually. The current
limitations of our manufacturing management systems increase the risk that we
may fail to effectively manage our inventory. In this regard, we experienced
significant increases in provisions for excess and obsolete inventory, which
harmed our gross margins, in the first quarter of fiscal 2001 and the prior two
quarters. As we grow, we will need to implement new systems, which we may fail
to do on a timely basis. The risks associated with managing our inventory are
increased by the fact that we ship products to our largest customer, Lucent, on
a consignment basis, such that we carry the shipped products as inventory until
Lucent accepts the products for use.
BECAUSE WE DEPEND ON THIRD PARTIES TO SUPPLY SOME OF OUR RAW MATERIALS AND
EQUIPMENT, WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT QUANTITIES OF THESE MATERIALS
AND EQUIPMENT, WHICH COULD LIMIT OUR ABILITY TO FILL CUSTOMER ORDERS AND HARM
OUR OPERATING RESULTS.
We depend on third parties to supply the raw materials and equipment we use
to manufacture our products. To be competitive, we must obtain from our
suppliers, on a timely basis, sufficient quantities of raw materials at
acceptable prices. We obtain most of our critical raw materials from a single or
limited number of suppliers and generally do not have long-term supply contracts
with them. As a result, our suppliers could terminate the supply of a particular
material at any time without penalty. Difficulties in obtaining raw materials in
the future may limit our product shipments.
Some of our raw material suppliers are single sources, and finding
alternative sources may involve significant expense and delay, if these sources
can be found at all. For example, all of our GRIN lenses, which are incorporated
into substantially all of our products, are obtained from Nippon Sheet Glass,
the sole supplier worldwide of GRIN lenses. Our failure to obtain these
materials or other single or limited-source raw materials could delay or reduce
our product shipments, which could result in lost orders, increase our costs,
reduce our control over quality and delivery schedules and require us to
redesign our products. In this regard, we experienced difficulties in obtaining
GRIN lenses in the first quarter of fiscal 2001 and the prior two quarters, and
we continue to experience such difficulties. If a significant supplier became
unable or unwilling to continue to manufacture or ship materials in required
volumes, we would have to identify and qualify an acceptable replacement. A
material delay or reduction in shipments, any need to identify and qualify
replacement suppliers or any significant increase in our need for raw materials
that cannot be met on acceptable terms could harm our business.
We also depend on a limited number of manufacturers and vendors that make
and sell the complex equipment we use in our manufacturing process. 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.
OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY
OUR REVENUES COULD DECLINE, WHICH WOULD HARM OUR OPERATING RESULTS.
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The market for fiber optic components is intensely competitive. We believe
that our principal competitors are the major manufacturers of optical components
and modules, including vendors selling to third parties and business divisions
within communications equipment suppliers. Our principal competitors in the
components market include Avanex Corporation, Ciena Corporation, Corning, DiCon
Fiberoptics, Furukawa Electrical, Lucent, New Focus, Nortel, Sumitomo, Tyco
Electronics and JDS Uniphase, which recently acquired E-TEK Dynamics and
announced its intended acquisition of SDL. We believe that we primarily compete
with diversified suppliers, such as Corning, JDS Uniphase, Lucent and Nortel,
for the majority of our product line and to a lesser extent with niche players
that offer more limited product lines. Competitors in any portion of our
business may also rapidly become competitors in other portions of our business.
In addition, our industry has recently experienced significant consolidation,
and we anticipate that further consolidation will occur. This consolidation has
further increased competition.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing, manufacturing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, to
devote greater resources to the development, promotion and sale of products, or
to deliver competitive products at lower prices.
Several of our existing and potential customers are also current and
potential competitors of ours. JDS Uniphase, for example, generated 10.6% and
9.7% of our revenues for the year ended June 30, 2000 and the quarter ended
September 30, 2000, respectively. These companies may develop or acquire
additional competitive products or technologies in the future and thereby reduce
or cease their purchases from us. In light of the consolidation in the optical
networking industry, we also believe that the size of the optical component and
module suppliers will become increasingly important to our current and potential
customers in the future. We may not be able to compete successfully with
existing or new competitors, and the competitive pressures we face may result in
lower prices for our products, loss of market share, or reduced gross margins,
any of which could harm our business.
New technologies are emerging due to increased competition and customer
demand. The introduction of new products incorporating new technologies or the
emergence of new industry standards could make our existing products
noncompetitive. For example, new technologies are being developed in the design
of wavelength division multiplexers that compete with the thin film filters that
we incorporate in our products. These technologies include arrayed waveguide
grating, or AWG, which is being developed by Lucent and NTT, and fiber bragg
grating, or FBG, which is being developed by Ciena. If our competitors adopt new
technologies before we do, we could lose market share and our business would
suffer.
A SUBSTANTIAL PORTION OF OUR MANUFACTURING OPERATIONS ARE LOCATED IN CHINA,
WHICH EXPOSES US TO THE RISK THAT OUR FAILURE TO COMPLY WITH THE LAWS AND
REGULATIONS OF CHINA, OR EVENTS IN THAT COUNTRY, WILL DISRUPT OUR OPERATIONS.
A substantial portion of our manufacturing operations are located in China
and are subject to the laws and regulations of China. We anticipate that a
greater portion of our manufacturing operations will be located in China in the
future. Our operations in China may be adversely affected by changes in the laws
and regulations of China, such as those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
China's central or local government may impose new, stricter regulations or
interpretations of existing regulations which would require additional
expenditures. China's economy differs from the economies of many countries in
terms of structure, government involvement, level
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of development, growth rate, capital reinvestment, allocation of resources,
self-sufficiency and rate of inflation, among others. Our results of operations
and financial condition may be harmed by changes in the political, economic or
social conditions in China.
In addition, events out of our control in China, such as political unrest,
war, labor strikes and work stoppages, could disrupt our operations. There
currently is political tension between the United States and China, which could
lead to a breakdown in trade relations. There is also significant tension
between China and Taiwan, which could result in hostilities. If any of these
events occurs, it would be difficult for us to establish manufacturing
operations at an alternative location on comparable terms.
Our operations in China also expose us to the following general risks
associated with international operations:
- difficulties and costs of staffing and managing foreign operations with
personnel who have expertise in optical network technology;
- unexpected changes in regulatory or certification requirements for
optical systems or networks;
- disruptions in the transportation of our products and other risks related
to the infrastructure of foreign countries;
- fluctuations in the value of currencies; and
- economic instability.
OUR WAVELENGTH EXPANSION PRODUCTS HAVE ACCOUNTED FOR THE VAST MAJORITY OF OUR
REVENUES, AND OUR REVENUES COULD BE HARMED IF THE PRICE OF OR DEMAND FOR THESE
PRODUCTS DECLINES OR IF THESE PRODUCTS FAIL TO ACHIEVE BROADER MARKET
ACCEPTANCE.
Although we currently offer a broad spectrum of products, sales of our
wavelength expansion products accounted for the vast majority of our revenues in
the three months ended September 30, 2000 and the year ended June 30, 2000.
These products include, among others, dense wavelength division multiplexers, or
DWDMs, and noise reduction filters. We believe that our future growth and a
significant portion of our future revenues will depend on the commercial success
of our wavelength expansion products. Customers that have purchased wavelength
expansion products may not continue to purchase these products from us. Any
decline in the price of, or demand for, our wavelength expansion products, or
their failure to achieve broader market acceptance, could harm our revenues.
THE OPTICAL NETWORKING COMPONENT INDUSTRY IS EXPERIENCING DECLINING AVERAGE
SELLING PRICES, WHICH COULD CAUSE OUR GROSS MARGINS TO DECLINE AND HARM OUR
OPERATING RESULTS.
The optical networking component industry is experiencing declining average
selling prices, or ASPs, as a result of increasing competition and greater unit
volumes as communications service providers continue to deploy fiber optic
networks. We anticipate that ASPs 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 ASP declines have
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contributed and may continue to contribute to a decline in our gross margins,
which could harm our results of operations.
OUR FAILURE TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS IN A COST-EFFECTIVE
MANNER COULD DELAY PRODUCT SHIPMENTS TO OUR CUSTOMERS AND HARM OUR OPERATING
RESULTS.
Because manufacturing our products involves complex and precise processes
and the majority of our manufacturing costs are relatively fixed, manufacturing
yields are critical to our results of operations. Lower than expected
manufacturing yields could delay product shipments and harm our operating
results. Factors that affect our manufacturing yields include the quality of raw
materials used to make our products, quality of workmanship and our
manufacturing processes. Our or our suppliers' inadvertent use of defective
materials could significantly reduce our manufacturing yields. Furthermore,
because of the large labor component in and complexity of the manufacturing
process, quality of workmanship is critical to achieving acceptable yields. We
cannot assure you that we will be able to hire and train a sufficient number of
qualified personnel to cost-effectively produce our products with the quality
and in the quantities required by our customers. Changes in our manufacturing
processes or those of our suppliers could also impact our yields. In some cases,
existing manufacturing techniques, which involve substantial manual labor, may
not allow us to cost-effectively meet our manufacturing yield goals so that we
maintain acceptable gross margins while meeting the cost targets of our
customers. We will need to develop new manufacturing processes and techniques
that will involve higher levels of automation in order to increase our gross
margins and help achieve the targeted cost levels of our customers. We may not
achieve manufacturing cost levels that will allow us to achieve acceptable gross
margins or fully satisfy customer demands.
OUR PRODUCTS MAY HAVE DEFECTS THAT ARE NOT DETECTED UNTIL FULL DEPLOYMENT OF A
CUSTOMER'S EQUIPMENT, WHICH COULD RESULT IN A LOSS OF CUSTOMERS, DAMAGE TO OUR
REPUTATION AND SUBSTANTIAL COSTS.
Our products are deployed in large and complex optical networks and must be
compatible with other system components. Our products can only be fully tested
for reliability when deployed in networks for long periods of time. Our
customers may discover errors, defects or incompatibilities in our products
after they have been fully deployed and operated under peak stress conditions.
Our products may also have errors, defects or incompatibilities that are not
found until after a system upgrade is installed. Errors, defects,
incompatibilities or other problems with our products could result in:
- loss of customers;
- loss of or delay in revenues;
- loss of market share;
- damage to our brand and reputation;
- inability to attract new customers or achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
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- legal actions by our customers; and
- increased insurance costs.
If any of these occur, our operating results could be harmed.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OUR ABILITY TO SUCCEED
WILL BE HARMED.
Our ability to compete successfully and achieve future growth will depend,
in part, on our ability to protect our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. However,
the steps we have taken may not prevent the misappropriation of our intellectual
property, particularly in foreign countries, such as China, where the laws may
not protect our proprietary rights as fully as in the United States. We
currently hold 12 patents and have 20 pending patent applications in the United
States. We cannot assure you that patents will be issued from pending or future
applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented. Rights granted under these patents may not provide
us with meaningful protection or any commercial advantage. If we are unable to
protect our proprietary technology, our ability to succeed will be harmed. We
may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights. These claims could result in costly
litigation and the diversion of our technical and management personnel.
WE ARE CURRENTLY DEFENDANTS IN TWO PATENT DISPUTES AND MAY BE INVOLVED IN OTHER
INTELLECTUAL PROPERTY DISPUTES IN THE FUTURE, WHICH WILL DIVERT MANAGEMENT'S
ATTENTION AND COULD CAUSE US TO INCUR SIGNIFICANT COSTS AND PREVENT US FROM
SELLING OR USING THE CHALLENGED TECHNOLOGY.
Participants in the communications and optical components markets in which
we sell our products have experienced frequent litigation regarding patent and
other intellectual property rights. Numerous patents in these industries are
held by others, including our competitors and academic institutions. We have no
means of knowing that a patent application has been filed in the United States
until the patent is issued. Optical component suppliers may seek to gain a
competitive advantage or other third parties may seek an economic return on
their intellectual property portfolios by making infringement claims against us.
In November 1999, E-TEK Dynamics filed a lawsuit against us in the United
States District Court for the Northern District of California alleging
infringement of E-TEK's patent relating to fiber optic couplers based on our
manufacture and sale of our DWDM products. E-TEK seeks an award for damages and
injunctive relief. Our DWDM products generated a majority of our revenues for
the year ended June 30, 2000 and the first fiscal quarter ended September 30,
2000. An adverse ruling in this matter would materially adversely affect our
financial condition. JDS Uniphase, which accounted for 10.6% and 9.7% of our
revenues for the year ended June 30, 2000 and the quarter ended September 30,
2000, respectively, recently acquired E-TEK. While we do not currently believe
that the E-TEK lawsuit will materially harm our supplier relationship with JDS
Uniphase, primarily because the products we sell to JDS Uniphase are not
subjects of the lawsuit, the ultimate impact of the lawsuit on our business
cannot be determined at this time. In addition, in June 2000, Chorum
Technologies, Inc. filed a lawsuit against us and our wholly-owned subsidiary,
Telelight Communication Inc., in the United States District Court for the
Northern District of Texas alleging, among other things, infringement of two
U.S. patents allegedly owned by Chorum relating to fiber optical interleaving,
based on our manufacture of and offer to sell various fiber optic interleaver
products. Chorum seeks an award for damages and injunctive relief.
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Defending these lawsuits, and any additional litigation to which we may
become a party in the future as a result of alleged infringement of others'
intellectual property, will likely be costly and time consuming and will divert
the efforts and attention of our management and technical personnel. Patent
litigation is highly complex and can extend for a protracted period of time,
which can substantially increase the cost of litigation. Accordingly, the
expenses and diversion of resources associated with either of these matters, or
any other intellectual property litigation to which we may become a party, could
seriously harm our business and financial condition. Any intellectual property
litigation also could invalidate our proprietary rights and force us to do one
or more of the following:
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all;
- stop selling, incorporating or using our products that use the challenged
intellectual property;
- pay substantial money damages; or
- redesign the products that use the technology.
Any of these actions could result in a substantial reduction in our revenue
and could result in losses over an extended period of time.
IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE
MARKET ACCEPTANCE, SALES OF OUR PRODUCTS COULD DECLINE, WHICH WOULD HARM OUR
OPERATING RESULTS.
The communications industry is characterized by rapid technological
changes, frequent new product introductions, changes in customer requirements
and evolving industry standards. As a result, our products could quickly become
obsolete as new technologies are introduced and incorporated into new and
improved products. Our future success depends on our ability to anticipate
market needs and to develop products that address those needs. Our failure to
predict market needs accurately or to develop new products or product
enhancements in a timely manner will harm market acceptance and sales of our
products. In this regard, we are currently developing bandwidth creation
products as well as bandwidth management products. If the development of these
products or any other future products takes longer than we anticipate, or if we
are unable to develop and introduce these products to market, our revenues could
suffer and we may not gain market share. Even if we are able to develop and
commercially introduce these new products, the new products may not achieve
widespread market acceptance.
WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE COMMUNICATIONS INDUSTRY,
WHICH IS EXPERIENCING RAPID CONSOLIDATION AND REALIGNMENT AND MAY NOT CONTINUE
TO DEMAND FIBER OPTIC PRODUCTS, THEREBY REDUCING DEMAND FOR OUR PRODUCTS AND
HARMING OUR OPERATING RESULTS.
We depend on the continued growth and success of the communications
industry, including the continued growth of the Internet as a widely-used medium
for commerce and communication and the continuing demand for increased bandwidth
over communications networks. Trends that are currently driving growth in the
communications industry may not continue in a manner favorable to us and
technological or other developments in the communications industry may not favor
growth in the markets served by our products. Furthermore, the rate at which
communications service providers and other fiber optic network users have
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built new fiber optic networks or installed new systems in their existing fiber
optic networks has fluctuated in the past and these fluctuations may continue in
the future. These fluctuations may result in reduced demand for new or upgraded
fiber optic systems that utilize our products and, therefore, may result in
reduced demand for our products.
The communications industry is also experiencing rapid consolidation and
realignment, as industry participants seek to capitalize on the rapidly changing
competitive landscape developing around the Internet and new communications
technologies such as fiber optic and wireless communications networks. As the
communications industry consolidates and realigns to accommodate technological
and other developments, our customers may consolidate or align with other
entities in a manner that harms our business.
BECAUSE NONE OF OUR CUSTOMERS ARE OBLIGATED TO PURCHASE OUR PRODUCTS, THEY MAY
AND DO CANCEL OR DEFER THEIR PURCHASES ON SHORT NOTICE AND AT ANY TIME, WHICH
COULD HARM OUR OPERATING RESULTS.
We do not have contracts with our customers that provide any assurance of
future sales, and sales are typically made pursuant to individual purchase
orders, often with extremely short lead times. Accordingly, our customers:
- may stop purchasing our products at any time without penalty;
- are free to purchase products from our competitors;
- are not required to make minimum purchases; and
- may and do cancel orders that they place with us.
Sales to any single customer may vary significantly from quarter to
quarter. Our customers generally do not place purchase orders far in advance. In
addition, our customer purchase orders have varied significantly from quarter to
quarter. Our customers base their purchase orders on a decision to deploy their
systems in a particular geographic area and may not order additional products
until they make their next major deployment decision. This means that customers
who account for a significant portion of our revenues in one quarter may not
place any orders in the succeeding quarter, which makes it difficult to forecast
revenue in future periods. Moreover, our expense levels are based in part on our
expectations of future revenue, and we may be unable to adjust costs in a timely
manner in response to revenue shortfalls. This can result in significant
quarterly fluctuations in our operating results.
OUR LENGTHY AND VARIABLE QUALIFICATION AND SALES CYCLE MAKES IT DIFFICULT TO
PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE, WHICH MAY HARM OUR
OPERATING RESULTS.
Our customers typically expend significant efforts in evaluating and
qualifying our products and manufacturing process prior to placing an order.
This evaluation and qualification process frequently results in a lengthy sales
cycle, typically ranging from nine to twelve months and sometimes longer. While
our customers are evaluating our products and before they place an order with
us, we may incur substantial sales, marketing, research and development
expenses, expend significant management efforts, increase manufacturing capacity
and order long lead-time supplies. Even after this evaluation process, it is
possible a potential customer will not purchase our products. In addition,
product purchases are frequently subject to unplanned processing and other
delays, particularly with respect to larger customers for which our products
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represent a very small percentage of their overall purchase activity. Long sales
cycles may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter, which could cause volatility in our stock
price.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OUR ABILITY
TO SELL OUR PRODUCTS COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers, particularly Joseph Y. Liu, our Chief Executive Officer, Frederick R.
Fromm, our President, Haiguang Lu, our Senior Vice President, Worldwide
Manufacturing Operations, and other key engineering, finance, sales, marketing,
manufacturing and support personnel. In addition, we depend substantially upon
the continued services of key management personnel at our Chinese subsidiaries.
None of our officers or key employees is bound by an employment agreement for
any specific term, and these personnel may terminate their employment at any
time. In addition, we do not have "key person" life insurance policies covering
any of our employees.
As a result of the expansion of our operations, we must hire a significant
number of additional employees in the near future, 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 in the future. Competition for highly-skilled personnel is
intense, especially in the San Francisco Bay area. We may not be successful in
attracting, assimilating or retaining qualified personnel to fulfill our current
or future needs. In addition, many of the members of our management team have
just recently joined our company. Mr. Jingyu Xu, Senior Vice President of
Engineering, joined us in November 1999, Mr. Bruce Horn, our Chief Financial
Officer, joined us in April 2000, Mr. Frederick R. Fromm, our President, joined
us in July 2000, Messrs. Jeff Friedman, our General Counsel, and Daryl Eigen,
our Vice President of Sales and Marketing, joined us in August 2000, and Mr.
Robert T. Ku, our Senior Vice President of Technology, joined us in October
2000. If our new management team does not work effectively together, it could
seriously harm our business.
BECAUSE SOME OF OUR THIRD-PARTY SALES REPRESENTATIVES AND DISTRIBUTORS CARRY
PRODUCTS OF ONE OR MORE OF OUR COMPETITORS, THEY MAY NOT RECOMMEND OUR PRODUCTS
OVER COMPETITORS' PRODUCTS.
A majority of our revenues are derived from sales through our domestic and
international sales representatives and distributors. Our sales representatives
and distributors are independent organizations that generally have exclusive
geographic territories and generally are compensated on a commission basis. We
expect that we will continue to rely on our independent sales representatives
and distributors to market, sell and support many of our products. Some of our
third-party sales representatives and distributors carry products of one or more
of our competitors. As a result, these sales representatives and distributors
may not recommend our products over competitors' products.
IF WE DO NOT EXPAND OUR SALES ORGANIZATION, WE MAY FACE DIFFICULTIES IN
INCREASING MARKET AWARENESS AND SALES OF OUR PRODUCTS, WHICH COULD PREVENT US
FROM ACHIEVING AND MAINTAINING PROFITABILITY.
We currently have a small sales force. We will need to hire additional
qualified sales personnel domestically and internationally to increase market
awareness and sales of our products. Competition for qualified sales personnel
in our industry is intense and we might not be able to hire and train the kind
and number of sales personnel we need to be successful. If we are unable to
expand our sales organization, we
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may not be able to increase market awareness or sales of our products, which
could prevent us from achieving and maintaining profitability.
BECAUSE SOME OF OUR MANUFACTURING OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE
FAULT ZONES, WE FACE THE RISK THAT A LARGE EARTHQUAKE COULD HARM OUR OPERATIONS.
A substantial portion of our manufacturing operations are located in San
Jose, California, an active earthquake fault zone. This region has experienced
large earthquakes in the past and may likely experience them in the future. A
large earthquake in the San Jose area could disrupt our manufacturing operations
for an extended period of time, which would limit our ability to supply our
products to our customers in sufficient quantities on a timely basis, harming
our customer relationships.
OUR FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD SUBJECT US TO
LIABILITY.
Our failure to comply with a variety of federal, state and local laws and
regulations in the United States and China could subject us to criminal, civil
and administrative penalties. Our products are subject to U.S. export control
laws and regulations that regulate the export of products and disclosure of
technical information to foreign countries. These laws and regulations may
require licenses for the export of some of our products to, and disclosure of
our technology in, some countries, including China, and disclosure of our
technology to a number of our employees who are foreign citizens. We have filed
two applications to obtain commodity classifications confirming that we may
export our products and disclose our technologies to foreign countries,
including China, and citizens, including Chinese nationals, without export
licenses. In the event these classifications are not obtained, we have
alternatively filed an application to obtain a license permitting us to disclose
our technology to a specified employee. We cannot assure you that we will obtain
these classifications or licenses. Furthermore, the Department of Commerce has
initiated an inquiry as to whether one of our employees received information in
violation of licensing requirements. We may be found to have violated export
restrictions with respect to this individual and other individuals, which could
result in criminal, civil and administrative penalties, including the denial of
export privileges. Depending on the outcome of the pending applications,
additional applications for licenses and other approvals may be required. We
cannot provide any assurances that such applications will be approved. If any or
all of the applications are not approved, our ability to satisfy contractual
commitments and achieve financial projections may be harmed, our manufacturing
operations may be impaired, and we may face additional adverse consequences due
to our noncompliance with these laws and regulations.
In addition, we are subject to laws relating to the storage, use, discharge
and disposal of toxic or otherwise hazardous or regulated chemicals or materials
used in our manufacturing processes. While we believe that we are currently in
compliance in all material respects with these laws and regulations, if we fail
to store, use, discharge or dispose of hazardous materials appropriately, we
could be subject to substantial liability or could be required to suspend or
adversely modify our manufacturing operations. In addition, we could be required
to pay for the cleanup of our properties if they are found to be contaminated,
even if we are not responsible for the contamination.
We employ a number of foreign nationals in our U.S. operations and as a
result we are subject to various laws related to the status of those employees
with the Immigration and Naturalization Service. Our failure to comply with the
forgoing laws or any other laws and regulations could subject us to liability.
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BECAUSE THE OPTICAL COMPONENTS INDUSTRY IS CAPITAL INTENSIVE, OUR BUSINESS MAY
BE HARMED IF WE ARE UNABLE TO RAISE ANY NEEDED ADDITIONAL CAPITAL.
The optical components industry is capital intensive, and expansion of our
manufacturing facilities, the development and marketing of new products and the
hiring and retention of personnel will require a significant commitment of
resources. Furthermore, we may continue to incur significant operating losses if
the market for optical networking components develops at a slower pace than we
anticipate, or if we fail to establish significant market share and achieve a
significantly increased level of revenue. If cash from available sources is
insufficient for these purposes, or if additional cash is used for acquisitions
or other unanticipated uses, we may need to raise additional capital. Additional
capital may not be available on terms favorable to us, or at all. If we are
unable to raise additional capital when we require it, our business could be
harmed. In addition, any additional issuance of equity or equity-related
securities to raise capital will be dilutive to our stockholders.
BECAUSE THE OPTICAL COMPONENTS INDUSTRY IS EVOLVING RAPIDLY AND HIGHLY
COMPETITIVE, OUR STRATEGY INVOLVES ACQUIRING OTHER BUSINESSES AND TECHNOLOGIES
TO GROW OUR BUSINESS. IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED
BUSINESSES OR TECHNOLOGIES, OUR OPERATING RESULTS MAY BE HARMED.
The optical components industry is evolving rapidly and highly competitive.
Accordingly, we have pursued and expect to continue to pursue acquisitions of
businesses and technologies, or the establishment of joint venture arrangements,
that could expand our business. The negotiation of potential acquisitions or
joint ventures, as well as the integration of an acquired or jointly developed
business or technology, could cause diversion of management's time and other
resources or disrupt our operations. Future acquisitions could result in:
- additional operating expenses without additional revenues;
- potential dilutive issuances of equity securities;
- the incurrence of debt and contingent liabilities;
- amortization of goodwill and other intangibles;
- research and development write-offs; and
- other acquisition-related expenses.
Furthermore, we may not be able to successfully integrate acquired
businesses or joint ventures with our operations, and we may not receive the
intended benefits of any future acquisition or joint venture.
RISKS RELATED TO OUR COMMON STOCK
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER OUR INITIAL
PUBLIC OFFERING IN OCTOBER 2000 BY OUR STOCKHOLDERS AND THESE SALES COULD CAUSE
OUR STOCK PRICE TO DECLINE.
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At September 30, 2000, our current stockholders held 141,549,853 shares of
our common stock and common stock equivalents, including shares issuable upon
conversion of outstanding preferred stock upon consummation of our initial
public offering in October 2000. In addition, at September 30, 2000, options to
purchase an aggregate of 26,021,978 shares were outstanding and warrants to
purchase an aggregate of 348,904 shares were outstanding. Our executive
officers, directors and stockholders holding an aggregate of 138,669,269 shares
of our common stock, or 98.0% of our total outstanding shares as of September
30, 2000, have executed lock-up agreements that prevent them from selling or
otherwise disposing of our common stock for a period of 180 days from October 3,
2000, the date of our initial public offering. These lock-up agreements will
expire on April 2, 2001, and an aggregate of 138,669,269 shares will be
"restricted securities" as defined in Rule 144. These restricted securities may
be sold in the future without registration under the Securities Act to the
extent permitted under Rule 144, Rule 701 or another exemption under the
Securities Act. In addition, Cisco and the holders of outstanding preferred
stock are entitled to registration of their shares of common stock and the
shares of common stock issuable upon conversion of their preferred stock under
certain circumstances.
Sales of a substantial number of shares of our common stock after our
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 in the future at a price that we deem appropriate.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER OUR OFFERING
AND COULD DELAY A CHANGE IN OUR CORPORATE CONTROL, WHICH MAY NEGATIVELY AFFECT
YOUR INVESTMENT.
Our current executive officers, directors and their affiliates will own, in
the aggregate, as of September 30, 2000, approximately 23.3% of our outstanding
shares after our offering. As a result, these persons and/or entities acting
together will be able to substantially influence the outcome of all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This ability may have the effect
of delaying a change in control, which may be favored by our other stockholders.
BECAUSE OF THE EARLY STAGE OF OUR BUSINESS AND THE RAPID CHANGES TAKING PLACE IN
THE FIBER OPTICS INDUSTRY, WE EXPECT TO EXPERIENCE SIGNIFICANT VOLATILITY IN OUR
STOCK PRICE, WHICH COULD CAUSE YOU TO LOSE ALL OR PART OF YOUR INVESTMENT.
Because of the early stage of our business and the rapid changes taking
place in the fiber optics industry, we expect the market price of our common
stock to fluctuate significantly. These fluctuations may occur in response to a
number of factors, some of which are beyond our control, including:
- quarterly variations in our operating results;
- changes in financial estimates by securities analysts and our failure to
meet any estimates;
- changes in market values of comparable companies;
- announcements by us or our competitors of new products or of significant
acquisitions, strategic partnerships or joint ventures;
- any loss by us of a major customer;
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- the outcome of, and costs associated with, any litigation to which we are
or may become a party;
- additions or departures of key management or engineering personnel; and
- future sales of our common stock.
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT ANY CHANGE IN CONTROL, WHICH COULD NEGATIVELY AFFECT
YOUR INVESTMENT.
Provisions of Delaware law and of our certificate of incorporation and
bylaws could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders. These provisions permit us to:
- issue preferred stock with rights senior to those of the common stock
without any further vote or action by the stockholders;
- provide for a classified board of directors;
- eliminate the right of the stockholders to call a special meeting of
stockholders;
- eliminate the right of stockholders to act by written consent; and
- impose various procedural and other requirements which could make it
difficult for stockholders to effect certain corporate actions.
Any of the foregoing provisions could limit the price that certain
investors might be willing to pay in the future for shares of our common stock.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to market risk related to fluctuations in interest rates and
in foreign currency exchange rates:
INTEREST RATE EXPOSURE. The primary objective of our investment activities
is to preserve principal while maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we may invest in may be subject to market risk. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities and certificates of
deposit. As of September 30, 2000, all of our investments were in money market
funds, certificates of deposits or high quality commercial paper.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is disclosed in Note 7 of Notes to
Consolidated Financial Statements set forth in Item 1 of Part I, above. The text
of such Note is hereby incorporated herein by reference. See also "Risk
Factors -- We are currently defendants in two patent disputes and may be
involved in other intellectual property disputes in the future, which will
divert management's attention and could cause us to incur significant costs
and prevent us from selling or using the challenged technology."
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Item 2. Changes in Securities and Use of Proceeds
(a) Initial Public Offering
The effective date of the Registration Statement for the Company's initial
public offering, filed on Form S-1 under the Securities Act of 1933, as amended
(File No. 333-41506), was October 3, 2000. Pursuant to the Registration
Statement, 15,755,000 shares of common stock, including the over-allotment
shares, were offered and sold at a price of $18.00 per share before underwriting
discounts, generating gross offering proceeds of $283.6 million. The managing
underwriters were Robertson Stephens Inc., CIBC World Markets Corp., J.P. Morgan
Securities Inc. and UBS Warburg LLC. The Company incurred expenses of
approximately $21.1 million, of which $19.9 million represented underwriting
discounts and commissions and $1.2 represented other related expenses. The net
offering proceeds to the Company after total expenses were $262.5 million.
We plan to use the net proceeds for expansion of manufacturing facilities,
marketing and distribution activities, research and development activities,
working capital and other general corporate purposes. The net proceeds have been
invested in cash, cash equivalents and short-term investments. The use of the
proceeds from the offering is not materially different from the use of proceeds
described in our Form S-1 filing.
On August 28, 2000, the Company received $50.0 million in exchange for a
note payable to Cisco Systems, Inc. The note payable accrued interest at a rate
of 8% per annum. Upon the closing of the Company's initial public offering which
occurred October 10, 2000, this note payable was converted into 3,298,773 shares
of common stock at a conversion price of $15.30 per share, or 85% of the public
offering price of $18.00 per share.
Upon the closing of the Company's initial public offering which occurred
October 10, 2000, all outstanding Preferred Stock converted into Common Stock.
(b) Certain grants and exercises of Stock Options
During the three months ended September 30, 2000, we granted stock options
to purchase 7,113,400 shares of common stock at exercise prices ranging from
$5.00 to $9.00 per share to employees pursuant to our 1998 Stock Option Plan.
During the three months ended September 30, 2000, we issued and sold an
aggregate of 3,689,858 shares of our common stock to employees for an aggregate
consideration of $568,000 pursuant to exercises of options pursuant to our 1995
and 1998 Stock Option Plans. In exchange for services, we granted a consultant
the right to purchase 10,000 shares of common stock. Such sales were made in
reliance upon an exemption from the registration provisions of the Securities
Act set forth in Rule 701 or Regulation D of the Securities Act of 1933.
(c) Reincorporation
On September 6, 2000, the Company reincorporated from a California
corporation to a Delaware corporation by merging the Company, then a
California corporation, with and into Oplink Merger Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company. The resulting entity
was the Delaware corporation which was renamed "Oplink Communications, Inc."
Each share of the outstanding
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stock of the California corporation was exchanged for a like share of stock
of the Delaware corporation. The issuance of the stock of the Delaware
corporation did not require registration under the Securities Act because the
issuance did not constitute a "sale" as the sole purpose of the transaction
was to change the Company's domicile solely within the United States. See
Rule 145(a)(2) under the Securities Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
In September 2000, in actions by written consent in connection with the
initial public offering of the Company's common stock, the stockholders
approved (a) the reincorporation of the Company in Delaware, (b) a 2-for-1
stock split of the Company's common stock and preferred stock, (c) the
post-IPO Amended and Restated Certificate of Incorporation, (d) the 2000
Equity Incentive Plan, (e) the 2000 Employee Stock Purchase Plan, (f) the
form of Indemnity Agreements for the Company's directors and executive
officers, (g) the increase in the 1998 Stock Plan, (h) the increase in the
number of authorized shares of Series E Preferred Stock and (i) the Amended
and Restated Certificate of Incorporation increasing the authorized number of
shares of common stock of the Company from 200,000,000 to 400,000,000 shares.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPLINK COMMUNICATIONS, INC.
(Registrant)
DATE: November 13, 2000 By: /s/ Bruce Horn
-------------------- --------------------------------
Bruce Horn
Chief Financial Officer
(for Registrant and as Principal Financial and
Accounting Officer)
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