<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 2000
REGISTRATION NO. 333-41506
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
OPLINK COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0411346
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
3469 NORTH FIRST STREET
SAN JOSE, CALIFORNIA 95134
(408) 433-0606
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Joseph Y. Liu
Chief Executive Officer
Oplink Communications, Inc.
3469 North First Street
San Jose, California 95134
(408) 433-0606
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Matthew W. Sonsini, Esq. Cynthia A. Rotell, Esq.
Cooley Godward LLP Latham & Watkins
Five Palo Alto Square 633 West Fifth Street
3000 El Camino Real Suite 4000
Palo Alto, California 94306-2155 Los Angeles, California 90071
(650) 843-5000 (213) 485-1234
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with a United States and Canadian offering of the registrant's
common stock and one to be used in a concurrent international offering of the
common stock. The international prospectus will be identical to the U.S.
prospectus except that it will have a different front cover page and
underwriting section. The U.S. prospectus is included herein and is followed by
the alternate front cover page and underwriting section to be used in the
international prospectus, each of which have been labeled "Alternative Pages for
International Prospectus."
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[OPLINK LOGO]
13,700,000 SHARES
COMMON STOCK
Oplink Communications, Inc. is offering 13,700,000 shares of its common
stock. This is our initial public offering and no public market currently exists
for our shares. We have approval for quotation of our common stock on the Nasdaq
National Market under the symbol "OPLK." We anticipate that the initial public
offering price will be between $14.00 and $16.00 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Oplink Communications, Inc...................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Oplink Communications, Inc. has granted the underwriters a 30-day option to
purchase up to an additional 2,055,000 shares of common stock to cover
over-allotments.
------------------------
ROBERTSON STEPHENS
CIBC WORLD MARKETS
J.P. MORGAN & CO.
UBS WARBURG LLC
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
[INSIDE FRONT COVER GRAPHIC]
Fiber Optic Products to Enable
Bandwidth Creation and Management
for the Communications Industry
[Graphic depiction of the telecommunications market segments using a
triangle sectioned horizontally into four trapezoids, each of the four
trapezoids representing one of the market segments. The trapezoids are labeled
in descending order: "Service Providers," "Communications Systems Equipment,"
"Integrated Optical Modules" and "Fiber Optic Components." Oplink's logo is
located adjacent to the "Integrated Optical Modules" and "Fiber Optic
Components" segments denoting Oplink's focus on these market segments.
[GATEFOLD GRAPHIC]
[OPLINK LOGO]
FIBER OPTIC COMPONENTS AND INTEGRATED OPTICAL MODULES
[Graphic depiction of ultra-long haul/long haul, metropolitan and access
systems, including illustrations of each of these systems superimposed upon a
map of the United States. The three systems are labeled: "Ultra-Long Haul/Long
Haul," followed by the caption "Cross-Country and Long Distance Connections
Between Cities;" "Metropolitan" followed by the caption "Connections within
Urban Areas;" and "Access" followed by the caption "Connections to Businesses
and Homes." Beneath the diagram are the caption "Addressing All Segments of
Communications Networks with a Broad Product Line" and four pictures of Oplink
products representing four of Oplink's product categories. The four categories
are labeled: "Wavelength Expansion," "Optical Amplification," "Optical
Wavelength Performance Monitoring & Protection" and "Optical Switching." Each
product picture has an arrow pointing to the system in which that product is
used.]
[INSIDE BACK COVER GRAPHIC]
Wavelength Expansion Products
<TABLE>
<CAPTION>
<S> <C>
[Picture of DWDM and
DWDM and Interleavers Interleaver]
</TABLE>
Optical Amplification Products
<TABLE>
<CAPTION>
<S> <C>
[Picture of isolator and
integrated hybrid components
and polarization beam
Pump Combiners, Signal/Pump WDM, Isolators and Tap Couplers combiner]
</TABLE>
Wavelength Performance Monitoring & Protection Products
<TABLE>
<CAPTION>
<S> <C>
[Picture of
Monitoring/Protection and Supervisory Modules Monitoring/Protection module]
</TABLE>
Optical Switching Products
<TABLE>
<CAPTION>
<S> <C>
[Picture of Optical Switch and
Optical Switches, Add/Drop and Circulators Add/Drop module]
</TABLE>
<PAGE>
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 4
Note Regarding Forward-Looking Statements................... 17
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Selected Unaudited Pro Forma Combined Financial Data........ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 33
Management.................................................. 48
Related Party Transactions.................................. 63
Principal Stockholders...................................... 66
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 70
United States Federal Tax Considerations for Non-United
States Holders............................................ 72
Underwriting................................................ 75
Legal Matters............................................... 78
Experts..................................................... 78
Where You Can Find More Information......................... 78
Index To Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 2000, ALL DEALERS, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, THAT EFFECT TRANSACTIONS IN THESE SECURITIES MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER IN THIS OFFERING AND WHEN
SELLING PREVIOUSLY UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION IN THIS PROSPECTUS, INCLUDING RISK FACTORS, REGARDING OPLINK AND THE
COMMON STOCK BEING SOLD IN THIS OFFERING.
OPLINK COMMUNICATIONS, INC.
We design, manufacture and market fiber optic components and integrated
optical modules that increase the performance of optical networks. We sell our
products worldwide to communications equipment suppliers. Our top customers by
revenue for the quarter ended June 30, 2000 were, listed alphabetically: ADVA
International, Cisco Systems, Corning Incorporated, JDS Uniphase Corporation,
Lucent Technologies, LuxN and Sycamore Networks. Our broad line of products
enables the following applications within a fiber optic network:
- WAVELENGTH EXPANSION--uses dense wavelength division multiplexing, or
DWDM, to transmit large amounts of data through multiple wavelengths of
light.
- OPTICAL AMPLIFICATION--amplifies optical signals without the need to
enhance the signals electronically.
- WAVELENGTH PERFORMANCE MONITORING AND PROTECTION--controls the direction
of light signals by monitoring wavelength performance within an optical
network.
- OPTICAL SWITCHING--redirects light signals without requiring the signal to
be converted into an electrical one.
These applications address the unique requirements of all segments within
communications networks including: ultra-long haul, for cross-country
connections; long haul, for long distance connections between cities;
metropolitan, for connections within urban areas; and access, for connections to
individual businesses and homes. We work closely with our customers early in
their product development cycles to design components and integrated optical
modules that meet their particular requirements. We combine our design expertise
with our manufacturing capabilities in the United States and China to produce
high performance products in large volumes.
Data traffic has increased rapidly over the past several years, driving the
demand for greater capacity, or bandwidth, on existing communications networks.
Limitations of these networks and recent breakthroughs in optical component
technology have led to the widespread deployment of fiber optic technology,
which is able to transport large amounts of data. These breakthroughs include
new technologies that expand the bandwidth of existing optical fiber networks
and that provide intelligence, or the ability to monitor and manage optical
signals. Fiber optic components and integrated optical modules are the core
elements of optical systems that provide these capabilities within a network. We
believe that manufacturers that are able to provide a broad line of
sophisticated and customized components and modules in large volume will be in a
strong position to grow their revenues in the fiber optic market.
Our objective is to become a leading supplier of advanced components and
integrated optical modules for the fiber optic communications industry. Key
elements of our strategy include:
- expanding our manufacturing capacity in both the United States and China
as well as enhancing our manufacturing capabilities through automation;
- building new and expanding existing customer relationships to increase
market penetration by focusing on custom design and quality;
- expanding and enhancing our existing line of optical components and
integrated optical modules for all segments of the optical network;
- continuing to develop optical products with features that allow service
providers to manage their optical networks effectively;
- continuing to attract talented personnel; and
- pursuing strategic acquisitions of businesses and technologies.
1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................... 13,700,000 shares
Common stock offered in a concurrent private
placement............................................. 3,949,932 shares
Common stock to be outstanding after the offering and
the private placement................................. 154,414,354 shares
Use of proceeds......................................... For expansion of manufacturing facilities,
marketing and distribution activities,
research and development activities, working
capital and other general corporate purposes
and acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol........................... OPLK
</TABLE>
CONCURRENT PRIVATE PLACEMENT
In August 2000, we issued a convertible promissory note to Cisco Systems in
the principal amount of $50 million. The note accrues interest at a rate of 8%
per annum. Upon the closing of this offering, the outstanding principal amount
and all accrued interest on the note will automatically convert into shares of
our common stock at a conversion price per share equal to 85% of the public
offering price. Assuming a public offering price of $15.00 and a closing date of
September 30, 2000, the note would convert into 3,949,932 shares of common
stock.
The common stock outstanding after this offering is based on shares
outstanding as of July 31, 2000 and includes 3,949,932 shares to be issued to
Cisco Systems upon conversion of the convertible promissory note, but excludes:
- 22,363,744 shares issuable upon exercise of outstanding options as of
July 31, 2000 with a weighted average exercise price of $1.1139;
- 3,255,178 shares reserved for future issuance under our 1995 and 1998
stock option plans as of July 31, 2000; and
- 348,904 shares of common stock issuable upon exercise of outstanding
warrants as of July 31, 2000 with a weighted average exercise price of
$0.1720.
Unless otherwise indicated, the information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- reflects, except in the consolidated financial statements and notes
thereto, the conversion of all outstanding shares of our convertible
preferred stock into shares of common stock upon completion of this
offering; and
- reflects a 2-for-1 stock split of our common stock and preferred stock
effected in September 2000.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 10 $ 426 $ 2,493 $ 9,094 $ 39,048
Gross profit (loss)........................................ 7 (451) (471) 1,869 5,704
Loss from operations....................................... (436) (1,406) (2,136) (3,417) (25,591)
Net loss................................................... (426) (1,397) (2,148) (3,474) (24,902)
Net loss per share: Basic and diluted...................... $ (4.67) $ (2.37) $ (3.18)
Weighted average shares: Basic and diluted................. 459,616 1,463,342 7,839,650
Pro forma net loss per share............................... $ (0.24)
Pro forma weighted average shares.......................... 104,537,892
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $26,665 $ 76,665 $266,055
Working capital............................................. 30,618 80,618 270,008
Total assets................................................ 95,932 145,932 335,322
Long term liabilities....................................... 4,225 54,225 4,225
Convertible preferred stock................................. 58,373 -- --
Total stockholder's equity.................................. 10,825 69,198 299,764
</TABLE>
- Pro forma balance sheet data gives effect to the conversion of all
outstanding shares of our preferred stock into shares of our common stock
upon the closing of this offering and the receipt of $50.0 million from
Cisco Systems pursuant to a convertible note payable.
- Pro forma as adjusted balance sheet data gives effect to our sale of
13,700,000 shares of common stock in this offering at an assumed initial
public offering price of $15.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses and
the conversion of the principal and accrued interest on the note payable
to Cisco Systems into shares of our common stock at a conversion price
equal to 85% of the initial public offering price. Assuming a public
offering price of $15.00 and a closing date of September 30, 2000, the
note would convert into 3,949,932 shares of common stock. Pro forma as
adjusted stockholders' equity reflects the recording of selling and
marketing expenses of $8.8 million, representing the fair value of the
discount feature of the note payable and accrued interest of $362,000 on
the note payable.
CORPORATE INFORMATION
We were incorporated in California in September 1995 and reincorporated in
Delaware in September 2000. Our principal executive offices are located at 3469
North First Street, San Jose, California 95134-1803, and our telephone number at
that address is (408) 433-0606. Our website is located on the world wide web at
"oplink.com." Information contained in our website is not part of this
prospectus.
3
<PAGE>
RISK FACTORS
ANY INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS,
TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU
DECIDE TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD LIKELY SUFFER.
IN THESE CIRCUMSTANCES, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATED TO OUR FINANCIAL CONDITION
WE HAVE INCURRED SIGNIFICANT LOSSES, AND OUR FAILURE TO INCREASE OUR REVENUES
COULD PREVENT US FROM ACHIEVING PROFITABILITY.
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 have not achieved profitability on a quarterly
basis. As of June 30, 2000, we had an accumulated deficit of $32.5 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.
Please see "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a discussion
of our financial condition.
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. Lucent Technologies, Sycamore Networks and JDS
Uniphase accounted for 42.6%, 15.7% and 10.6% of our revenues for the year ended
June 30, 2000. We expect that we will continue to depend upon a small number of
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 accounted for 28.3% of our revenues.
Lucent may not introduce or sell significant quantities of other products that
incorporate this optical component. 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
4
<PAGE>
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;
- 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.
5
<PAGE>
RISKS RELATED TO OUR BUSINESS
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. 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 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. As of
July 31, 2000, we had a total of 648 full-time employees in San Jose and 804
full-time employees in China. 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.
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
6
<PAGE>
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 quarters ended March 31 and June 30, 2000. 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 quarters ended March 31 and June 30, 2000, 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.
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
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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% of our
revenues in the year ended June 30, 2000. 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 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 is
currently 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;
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- 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 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
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.
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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;
- 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 11 patents and have 21 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.
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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. An adverse ruling in this matter would materially
adversely affect our financial condition. JDS Uniphase, which accounted for
10.6% of our revenues for the year ended June 30, 2000, 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. For additional information concerning these matters, see
"Business--Legal Proceedings and Regulatory Matters."
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.
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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 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
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 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
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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 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, Alex Hsu, our President, Global 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, and Messrs. Jeff Friedman, our Associate General Counsel, and
Daryl Eigen, our Vice President of Sales and Marketing, joined us in
August 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
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organization, we 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.
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
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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 AND THIS OFFERING
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING BY OUR STOCKHOLDERS AND THESE SALES COULD CAUSE OUR STOCK PRICE TO
DECLINE.
At July 31, 2000, our current stockholders held 150,464,422 shares of our
common stock, including shares issuable upon conversion of outstanding preferred
stock upon consummation of this offering. In addition, at July 31, 2000, options
to purchase an aggregate of 22,363,744 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 122,703,084 shares
of our common stock, or 94.8% of our total outstanding shares as of July 31,
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 the date
of this prospectus without the prior written approval of Robertson
Stephens, Inc. These lock-up agreements will expire on , 2000, and
an aggregate of 122,703,084 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.
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Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
stock in the future at a price that we deem appropriate.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS 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 July 31, 2000, approximately 26.2% of our outstanding
shares after this offering, or 25.9% if the underwriters' over-allotment option
is exercised in full. 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.
See "Principal 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;
- 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.
We determined the initial public offering price based on negotiations with
the representatives of the underwriters and based on factors that may not be
indicative of future market performance. The initial public offering price may
bear no relationship to the price at which the common stock will trade
subsequent to the completion of this offering.
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.
16
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect," "anticipate," "intend," "plan," "will" and similar expressions. Our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include those discussed in
"Risk Factors," "Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds we will receive from the sale of the 13,700,000 shares of
common stock offered by us are estimated to be $189.4 million, or
$218.1 million if the underwriters' over-allotment option is exercised in full,
after deducting the estimated underwriting discounts and commissions and the
estimated offering expenses payable by us based on an assumed initial public
offering price of $15.00 per share. In addition, we have received $50.0 million
in connection with the issuance to Cisco Systems of a promissory note which will
convert automatically into shares of common stock upon the closing of this
offering.
The principal purposes of this offering are:
- to obtain additional capital;
- to create a public market for our common stock;
- to increase our visibility and credibility; and
- to facilitate future access to the public equity markets.
We intend to use the net proceeds we receive from the offering for expansion
of manufacturing facilities, marketing and distribution activities, research and
development activities, working capital and other general corporate purposes.
During the next twelve months, we expect to use approximately $60 million for
the expansion of our manufacturing facilities. In addition, we anticipate using
a portion of the net proceeds for strategic acquisitions of businesses and
technologies. However, we have no specific agreements or commitments and are not
currently engaged in any negotiations with respect to any material acquisitions.
Accordingly, our management will retain broad discretion as to the allocation of
the net proceeds of this offering. We intend to invest the net proceeds of this
offering in short-term, interest-bearing investment grade securities until they
are used.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future. We currently intend
to retain our earnings, if any, for the development of our business.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all shares of our
convertible preferred stock outstanding as of June 30, 2000 into
110,103,344 shares of common stock upon completion of this offering and
the receipt of $50.0 million from Cisco Systems pursuant to a convertible
note payable; and
- on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of 13,700,000 shares of common stock by us at an
assumed public offering price of $15.00 per share less estimated
underwriting discounts and commissions and estimated offering expenses and
the conversion of the principal and accrued interest on the note payable
to Cisco Systems into shares of our common stock at a conversion price
equal to 85% of the public offering price. Assuming a public offering
price of $15.00 and a closing date of September 30, 2000, the note would
convert into 3,949,932 shares of common stock. Pro forma as adjusted
accumulated deficit reflects recording of selling and marketing expenses
of $8.8 million, representing the fair value of the discount feature of
the note payable and accrued interest of $362,000 on the note payable.
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 26,665 $ 76,665 $266,055
======== ======== ========
Capital lease obligations, non current................ $ 1,267 $ 1,267 $ 1,267
-------- -------- --------
Convertible note payable.............................. -- 50,000 --
Mandatorily Redeemable Convertible Preferred Stock:
$.001 par value, 110,183,344 authorized; issued and
outstanding: 110,103,344 in 2000; zero pro forma;
and zero pro forma as adjusted...................... 58,373 -- --
-------- -------- --------
Stockholders' (deficit) equity:
Common Stock, $.001 par value, 400,000,000 shares
authorized; issued and outstanding: 24,457,878 in
2000; 134,561,222 pro forma, and 152,211,154 pro
forma as adjusted................................. 24 134 152
Additional paid-in capital.......................... 61,253 119,516 359,250
Deferred compensation............................... (17,986) (17,986) (17,986)
Accumulated deficit................................. (32,466) (32,466) (41,652)
-------- -------- --------
Total stockholders' (deficit) equity.............. 10,825 69,198 299,764
-------- -------- --------
Total capitalization............................ $ 70,465 $120,465 $301,031
======== ======== ========
</TABLE>
The outstanding share information excludes:
- 24,962,888 shares of common stock issuable on exercise of outstanding
options under our stock option plans as of June 30, 2000 with a weighted
average exercise price of $0.8278 per share;
- 348,904 shares of common stock issuable upon exercise of outstanding
warrants as of June 30, 2000 with a weighted average exercise price of
$0.1720;
18
<PAGE>
- 2,859,234 shares of stock available for future grants under our 1995 and
1998 stock option plans as of June 30, 2000;
- 4,000,000 shares of stock to be reserved for issuance under our 2000
Employee Stock Purchase Plan that will become effective upon the closing
of this offering; and
- 20,000,000 shares of stock to be reserved for issuance under our 2000
Equity Incentive Plan that will become effective upon the closing of this
offering.
You should read this table with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the related notes. See also "Management--Employee and Director Benefit Plans"
and "Description of Capital Stock."
19
<PAGE>
DILUTION
Our pro forma net tangible book value at June 30, 2000 was approximately
$48.6 million, or $0.36 per share, after giving effect to the conversion of all
outstanding shares of our convertible preferred stock into shares of common
stock upon completion of this offering. Pro forma net tangible book value per
share is equal to our total tangible assets less our total liabilities, divided
by the total number of shares of our common stock outstanding. After giving
effect to the sale of the 13,700,000 shares of our common stock offered in this
offering at an assumed initial public offering price of $15.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, and conversion of our convertible note payable
to Cisco Systems into 3,949,932 shares of our common stock, our pro forma as
adjusted net tangible book value at June 30, 2000 would have been approximately
$279.2 million or $1.83 per share. This represents an immediate increase in net
tangible book value of $1.47 per share to existing stockholders and an immediate
dilution of $13.17 per share to new investors purchasing shares of our common
stock in this offering. The following table illustrates the per share dilution
to the new investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
------
Pro forma net tangible book value per share at June 30,
2000.................................................... $0.36
-----
Increase per share attributable to new investors.......... 1.47
-----
Pro forma net tangible book value per share after this
offering................................................ 1.83
------
Dilution per share to new investors in this offering........ $13.17
======
</TABLE>
The following table presents information on a pro forma basis at June 30,
2000, after giving effect to the conversion of all outstanding shares of our
preferred stock into an aggregate of 110,103,344 shares of common stock and
conversion of our convertible note payable to Cisco Systems into 3,949,932
shares of common stock upon the closing of this offering. The table also shows
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price paid per share by existing stockholders and by
new investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders......... 138,511,154 91.0% $109,008,000 34.7% $ 0.79
New investors.......... 13,700,000 9.0 205,500,000 65.3 15.00
----------- ----- ------------ ----- ------
Total.............. 152,211,154 100.0% $314,508,000 100.0% $ 2.07
=========== ===== ============ =====
</TABLE>
The above information is based on shares outstanding as of June 30, 2000.
The above information excludes:
- 24,962,888 shares of common stock reserved for issuance upon exercise of
outstanding options at June 30, 2000 with a weighted average exercise
price of $0.8278 per share;
- 348,904 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $0.1720 per share; and
- 26,859,234 shares available for issuance under our 1995 Stock Option Plan,
1998 Stock Plan, 2000 Employee Stock Purchase Plan and 2000 Equity
Incentive Plan.
Assuming the exercise of all options and warrants outstanding as of
June 30, 2000, our pro forma as adjusted net tangible book value at June 30,
2000 would be $299.9 million, or $1.69 per share, which would represent an
immediate increase in the pro forma as adjusted net tangible book value of $1.33
per share to existing stockholders and an immediate dilution of $13.31 per share
to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected consolidated
statement of operations data for the fiscal years ended June 30, 1998, 1999 and
2000 and selected consolidated balance sheet data as of June 30, 1999 and 2000
are derived from, and qualified by reference to, the audited consolidated
financial statements included in this prospectus. The selected consolidated
statement of operations data for the fiscal years ended June 30, 1996 and 1997
and the selected consolidated balance sheet data as of June 30, 1996, 1997 and
1998 are derived from unaudited financial statements not included in this
prospectus. Net loss per share is not presented for the years ended June 30,
1996 and 1997, as there were no common shares outstanding during these periods
and common stock equivalents would be anti-dilutive to our net loss per share.
The unaudited consolidated financial statements have been prepared by us on
a basis consistent with our audited consolidated financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations and financial position as of and for those periods. Historical
results are not necessarily indicative of results that may be expected for any
future period.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 10 $ 426 $ 2,493 $ 9,094 $ 39,048
Cost of revenues.......................................... 3 877 2,964 7,225 33,344
----------- ----------- ----------- ----------- ------------
Gross profit (loss)....................................... 7 (451) (471) 1,869 5,704
----------- ----------- ----------- ----------- ------------
Operating expenses
Research and development................................ 57 524 455 626 3,686
Sales and marketing..................................... -- 238 527 802 2,695
General and administrative.............................. 386 193 683 826 4,173
Amortization of deferred compensation*.................. -- -- -- 3,032 12,740
In-process research and development..................... -- -- -- -- 7,020
Amortization of goodwill................................ -- -- -- -- 981
----------- ----------- ----------- ----------- ------------
Total operating expenses.............................. 443 955 1,665 5,286 31,295
----------- ----------- ----------- ----------- ------------
Loss from operations...................................... (436) (1,406) (2,136) (3,417) (25,591)
Interest and other income (expense), net.................. 10 9 (12) (57) 689
----------- ----------- ----------- ----------- ------------
Net loss.................................................. $ (426) $ (1,397) $ (2,148) $ (3,474) $ (24,902)
=========== =========== =========== =========== ============
Net loss per share--basic and diluted..................... $ -- $ -- $ (4.67) $ (2.37) $ (3.18)
=========== =========== =========== =========== ============
Weighted average shares................................... -- -- 459,616 1,463,342 7,839,650
=========== =========== =========== =========== ============
Pro forma net loss per share--basic and diluted........... $ (0.24)
============
Pro forma weighted average shares......................... 104,537,892
============
* Allocation of amortization of deferred compensation:
Cost of revenues........................................ $ 705 $ 2,269
Research and development................................ 646 1,801
Sales and marketing..................................... 526 1,312
General and administrative.............................. 1,155 7,358
----------- ------------
$ 3,032 $ 12,740
=========== ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 711 $ 106 $ 933 $ 4,757 $26,665
Working capital (deficit)................................... (411) 182 1,512 5,637 30,618
Total assets................................................ 1,302 1,361 3,061 11,711 95,932
Long term liabilities....................................... -- -- -- -- 4,225
Total convertible preferred stock........................... 600 2,646 6,373 12,083 58,373
Total stockholders' (deficit) equity........................ (534) (1,924) (4,089) (4,525) 10,825
</TABLE>
21
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined statement of operations data
presents the results of our operations for the year ended June 30, 2000,
combined with the statement of operations of Telelight for the same period
(except in the case of the Telelight statement of operations data, which
information is combined through the acquisition date of April 6, 2000), giving
effect to the acquisition as if it occurred at the beginning of the period
presented. The unaudited pro forma combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the
transaction had been consummated at the dates indicated, nor is it necessarily
indicative of the future operating results of the combined companies.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 2000
---------------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 39,639
Cost of revenues.......................................... 35,165
------------
Gross profit.............................................. 4,474
------------
Operating expenses:
Research and development................................ 3,888
Sales and marketing..................................... 2,706
General and administrative.............................. 4,449
Amortization of deferred compensation................... 12,740
Amortization of goodwill................................ 3,714
------------
Total operating expenses.............................. 27,497
------------
Loss from operations...................................... (23,023)
Interest and other income, net............................ 714
------------
Net loss.................................................. $ (22,309)
============
Net loss per share........................................ $ (0.19)
============
Weighted average shares................................... 114,856,581
============
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE
DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO FACTORS INCLUDING, BUT
NOT LIMITED TO, THOSE FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS.
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., a designer and
manufacturer of fiber optic components with operations in Sunnyvale, California
and Fuzhou, China.
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 sell our products through our direct sales force, sales representatives
and distributors. For the year ended June 30, 2000, we sold our products to over
100 communications equipment suppliers. A relatively small number of these
suppliers have accounted for a significant portion of our revenues to date, and
we expect this trend to continue for the foreseeable future. For the year ended
June 30, 2000, sales to Lucent Technologies, Sycamore Networks and JDS Uniphase
accounted for 42.6%, 15.7% and 10.6% of revenues. Sales to Lucent are made to
three different groups within the Lucent organization, each making its own
purchasing decisions. Sales to the Optical Network Group, the Optical
Electronics Group and Bell Labs comprised 31.9%, 10.3% and 0.4% of our revenues
for the year ended June 30, 2000. 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 represented 28.3% of our revenues for the year ended June 30, 2000.
For the years ended June 30, 1999 and 2000, sales to international customers
represented 23.2% and 20.7% of revenues. All of our sales are transacted in U.S.
dollars.
Except for sales to Lucent, we recognize revenues from product sales at the
time the product is shipped to our customers, including our distributors,
provided there are no significant uncertainties with respect to customer
acceptance or collection. Our distributors do not have the right to return or
exchange products. Substantially all shipments to Lucent are on a consignment
basis, and we do not recognize revenues until Lucent accepts the products for
use. In most cases, Lucent will accept products and we will recognize revenues
within one to two months of shipment. We continue to report products shipped to
Lucent as our inventory until they are accepted.
We have manufacturing operations in San Jose, California and Zhuhai and
Fuzhou, China. We have expanded and plan to continue to expand our manufacturing
capacity as our business grows. We are currently expanding our facilities in San
Jose and Zhuhai. In addition, we have acquired rights to a parcel of land in
China which we intend to use for future expansion of our manufacturing
facilities.
23
<PAGE>
COST OF REVENUES. Our cost of revenues consists of raw material, salaries
and related personnel expense, manufacturing overhead, and provisions for excess
and obsolete inventories and warranties. We expect cost of revenues, as a
percentage of revenues, to fluctuate from period to period. Our gross margins
will primarily be affected by production yield, provisions for excess and
obsolete inventories, our pricing policies, mix of products sold, costs incurred
in establishing additional manufacturing lines and facilities, and manufacturing
volume. The fiber optic component industry is characterized by rapidly declining
average selling prices, increasing unit volumes and declining margins.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
consist primarily of salaries and related personnel costs, fees paid to
consultants and outside service providers, patent filing costs, non-recurring
engineering charges and prototype costs, all of which relate to the design,
development, testing, pre-manufacturing and significant improvement of our
products. We expense our research and development costs as they are incurred. We
believe that developing customer solutions at the prototype stage is critical to
our strategic product development objectives. We further believe that, in order
to meet the changing requirements of our customers, we will need to fund
investments in several concurrent product development projects. As a result, we
expect our research and development expenses to increase in absolute dollar
amount and as a percentage of revenues in the future.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist
primarily of salaries and related expenses for marketing, sales, customer
service and application engineering support personnel, commissions paid to the
internal sales personnel and representatives, as well as costs associated with
promotional and other marketing expenses. We intend to expand our direct sales
operations, as well as engage additional sales representatives and distributors,
to increase market awareness and revenues. As we hire additional sales and
marketing personnel, initiate additional marketing programs to support our
products and establish sales offices, we expect that sales and marketing
expenses will increase in absolute dollar amount over the next year but remain
approximately at the current percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses consist primarily of salaries and related expenses for executive,
finance, accounting, and human resources personnel, professional fees and other
corporate expenses. As we add personnel and incur additional costs related to
the growth of our business and our operation as a public company, we expect
general and administrative expenses to increase in absolute dollar amount but
decrease as a percentage of revenues.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have granted stock options
and issued warrants to employees and consultants at prices subsequently deemed
to be below the fair value of the underlying stock on the date of grant or
issuance. During the period from July 1, 1998 through June 30, 2000, we recorded
aggregate deferred stock compensation of approximately $33.8 million, of which
$3.0 million was expensed during the year ended June 30, 1999 and $12.7 million
was expensed during the year ended June 30, 2000. While this expense has
increased our net loss, it has had no impact on our cash flows. With respect to
employee stock-based compensation, we are amortizing the deferred compensation
expense over the vesting period using the multiple option approach, as set forth
in FASB Interpretation No. 28, or FIN 28. Under the FIN 28 method, each vested
tranche of options is accounted for as a separate option grant awarded for
services. The compensation expenses are recognized over the period during which
the services are provided. Accordingly, this method results in higher
compensation expenses being recognized in the earlier vesting periods of an
option. Non-employee grants are accounted for in accordance with SFAS 123 and
EITF 96-18 and valued using the Black-Scholes model. The remaining
$18.1 million will be expensed in future periods generally over a four-year
vesting period.
Subsequent to June 30, 2000, we have issued shares and granted options that
will result in an additional $28.0 million of deferred stock compensation. We
estimate that our deferred stock compensation expense from options and shares
granted or issued from July 1998 through
24
<PAGE>
September 19, 2000 will be $9.1 million, $7.2 million, $5.6 million and
$4.6 million for each of the fiscal quarters in the year ended June 30, 2001,
and $12.0 million, $5.7 million and $1.9 million for the years ending June 30,
2002, 2003 and 2004, assuming no cancellations or additional stock option grants
with exercise prices below deemed fair value of our common stock.
CONVERTIBLE NOTE PAYABLE. On August 28, 2000, we received $50.0 million in
exchange for a note payable to Cisco Systems. The note payable accrues interest
at a rate of 8% per annum. Upon the closing of our initial public offering, the
note payable and unpaid accrued interest will automatically convert into shares
of our common stock at a conversion price per share equal to 85% of the initial
public offering price. Assuming an initial public offering price of $15.00 per
share and a closing date of September 30, 2000, the note would convert into
3,949,932 shares of common stock. Upon the closing of our initial public
offering, we expect to record selling and marketing expenses of $8.8 million,
representing the fair value of the discount feature of this note payable and
accrued interest of $362,000 on the note payable.
ACQUISITION OF TELELIGHT. We entered into a definitive agreement to acquire
Telelight in February 2000 in a merger transaction accounted for as a purchase
business combination. The acquisition was consummated on April 6, 2000. The
results of operations of Telelight are included in our consolidated financial
statements beginning on the date of the acquisition. The purchase price of
Telelight consisted of 13,440,000 shares of our common stock valued at
$26.9 million. We also incurred direct acquisition costs of approximately
$200,000 resulting in an aggregate purchase price of $27.1 million. Telelight
was founded in 1998 to design, develop and sell fiber optic components that are
designed to increase the capacity of fiber optic communications networks. The
purchase price was allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed on the basis of their relative fair values as
follows:
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets of Telelight............................ $ 1,043
Deferred tax liability arising from the acquisition......... (2,958)
Developed technology........................................ 31
Core technology............................................. 6,245
In-process research and development......................... 7,020
Patents..................................................... 1,086
Assembled workforce......................................... 33
Goodwill.................................................... 14,580
-------
$27,080
=======
</TABLE>
The net tangible assets of Telelight consist primarily of cash and cash
equivalents, accounts receivable, inventory, property and equipment, accounts
payable and other liabilities.
The developed technologies acquired in the Telelight acquisition were the
optical circulator and filter products. These products have yet to gain market
acceptance or receive certain industry-standard qualifications. Given these
facts and the commodity nature of these products, minimal value was attributed
to them in the purchase price allocation.
The in-process research and development consisted of an optical wavelength
interleaver product that, as of the date of acquisition, had not yet reached
technological feasibility and had no alternative future use. The optical
interleaver is a compact, high performance fiber optic product that segments
optical signals by wavelengths. This product makes channel spacing smaller,
thereby increasing the number of channels on a fiber optic network.
The value of the optical wavelength interleaver was determined by estimating
the net cash flows from the sale of the products resulting from the completion
of this project, reduced by the portion of the net cash flows from the revenue
attributable to core technology. The resulting cash flows were then
25
<PAGE>
discounted back to their present value using a discount rate of 35%. The fair
value assigned to the core technology totaled $6,245,000, and is being amortized
over the expected life of its cash flows of four years. At the time of the
acquisition this project was approximately 80% complete. The fair value assigned
to the in-process research and development totaled $7,020,000, and was charged
to expense at the time of the acquisition. We have incurred approximately
$50,000 of expense subsequent to the acquisition, and in May 2000 the first
qualified prototype was completed and technological feasibility was achieved.
The value of certain patents assigned to us was determined using the relief
from royalty methodology, which assumes that the value of the asset equals the
amount a third party would pay to use the asset and capitalize on the related
benefits of the assets. The fair value assigned to patents of $1,086,000 is
being amortized over its expected life of four years.
Goodwill is being amortized on a straight line basis over the estimated
period of benefit of four years.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 118.9 79.4 85.4
----- ----- -----
Gross profit (loss)......................................... (18.9) 20.6 14.6
----- ----- -----
Operating expenses
Research and development.................................. 18.3 6.9 9.4
Sales and marketing....................................... 21.1 8.8 6.9
General and administrative................................ 27.4 9.1 10.7
Amortization of deferred compensation..................... -- 33.3 32.6
In-process research and development....................... -- -- 18.0
Amortization of goodwill.................................. -- -- 2.5
----- ----- -----
Total operating expenses................................ 66.8 58.1 80.1
----- ----- -----
Loss from operations........................................ (85.7) (37.5) (65.5)
Interest and other income (expense), net.................... (0.5) (0.6) 1.8
----- ----- -----
Net loss.................................................... (86.2)% (38.1)% (63.7)%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND 2000
REVENUES. Revenues increased $29.9 million, or 329%, from $9.1 million for
the year ended June 30, 1999 to $39.0 million for the year ended June 30, 2000.
This increase in revenues was primarily due to increased shipments of our
existing wavelength expansion products to existing customers and to a lesser
extent shipments of existing products to new customers and shipments of new
products to new and existing customers. This increase was offset by a decrease
in the price of a product sold to Lucent and a decrease in the average selling
price of some of our other products.
GROSS PROFIT (LOSS). Gross profit increased $3.8 million, or 205%, from
$1.9 million for the year ended June 30, 1999 to $5.7 million for the year ended
June 30, 2000. This resulted in a decrease in gross margins from 20.6% to 14.6%.
The decrease in our gross margin was substantially the result of a
26
<PAGE>
decrease in the average selling price of some of our products and the recording
of a provision for excess and obsolete inventory of $4.7 million for the year
ended June 30, 2000, compared to a provision of $555,000 in the year ended
June 30, 1999. This decrease was partially offset by increased unit shipments of
our products and economies of scale resulting from higher production volumes.
The increase in inventory reserve is the result of inventory levels exceeding
the amounts that we anticipate using over the period of time specified in our
reserve policy. We expect to continue to incur excess and obsolete inventory
costs; however, the magnitude is not determinable. Gross profit, including
amortization of deferred compensation, increased $2.2 million, or 195%, from
$1.2 million in the year ended June 30, 1999 to $3.4 million for the year ended
June 30, 2000. This resulted in a decrease in gross margins from 12.8% to 8.8%.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$3.1 million, or 489%, from $626,000 for the year ended June 30, 1999 to
$3.7 million for the year ended June 30, 2000. The increase in research and
development expenses was substantially due to increases in personnel-related
costs, prototype expenses and occupancy costs. The personnel-related costs
increased $1.9 million due to an increase in average personnel from 12 in the
year ended June 30, 1999 to 40 in the year ended June 30, 2000. Prototype
expenses increased $790,000 as a result of a greater number of projects, and
occupancy costs increased $250,000 due to occupying a larger facility. Research
and development expenses, including amortization of deferred compensation,
increased $4.2 million, or 331%, from $1.3 million for the year ended June 30,
1999 to $5.5 million for the year ended June 30, 2000.
SALES AND MARKETING. Sales and marketing expenses increased $1.9 million,
or 236%, from $802,000 for the year ended June 30, 1999 to $2.7 million for the
year ended June 30, 2000. The increase in sales and marketing expenses was
substantially due to increases in sales and marketing personnel and related
costs of $535,000, commissions to our internal and external sales
representatives of $1.0 million and tradeshow, advertising and other
customer-related costs of $130,000. The increase in personnel and related costs
is due to an increase in the average number of personnel from six in the year
ended June 30, 1999 to 11 in the year ended June 30, 2000. Sales and marketing
expenses, including amortization of deferred compensation, increased
$2.7 million, or 202%, from $1.3 million for the year ended June 30, 1999 to
$4.0 million for the year ended June 30, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$3.3 million, or 405%, from $826,000 for the year ended June 30, 1999 to
$4.2 million for the year ended June 30, 2000. The increase in general and
administrative expenses was substantially due to increases in personnel and
related costs of $1.1 million, legal fees of $474,000, employee recruiting fees
of $226,000, bad debt reserves of $256,000, start up costs in China of $397,000,
supplies of $238,000 and accounting fees of $134,000. The increase in personnel
and related costs is due to an increase in the average number of personnel from
three in the year ended June 30, 1999 to 15 in the year ended June 30, 2000.
General and administrative expenses, including amortization of deferred
compensation, increased $9.5 million, or 482%, from $2.0 million for the year
ended June 30, 1999 to $11.5 million for the year ended June 30, 2000.
AMORTIZATION OF DEFERRED COMPENSATION. Through June 30, 2000, we had
recorded a total of $33.8 million in deferred compensation. Amortization of
deferred compensation expenses increased $9.7 million, or 320%, from
$3.0 million for the year ended June 30, 1999 to $12.7 million for the year
ended June 30, 2000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND AMORTIZATION OF
GOODWILL. In-process research and development and amortization of goodwill
represents charges incurred as a result of our acquisition of Telelight in
April 2000. See Note 4 of the Notes to the Consolidated Financial Statements for
additional information.
27
<PAGE>
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense) for the year ended June 30, 1999 was $57,000 of expense as compared to
$689,000 of income for the year ended June 30, 2000. This increase in income is
due to larger cash balances from the proceeds of our preferred stock financing
in February 2000.
PROVISION FOR INCOME TAXES. We had approximately $300,000 and $2.2 million
of taxable income during the years 1999 and 2000. We have not recorded a tax
provision due to the utilization of net operating loss carryforwards and
realizable deferred tax assets. At June 30, 2000, we have approximately $2.0
million of net operating loss carryforwards subject to certain annual
limitations.
We have recorded a net deferred tax asset of $1.1 million as of June 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 expense 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.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1999
REVENUES. Our revenues were $2.5 million and $9.1 million for the years
ended June 30, 1998 and 1999. This change represents an increase of 265%. The
increase in revenues is attributable primarily to shipments of new products and
to a lesser extent shipments of products to new customers.
GROSS PROFIT (LOSS). Our gross profit (loss) was $(471,000) and
$1.9 million for the years ended June 30, 1998 and 1999. Our gross profit of
$1.9 million for the year ended June 30, 1999 represented 20.6% of revenues. The
improvement in our gross margin was primarily the result of increased unit
shipments of our products, combined with a decrease in the cost of materials
that are used in our products and economies of scale associated with higher
production levels.
RESEARCH AND DEVELOPMENT. Research and development expenses were $455,000
and $626,000 for the years ended June 30, 1998 and 1999. This change represents
an increase of 38% and was primarily due to increases in personnel-related costs
as a result of increased personnel and prototype expenses.
SALES AND MARKETING. Sales and marketing expenses were $527,000 and
$802,000 for the years ended June 30, 1998 and 1999. This change represents an
increase of 52% and was primarily due to increases in sales and marketing
personnel and related costs as a result of increased personnel, commission,
tradeshow, advertising and other customer-related costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$683,000 and $826,000 for the years ended June 30, 1998 and 1999. This change
represents an increase of 21% and was primarily due to increases in personnel
and related costs as a result of increased personnel.
AMORTIZATION OF DEFERRED COMPENSATION. Through June 30, 1999, we recorded a
total of $6.5 million in deferred compensation. We recognized amortization of
deferred compensation of $3.0 million for the year ended June 30, 1999 and none
during the year ended June 30, 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other expense for
the years ended June 30, 1998 and 1999 was $12,000 and $57,000. The increase in
expense was primarily due to lease cancellation charges.
PROVISION FOR INCOME TAXES. We incurred operating losses during the years
ended June 30, 1998 and 1999, and had no provision for income taxes in either of
these periods. As of June 30, 1999, we had $3.2 million in net operating losses,
which are available to offset future income subject to an annual limitation of
$600,000. If not used, the net operating losses will expire between 2004 and
2019.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for the last eight
quarters. The information for each of these quarters is unaudited but has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements and the related
notes appearing elsewhere in this prospectus. These operating results are not
necessarily indicative of the results of any future period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- -------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $1,576 $1,657 $ 2,043 $3,818 $4,432 $ 6,817 $ 9,412 $ 18,387
Cost of revenues....................... 1,482 1,506 1,698 2,539 3,274 5,322 8,824 15,924
------ ------ ------- ------ ------ ------- ------- --------
Gross profit........................... 94 151 345 1,279 1,158 1,495 588 2,463
------ ------ ------- ------ ------ ------- ------- --------
Operating expenses:
Research and development............. 75 156 181 214 218 289 855 2,324
Sales and marketing.................. 163 163 189 287 311 481 600 1,303
General and administrative........... 156 144 209 317 719 612 928 1,914
Amortization of deferred
compensation....................... -- -- 1,899 1,133 529 1,664 3,049 7,498
In-process research and
development........................ -- -- -- -- -- -- -- 7,020
Amortization of goodwill............. -- -- -- -- -- -- -- 981
------ ------ ------- ------ ------ ------- ------- --------
Total operating expenses........... 394 463 2,478 1,951 1,777 3,046 5,432 21,040
------ ------ ------- ------ ------ ------- ------- --------
Loss from operations................... (300) (312) (2,133) (672) (619) (1,551) (4,844) (18,577)
Interest and other income (expense),
net.................................. (2) (13) 16 (58) 35 23 262 369
------ ------ ------- ------ ------ ------- ------- --------
Net Loss............................... $ (302) $ (325) $(2,117) $ (730) $ (584) $(1,528) $(4,582) $(18,208)
====== ====== ======= ====== ====== ======= ======= ========
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 94.0 90.9 83.1 66.5 73.9 78.1 93.8 86.6
------ ------ ------- ------ ------ ------- ------- --------
Gross profit........................... 6.0 9.1 16.9 33.5 26.1 21.9 6.2 13.4
------ ------ ------- ------ ------ ------- ------- --------
Operating expenses:
Research and development............. 4.8 9.4 8.9 5.6 4.9 4.2 9.1 12.6
Sales and marketing.................. 10.3 9.8 9.3 7.5 7.0 7.1 6.4 7.1
General and administrative........... 9.9 8.7 10.2 8.3 16.2 9.0 9.9 10.4
Amortization of deferred
compensation....................... 0.0 0.0 93.0 29.7 11.9 24.4 32.4 40.8
In-process research and
development........................ -- -- -- -- -- -- -- 38.2
Amortization of goodwill............. -- -- -- -- -- -- -- 5.3
------ ------ ------- ------ ------ ------- ------- --------
Total operating expenses........... 25.0 27.9 121.4 51.1 40.0 44.7 57.8 114.4
------ ------ ------- ------ ------ ------- ------- --------
Loss from operations................... (19.0) (18.8) (104.5) (17.6) (13.9) (22.8) (51.6) (101.0)
Interest and other income (expense),
net.................................. (0.1) (0.8) 0.8 (1.5) 0.8 0.3 2.8 2.0
------ ------ ------- ------ ------ ------- ------- --------
Net Loss............................... (19.1)% (19.6)% (103.7)% (19.1)% (13.1)% (22.5)% (48.8)% (99.0)%
====== ====== ======= ====== ====== ======= ======= ========
</TABLE>
Revenues increased in each of the eight quarters ended June 30, 2000. These
quarterly increases were primarily due to increased shipments of new and
existing wavelength expansion products to new and existing customers. These
increases were offset by a decrease in the average selling prices of some of our
products and, in particular, by a decrease in the price of a product sold to
Lucent during the quarters ended September 30, 1999 and December 31, 1999.
Both gross profit and gross margins increased in each of the four quarters
ended June 30, 1999 primarily as a result of higher unit shipment volumes and
the economies of scale associated with the higher production levels. Gross
profit and gross margins decreased in the quarter ended September 30,
29
<PAGE>
1999 from the prior quarter due to a significant drop in the average selling
price of a product sold to Lucent. Gross profits increased in the quarter ended
December 31, 1999 compared to the quarter ended September 30, 1999 primarily due
to higher unit shipments partially offset by a further decrease in the average
selling price of a product sold to Lucent. Gross margin decreased in this
quarter primarily due to the lower average selling price of a product sold to
Lucent. Gross profit and gross margins for the quarter ended March 31, 2000
decreased from the prior quarter primarily as a result of a significant increase
in the provision for excess and obsolete inventory. The gross profit increase in
the quarter ended June 30, 2000 compared to the prior quarter was primarily due
to higher unit shipments and a lower provision for excess and obsolete
inventory. Gross margins increased in the quarter ended June 30, 2000 compared
to the prior quarter due to a lower provision for excess and obsolete inventory.
We expect gross margins to fluctuate in the future as average selling prices of
our current products decline, as we incur higher manufacturing costs, as
production yields fluctuate, as we provide for excess and obsolete inventories,
as the mix of products changes, as we introduce new products which may have
higher margins, and as we increase our production capacity.
Research and development, sales and marketing and general and administrative
expenses have increased over the eight quarters ended June 30, 2000 primarily
due to the addition of personnel, costs incurred for the development of new
products, increases in sales commissions, promotional expenses, professional
fees and bad debt reserves.
Amortization of deferred compensation has fluctuated during the six quarters
ended June 30, 2000 primarily due to the timing of the granting of stock options
to our employees and consultants, partially offset by the timing of adjustments
made to deferred compensation resulting from forfeitures of stock options upon
termination of employment. These expenses may continue to fluctuate in the
future depending on the timing of stock option grants and forfeitures.
Due to the factors noted above and other factors noted under "Risk Factors,"
we believe that quarter-to-quarter comparisons of our operating results will not
be meaningful. You should not rely on our results for any one quarter as an
indication of our future performance.
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 approximately $58.4 million in aggregate net proceeds through June 30,
2000. In February 2000, we raised $44.0 million from venture capital and other
investors through the issuance of convertible preferred stock. As of June 30,
2000, we had cash and cash equivalents of $26.7 million and working capital of
$30.6 million. In August 2000, we received $50.0 million in connection with the
issuance to Cisco Systems of a promissory note which will convert automatically
into shares of common stock upon the closing of this offering.
Our operating activities used cash of $2.1 million in fiscal 1998, $537,000
in fiscal 1999, and $7.1 million in fiscal 2000. Cash used in operating
activities was primarily attributable to net losses incurred during fiscal 1998,
1999 and 2000 of $2.1 million, $3.5 million and $24.9 million. In fiscal 1998,
cash used in operating activities was also attributable to increases in accounts
receivable, inventories, and prepaid expenses of $509,000, $184,000, and
$174,000, partially offset by increases in accounts payable and accrued
liabilities of $280,000 and $210,000, depreciation and amortization expense of
property and equipment of $179,000 and provisions for excess and obsolete
inventory of $224,000. In fiscal 1999, cash used in operating activities was
also attributable to increases in accounts receivable, inventories and prepaid
expenses of $1.2 million, $2.5 million and $480,000, partially offset by
increases in accounts payable and accrued liabilities of $2.8 million and
$574,000, depreciation and amortization of property and equipment of $267,000,
amortization of deferred compensation of $3.0 million, and provision for excess
and obsolete inventory of $555,000. In fiscal 2000, cash used in operating
activities was also attributable to increases in accounts receivable,
inventories and prepaid expenses of
30
<PAGE>
$8.1 million, $13.6 million and $3.1 million. The increases in accounts
receivable and inventories are a result of an increase in revenue from
$3.8 million to $18.4 million for the quarters ending June 30, 1999 and 2000.
The increase in prepaid expenses is primarily due to an increase in prepaid rent
due to the leasing of additional facilities, an increase in the amount advanced
to a vendor as prepayment for product and the costs associated with this
offering. These increases are partially offset by increases in accounts payable
and accrued liabilities of $11.2 million and $5.7 million, depreciation and
amortization of property and equipment of $1.2 million, amortization of goodwill
and intangible assets of $1.4 million, amortization of deferred compensation of
$12.7 million, provision for excess and obsolete inventory of $4.7 million,
acquired in-process research and development of $7.0 million and an increase in
deferred tax assets of $1.1 million. The increase in accounts payable is the
result of increased purchases of inventory and operating materials as a result
of the increase in revenue from $3.8 million to $18.4 million for the quarters
ended June 30, 1999 and 2000 and increased purchases of capital equipment as a
result of our current expansion activities. The increase in accrued liabilities
is a result of increased accrued salaries and related expenses due to an
increase in personnel and an increase in accrued sales commissions, and an
increase in accrued sales returns and warranties due to the higher number of
units shipped that were under warranty during the fiscal year ended June 30,
2000 as compared to fiscal 1999.
Our investing activities used cash of $411,000 in fiscal 1998, $1.4 million
in fiscal 1999, and $18.0 million in fiscal 2000. Our investing activities
primarily reflect the purchase of property and equipment. During the next
12 months we expect to use approximately $60 million for the expansion of our
manufacturing facilities. We expect to use cash generated from the offering for
these expenditures.
Our financing activities provided cash of $3.3 million in fiscal 1998,
$5.7 million in fiscal 1999, and $46.9 million in fiscal 2000. The increase in
cash in each of these periods was primarily from the net proceeds from the
issuances of our convertible preferred stock.
Our principal source of liquidity at June 30, 2000 consisted of
$26.7 million in cash and cash equivalents. We believe that the proceeds from
this offering and cash received from Cisco Systems in exchange for a promissory
note in a principal amount of $50.0 million, 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. We have no current plans, and we are not currently
negotiating, to obtain additional financing following the completion of this
offering. 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.
QUALITATIVE AND QUANTITATIVE MARKET RISK
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
June 30, 2000, all of our investments were in money market funds, certificates
of deposits or high quality commercial paper.
31
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued 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 of SFAS No. 133 until
fiscal years beginning after June 15, 2000. We do not believe that the adoption
of SFAS No. 137 will have a material impact on our operations or financial
position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or 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. We believe
that we have complied with the guidance of SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, or 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 became 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 prior to March 31, 2000 did not have a material impact on our financial
statements. Management does not expect that the adoption of the remaining
provisions will have a material effect on our financial position or results of
operations.
In various areas, including revenue recognition, accounting standards and
practices continue to evolve. Additionally, the SEC is preparing to issue
interpretative guidance relating to SAB 101, and the FASB's Emerging Issues Task
Force continues to address revenue related accounting issues. We believe we are
in compliance with all of the rules and related guidance as they currently
exist. However, any changes to generally accepted accounting principles in these
areas could impact our future accounting for our operations.
32
<PAGE>
BUSINESS
OVERVIEW
We provide a broad line of high performance fiber optic components and
integrated optical modules worldwide to communications equipment suppliers. Our
bandwidth creation products substantially increase the capacity of fiber optic
networks. Our bandwidth management products provide communications service
providers with network intelligence, or the ability to monitor and manage
optical signals to enhance network performance. By combining our technical
expertise with our extensive micro-optic manufacturing capability and capacity
in the United States and China, we are able to produce large volumes of optical
components and customized integrated products that meet the specific design
needs of our customers. Our top customers by revenue for the quarter ended June
30, 2000 were, listed alphabetically: ADVA International, Cisco, Corning, JDS
Uniphase, Lucent, LuxN and Sycamore.
INDUSTRY BACKGROUND
INCREASE IN BANDWIDTH DEMAND
The rapid growth in Internet usage for activities such as electronic
commerce and large data and video file transmission has caused a significant
increase in data traffic across communications networks. According to Ryan,
Hankin & Kent, or RHK, a leading market research and consulting firm, Internet
traffic will increase from 0.4 million terabytes, or trillions of bytes, per
month at the end of 1999 to over 15 million terabytes per month in 2003, which
represents a compound annual growth rate of over 147%. The growth in Internet
usage has created significant demand for increased network capacity, or
bandwidth, causing communications service providers to expand and upgrade their
network systems at a rapid rate.
EVOLUTION OF THE OPTICAL NETWORK
Most existing communications networks were designed to convey voice rather
than high-speed data traffic. These networks are based on the transmission of
electronic signals over copper wires and are limited in their ability to handle
large quantities of data. As a result, communications service providers are
increasingly adopting fiber optic technology, which can handle large quantities
of data more effectively by transmitting signals using pulses of light rather
than electric signals. Fiber optic equipment consists of both passive and active
components. Passive optical components guide, mix, filter, route, adjust and
stabilize optical signals transmitted through an optical network and generally
do not require power to operate. Active components, in contrast, require power
and use electrical signals to create, modulate or amplify the original optical
signal. While fiber optic technology has existed for decades, recent
technological advances in the design and production of both passive and active
components have enabled communications equipment suppliers to develop
next-generation fiber optic systems. These components increase the capacity of
existing optical networks and enable the management of optical signals within
the network. RHK estimates that the market for fiber optic components was
approximately $6.7 billion in 1999 and anticipates that it will grow to
approximately $23.1 billion in 2003.
BANDWIDTH CREATION. Communications equipment suppliers may increase the
capacity of their customers' networks and enable them to transmit optical
signals over greater distances through the use of bandwidth creation
technologies.
- OPTICAL AMPLIFICATION. Prior to the development of fiber amplifiers,
signal attenuation, or loss, limited the distance over which an optical
signal could be transmitted without regeneration to approximately 60
miles. As a result, amplification equipment was installed in numerous
locations throughout the network to provide regeneration of optical
signals. This equipment, known as an
33
<PAGE>
opto-electrical regenerator, essentially converts optical signals into
electrical signals that are then amplified and converted back to optical
signals allowing them to travel longer distances. This technology is
expensive to deploy, difficult to maintain and inefficient. Advances in
optical amplification component technology now make it possible to
transmit an optical signal over a longer distance without opto-electrical
conversion by using modules known as erbium-doped fiber amplifiers, or
EDFAs, and Raman amplifiers. EDFAs combine a section of optical fiber with
traces of an element which excites light signals as they pass through,
resulting in the amplification of the signal. Unlike EDFAs, Raman
amplifiers use the transmission fiber itself for amplification and do not
require any specialty fiber.
- DENSE WAVELENGTH DIVISION MULTIPLEXING. Due to the increased demand for
network capacity, communications equipment suppliers are developing
optical systems that allow more data to be transmitted over an existing
fiber without the addition of new fiber. This is being accomplished
through the use of wavelength division multiplexing technology, or WDM,
which simultaneously transmits multiple wavelengths instead of just one
wavelength over a single fiber. Optical signals traveling over different
wavelengths are consolidated at one end of the fiber using multiplexing
devices and then transmitted over a single fiber. At the other end of the
fiber, the optical signal is demultiplexed, or separated, much like a
prism separating different colors of light. This technology has been
enhanced by the introduction of dense wavelength division multiplexing, or
DWDM, which permits wavelengths to be more closely spaced, thereby
allowing more wavelengths to be transmitted simultaneously.
BANDWIDTH MANAGEMENT. Bandwidth management technologies enable
communications equipment suppliers to add intelligence to their systems, which
allows communications service providers to monitor the performance and control
the direction of light signals throughout the optical network.
- WAVELENGTH MONITORING. As fiber optic networks become more complex,
wavelength monitoring becomes critical to maintaining high quality
service. Currently, optical signals are transmitted over a limited number
of wavelengths. While adding more wavelengths in a single optical fiber
can significantly increase network capacity, managing a large and
increasing number of wavelengths on optical fibers poses a constant
challenge to the communications service providers. These monitoring issues
can be resolved by integrating optical components with electronics,
providing intelligence to fiber optic systems. This added intelligence
enables communications service providers to improve traffic flow and
network efficiency.
- OPTICAL SWITCHING. Today's optical networks are simple point-to-point
transmission systems in which switching, or changing the direction of an
optical signal, is performed electronically rather than optically. As
networks grow more complex and evolve towards all optical systems, there
is a growing demand for fiber optic components that can redirect optical
signals without opto-electrical conversion.
SEGMENTATION OF THE COMMUNICATIONS NETWORK
Communications service providers rely upon communication equipment suppliers
to provide systems that address the specific technical, pricing and performance
requirements of their networks. Each network segment has different requirements,
and therefore service providers often install systems from different equipment
suppliers. Optical component manufacturers provide the underlying technologies
for these systems. The four segments of the network include:
- ultra-long haul, for cross-country connections;
- long haul, for long distance connections between cities;
- metropolitan, for connections within urban areas; and
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- access, for connections to individual homes and businesses.
While the ultra-long haul and long haul network segments currently represent
the largest markets for optical equipment, optical technologies in the
metropolitan and access network segments have become increasingly prevalent.
CHALLENGES FACED BY FIBER OPTIC COMPONENT MANUFACTURERS
Communications equipment suppliers rely upon fiber optic component
manufacturers to quickly design, manufacture and supply advanced optical
technologies. Even many large communications equipment suppliers that
manufacture their own components have found that demand for components exceeds
their own supply capabilities and have sought third-party providers to
supplement their supply. Component manufacturers face the following issues in
trying to meet this demand.
- NEED FOR OPTICAL COMPONENT INTEGRATION. Communications equipment
suppliers strive to reduce the overall cost, size, amount and
manufacturing complexity of equipment used to build optical networks. The
number of components that they must utilize to improve system performance
has substantially increased due to the growing complexity of optical
network systems. Therefore, component manufacturers need to integrate more
optical components into single compact modules. These integrated modules
may often provide higher performance and functionality than individual
products that are linked together; however, integration often adds more
design complexity.
- NEED FOR OPTICAL COMPONENT MANUFACTURING CAPACITY. Rapid technological
advances coupled with high demand for the most advanced optical components
and integrated optical modules has reduced product lifecycles and
shortened the time for deployment within networks. Optical component
manufacturers are increasingly required to achieve a significant ramp-up
in manufacturing capacity and reduce time-to-market for new component
design in order to meet the demand of equipment suppliers.
- NEED FOR OPTICAL COMPONENT QUALITY AND RELIABILITY. While end users are
demanding more bandwidth for voice and data services, they are typically
unwilling to accept service levels that are below that which they have
grown accustomed to with traditional voice service. Managing high volumes
of voice and data traffic utilizing early-stage optical technology poses a
unique problem to communications service providers that face the threat of
significant revenue loss and customer churn if they do not provide a high
level of service quality. Component manufacturers are increasingly
expected to enhance and grow their technical expertise to achieve product
quality and reliability that meets or exceeds technical standards.
- NEED FOR A BROAD LINE OF COMPONENTS AND EXPERTISE. As the complexity of
optical networks increases, their performance can be enhanced by
integrating more optical components into network equipment. Equipment
suppliers prefer to rely on optical component manufacturers that possess
technical expertise and knowledge across a broad range of components, and
are able to efficiently integrate multiple component types into a custom
solution. In addition, equipment suppliers that seek to streamline vendor
qualification procedures and concentrate volume purchases may choose to
use fewer component providers.
THE OPLINK SOLUTIONS
We provide a broad line of high performance fiber optic components and
integrated optical modules worldwide to communications equipment suppliers.
Through internal research and development and selective acquisitions we have
developed over 20 types of primary components which can be integrated through
various combinations to create over 100 custom solutions. For all segments of
the network we provide our customers with high quality passive components and
integrated optical
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modules that are used for bandwidth creation and management. In situations where
a customer requires a combination of multiple components within a module, our
highly trained engineering and marketing staff works closely with them to design
a reliable integrated solution. We work with our customers early in their
development cycle and design our products to meet their particular requirements.
This provides us with the ability to capture the volume production requirements
of our customers when their systems are ready for commercial deployment. We
support our customers' volume and time-to-market requirements with advanced
micro-optic manufacturing and packaging facilities in both the United States and
China.
THE OPLINK STRATEGY
Our objective is to be a leading supplier of high performance fiber optic
components and integrated optical modules. The key elements of this strategy
include:
EXPAND OUR MANUFACTURING CAPACITY AND ENHANCE MANUFACTURING CAPABILITIES
THROUGH AUTOMATION. We plan to aggressively increase our manufacturing capacity
in San Jose, California and Zhuhai, China. In addition, we intend to continue to
invest in our manufacturing process and introduce automation techniques. We
believe this will increase process yield, throughput and quality.
BUILD NEW AND EXPAND EXISTING CUSTOMER RELATIONSHIPS. Our experienced staff
of engineers works closely with our customers early in the product development
cycle to customize our products, or create new products, to meet our customers'
specific needs. This close involvement with our customers can extend for many
months, and in the process our staff gains in depth knowledge about our
customers' special requirements. This knowledge helps us respond more
effectively with solutions to the challenges our customers face. Through these
activities, we have built relationships with premier communications equipment
suppliers, including: ADVA International, Cisco, Corning, JDS Uniphase, Lucent,
LuxN and Sycamore. To better serve our existing customer base and attract new
customers, we intend to significantly increase our technical marketing and
support teams.
EXPAND AND ENHANCE OUR EXISTING LINE OF PRODUCTS FOR ALL SEGMENTS OF THE
OPTICAL NETWORK. Our innovative fiber optic products enable both bandwidth
creation and management. Through internal research and development and selective
acquisitions we have built, and plan to continue to build, a broad product line
of passive fiber optic components and integrated optical modules to meet the
requirements of our customers. By offering a broad array of products we are able
to serve numerous equipment providers across all segments of the network.
CONTINUE TO DEVELOP OPTICAL PRODUCTS WITH INTELLIGENCE FEATURES. We believe
that some of our products, including our wavelength performance monitors and
wavelength protection modules, are differentiated by their intelligence
features. The intelligence of an optical product is created by adding an
electronic interface which provides monitoring and controlling capabilities to
optical networks. We are currently adding this capability to other products,
including our reconfigurable wavelength add/drop and wavelength switching
families of products. We plan to continue to enhance existing products and
introduce new intelligent optical modules to our product line within the
bandwidth management segment of our business. We believe that this will allow us
to capitalize on the industry trend towards all-optical networks and enhanced
network functionality.
CONTINUE TO ATTRACT TALENTED PERSONNEL. We intend to continue recruiting
highly-qualified personnel at our design and manufacturing centers in San Jose,
California and China. We believe that the combination of our local knowledge and
the availability of experienced personnel in China are a competitive advantage
that will help us to meet the growth of our business and respond more quickly to
large volume orders.
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PURSUE STRATEGIC ACQUISITIONS OF BUSINESSES AND TECHNOLOGIES. We intend to
pursue strategic acquisitions of businesses and technologies that can provide us
with key intellectual property, strategic products and highly-qualified
engineering personnel to rapidly increase our technological expertise and expand
the breadth of our product portfolio.
PRODUCTS AND TECHNOLOGIES
We provide a broad line of fiber optic components and integrated optical
modules designed to satisfy the needs of communications equipment suppliers. We
categorize our products by the functionalities provided within a network, from
bandwidth creation to bandwidth management. Some of our products have attributes
which combine both of these functions. While all of our bandwidth creation
components can be categorized as passive optical components, some of our
bandwidth management components utilize electronic interfaces to provide
intelligence and to enhance their function in a network.
BANDWIDTH CREATION PRODUCTS
Communications equipment suppliers use our bandwidth creation products to
expand the capacity of their customers' networks and enable optical signals to
travel over greater distances.
WAVELENGTH EXPANSION PRODUCTS. In fiber optic communications, different
signals are transmitted over multiple wavelengths. With increases in the number
of wavelengths and data rates, spacing between the wavelengths narrows and it
becomes increasingly difficult to separate and direct them. We offer wavelength
expansion products that function as highly sensitive filters that enable the
combination and separation of a particular wavelength. Wavelength expansion
products include wavelength multiplexing (combining), de-multiplexing
(separating), wavelength interleaving, which combines light signals from two or
more simultaneous sources over a single fiber, and locking, which prevents
wavelengths traveling simultaneously over the same fiber from interfering with
one another. We offer the following products to handle these tasks.
- DENSE WAVELENGTH DIVISION MULTIPLEXERS. A dense wavelength division
multiplexer, or DWDM, is an integrated optical module that combines two or
more wavelengths for transmission over a single fiber (multiplexing) or
separates these wavelengths (demultiplexing) at the receiving end. Our
DWDM technology uses thin film filter technology to separate optical
signals.
- DWDM INTERLEAVERS. A DWDM interleaver is an optical component that
combines light signals from two or more simultaneous sources over a single
fiber, which effectively doubles the capacity of the optical network
system, or separates a single light source into multiple signals.
- WAVELENGTH LOCKERS. A wavelength locker is an opto-electrical component
that is used to stabilize the wavelengths of lasers used in DWDM
transmission systems. Wavelength lockers ensure that the wavelength of a
source laser does not interfere with an adjacent wavelength signal.
- NOISE REDUCTION FILTERS. A noise reduction filter is a filter array
module used in conjunction with a particular DWDM module to reduce
undesired signals in a communications transmission.
- CHROMATIC DISPERSION COMPENSATORS. A chromatic dispersion compensator is
a device that reduces the difference in travel time for signals carried by
different wavelengths.
- DISPERSION SLOPE COMPENSATORS. A dispersion slope compensator is a device
that reduces the difference in chromatic dispersion of different
wavelengths. Chromatic dispersion is caused when signals carried by
different wavelengths travel at different speeds.
OPTICAL AMPLIFICATION PRODUCTS. Optical fiber amplifiers are widely
deployed in optical communications networks to enhance the optical signal power.
Optical signals typically lose power and
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eventually are lost after travelling a long distance along an optical fiber.
This power loss is referred to as attenuation. Through recent advances in
technology, the optical signal can be amplified with EDFAs or with Raman
amplifiers, neither of which require opto-electrical conversion. The amplifiers
are arranged along fiber cable lines at regular intervals to enable the optical
signal to reach its destination as a clear and readable message. While
amplifiers range in complexity, a typical amplifier consists of a fiber and
several of the components listed below.
- ISOLATORS. Isolators are fiber optic devices that transmit light in only
one direction, thus preventing a reflected light signal from returning to
its laser source. Reflected light can interfere with a laser's process and
create noise, which can impair system performance in optical networks.
- TAP COUPLERS. Tap couplers transfer optical signals between fibers. They
are widely used for system monitoring purposes and have very low insertion
loss, or the power loss incurred when adding additional components to a
fiber cable.
- WDM PUMP/SIGNAL COMBINERS. Micro-optic WDM pump/signal combiners are
components that provide power for the optical amplifier. They are used to
efficiently combine light signals with pump laser sources. Pump lasers are
active optical components used in optical amplifiers such as EDFAs, or
erbium-doped fiber amplifiers, to amplify or regenerate light signals that
naturally suffer loss while traveling over distance within an optical
network.
- INTEGRATED HYBRID COMPONENTS. Optical amplifier systems can combine
optical components, including isolators, tap couplers and WDM pump/signal
combiners. The main advantage of hybrid components is that they minimize
the amplifier package size and reduce manufacturing cost.
- GAIN FLATTENING FILTERS. Gain flattening filters are used to ensure
signals are amplified by equal amounts. Our thin film filter technology,
or the technology in which layers of thin film separate optical signals,
employs multiple layers of optical materials on glass to adjust optical
output at different wavelengths to meet the needs of next-generation high
power amplifiers.
- WDM PUMP COMBINERS. WDM pump combiners are used to increase the power of
an optical amplifier by combining multiple pump lasers into one common
pump source for amplification.
- POLARIZATION BEAM COMBINERS. Polarization beam combiners are optical
components that combine two of the same or different wavelengths with
opposing polarization to increase the power output of the optical
amplifier.
- VARIABLE OPTICAL ATTENUATORS. Variable optical attenuators, or VOAs, are
optical devices that reduce the power of the optical signal in DWDM
networks to ensure that all optical signals within a network have equal
power. The amount of power reduction of a particular optical signal can be
adjusted to match the power of other optical signals in the network.
BANDWIDTH MANAGEMENT PRODUCTS
Communications equipment suppliers use our bandwidth management products to
add intelligence to their systems, which allows communications service providers
to monitor the performance, and control the direction, of light signals
throughout the optical network.
WAVELENGTH PERFORMANCE MONITORING AND PROTECTION PRODUCTS. The ability to
monitor wavelengths within an optical network enables service providers to
maintain quality of service even in the event of an interruption in the signal
path, such as a cut in the fiber. It is significantly more difficult to monitor
signal flow in optical systems as compared to electrical systems. Monitoring
requires that optical signals be extracted from the fiber without interfering
with the optical signal travelling through the same fiber.
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We offer products that enable service providers to monitor network performance
and make necessary decisions for traffic flow and network efficiency.
- SUPERVISORY CHANNEL MONITORS. Our supervisory channel monitors are
integrated solutions that combine multiple network performance monitoring
functions in a single package and integrate our WDMs and couplers. These
modules enable communications service providers to identify line
connectivity.
- WAVELENGTH PERFORMANCE MONITORS. Our multi-channel wavelength performance
monitors are integrated solutions that convert light signals into
electrical signals through a combination of: tap couplers; splitters, a
passive device that separates light signals; and third-party
photodetectors, a device supplied by another optical component
manufacturer that receives a light signal in an optical network and
converts it into an electrical signal. These modules allow communications
service providers to monitor whether or not wavelengths are being
transmitted properly through the network.
- WAVELENGTH PROTECTION MODULES. Our multi-channel wavelength protection
modules are integrated solutions that combine tap couplers, splitters,
switches and third-party photodetectors. These modules integrate network
protection functions and monitor optical signal quality, such as optical
power, wavelength and signal-to-noise ratio. In addition, these modules
can provide fast routing and switching capabilities in response to
unexpected errors in the optical network. They also enable communications
service providers to instantly monitor the network performance at each
individual optical wavelength, allowing increased management of traffic
flow and network efficiency.
OPTICAL SWITCHING PRODUCTS. As optical networks become more complex, there
is an increasing demand to provide switching capability to direct optical
signals across multiple points in the network. We supply optical fiber switching
products that provide all-optical signal switching between fibers with up to
eight different end destinations.
- SWITCHES. Optical switches are devices that can direct optical signals to
different end destinations.
- OPTICAL ADD/DROP MULTIPLEXERS. Optical add/drop multiplexers, or OADMs,
are used when part of the information from an optical signal carried on
the network is demultiplexed, or dropped, at an intermediate point and
different information is multiplexed, or added, for subsequent
transmission. The remaining traffic passes through the multiplexer without
additional processing. The OADM is typically used for rerouting a number
of specific optical wavelengths with different end destinations.
- RECONFIGURABLE OADMS. Reconfigurable OADMs combine OADM functionality
with optical switches and add flexibility to the network by allowing the
dynamic add/drop of variable optical wavelengths with different end
destinations.
- CIRCULATORS. Circulators consist of sophisticated micro-optic components
that are used to direct optical signals between different fibers.
Circulators are also used in optical amplifying applications.
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The following is a representative list of some of our products. We are
currently shipping all of these products except for those denoted as "in
development."
<TABLE>
<S> <C> <C> <C>
PRODUCTS FUNCTION BENEFIT MARKET
<S> <C> <C> <C>
WAVELENGTH EXPANSION PRODUCTS
-----------------------
200GHz DWDM - Provide up to 40 DWDM channels - Low cost - Ultra-long haul
- High performance - Long haul
- High reliability - Metro
- Access
100GHz DWDM - Provide up to 80 DWDM channels - High reliability - Ultra-long haul
(in development) - Advanced performance - Long haul
characteristics - Metro
Noise Reduction Filters - Noise reduction used in conjunction - Low insertion loss - Long haul
with a particular DWDM - Compact package
- Low cost
100GHz Interleavers - Enable DWDM with high number of - Compact size - Long haul
(in development) channels - No electrical cooling - Metro
- Double bandwidth capacity - Low insertion loss
Wavelength Lockers - Ensure optical signal wavelength - High flexibility - Long haul
(in development) accuracy and stability for DWDM - Compact size - Metro
Chromatic Dispersion - Compensate light signal shape in high - Wide dynamic range - Ultra-long haul
and Dispersion Slope speed transmission - Compact size - Long haul
Compensators
(in development)
OPTICAL AMPLIFICATION PRODUCTS
-----------------------
Isolators - Reduce noise and improve system - Low cost - Ultra-long haul
performance - Compact size - Long haul
- Metro
Tap Couplers - Enable signal monitoring - Very low cost - Ultra-long haul
- Wide bandwidth - Long haul
- Low insertion loss - Metro
- Access
Integrated Hybrid - Improve EDFA performance - Compact size - Ultra-long haul
Component: - High reliability - Long haul
Isolator+WDM+Tap - Metro
Gain Flattening Filters - Improve amplifier performance across - Temperature insensitive - Long haul
(GFF) large number of channels - Low error level
- High reliability
Polarization Beam - Increase amplifier power by combining - Sustain high laser beam - Ultra-long haul
Combiners beams of the same wavelength power - Long haul
- Low insertion loss
Variable Optical - Balance optical power in fibers - Low cost - Long haul
Attenuator - Compact size - Metro
(in development) - Access
WAVELENGTH PERFORMANCE MONITORING AND PROTECTION PRODUCTS
-----------------------
Supervisory Channel - Monitor transmission line integrity - Compact size - Long haul
Monitors - Integrated functions - Metro
- Low cost
Wavelength Monitoring - Monitor optical signal quality - Compact package - Long haul
and Wavelength - Provide protection switching when - Fast response - Metro
Protection Modules needed - High performance
OPTICAL SWITCHING PRODUCTS
-----------------------
Switches 1X2, 2X2 and - Direct optical signals between fibers - Compact size - Long haul
1X8 - Provide reliable network protection - Low insertion loss - Metro
- Low cost
- Fast switching time
Optical Add/Drop - Enable signal add/drop function at - Wide wavelength range - Long haul
Multiplexers (OADMs) multiple points - Low insertion loss - Metro
Reconfigurable OADMs - Dynamic signal add/drop function - Flexible add/drop - Long haul
(in development) wavelength - Metro
- Low insertion loss
Circulators - Direct signals between fibers - Compact size - Ultra-long haul
- Perform optical add/drop - High reliability - Long haul
- Low insertion loss - Metro
</TABLE>
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CUSTOMERS
We sell our products worldwide to communications equipment suppliers. In
certain cases, we sell our products to other component manufacturers for resale.
During the year ended June 30, 2000, we sold our products to over 100 companies
worldwide.
During the year ended June 30, 2000, sales to Lucent, Sycamore Networks and
JDS Uniphase accounted for 42.6%, 15.7% and 10.6% of revenues. We expect that
the majority of our revenues will continue to depend on sales to a small number
of customers. In addition, some of our customers are companies with which we
presently compete or in the future may compete.
CUSTOMER CASE STUDIES
We work closely with our customers to meet their unique needs. The following
are examples of successful collaborations with our customers to develop
innovative products.
- We worked closely with one of our major customers to quickly develop a
solution enabling them to monitor and protect signals in their DWDM
systems. The customer required a module that could tap into the network
with minimal intrusion, monitor wavelengths in an optical signal and, in
the case of signal loss, perform fiber switching to reroute the signal.
All of these functions had to be contained in a very small box. We quickly
developed a custom solution by integrating numerous components into a
module which met the customer's specifications. This integrated product
provides on-time signal monitoring by contemporaneously analyzing
wavelength, power level and signal-to-noise ratio information. It also
performs network protection functions in less than 15 milliseconds, which
exceeds the industry standard of 50 milliseconds.
- A global communications equipment supplier planned to increase the speed
of their networking systems by migrating from copper to optical
technology. Because they did not have the optical expertise to achieve
this migration, they relied upon our technical experts to design and
consult on the technology. We worked closely with the customer to create a
product that could be integrated seamlessly with the customer's existing
system. The customer was among the first few companies to launch
next-generation metro DWDM systems. Our contributions help to shorten
their time-to-market. As a result, we have become one of their major
suppliers of DWDM and other fiber optic components.
CUSTOMER AGREEMENTS
In July 1999, we entered into an agreement with Corning providing that we
will purchase all of our external requirements for various materials from
Corning as long as Corning offers the materials to us on terms at least as
favorable as those offered to us by another supplier. We are not currently
purchasing any materials from Corning under this agreement. Corning has agreed
to purchase various components from us and we will offer to supply Corning any
quantity of various components that is within our manufacturing capacity so long
as Corning purchases a minimum value of components from us each year. In
addition, if, prior to April 1, 2002, Corning requests a license to one or more
of our patents that were applied for or granted before April 1, 1999, we have
agreed to negotiate in good faith with Corning to enter into this license. The
agreement terminates on January 1, 2004, unless we and Corning agree to extend
it.
In January 2000, we entered into a general purchase agreement with Corning.
Under that agreement, we have agreed to provide Corning with pricing terms no
less favorable to Corning than those given to the other purchasers of
substantially similar or smaller quantities.
In July 1999 and November 1999, we entered into three consignment supply
agreements with Lucent Technologies pursuant to which we agreed to sell Lucent
various modules on a blanket order consignment basis. The agreements provide
that Lucent will notify us periodically of the number of
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modules it will require us to ship on consignment. Lucent has agreed to purchase
any modules it withdraws from the consigned inventory at an agreed price. To the
extent we offer to sell modules that are similar in quality and volume to any
other customer at a lower price, we have agreed to offer Lucent the lower price.
Lucent may terminate any or all consignment orders, in whole or in part, at any
time and without cause.
BACKLOG
We define backlog to include orders for which we expect to recognize
revenues within the succeeding twelve months. As of June 30, 2000, our backlog
was $54.6 million. Sales are made pursuant to purchase orders, which are
frequently subject to revision or cancellation. Approximately 50% of our backlog
as of June 30, 2000 included products that had been shipped or scheduled for
shipment to Lucent but had not yet been accepted for use. Because of the
possibility of changes in delivery or acceptance schedules, cancellations of
orders, distributor returns or price reductions, our backlog, as of any
particular date, may not be representative of actual sales for any succeeding
period.
MARKETING, SALES AND CUSTOMER SUPPORT
We market and sell our products through both direct sales and distribution
channels, including three domestic and 13 international sales representatives
and distributors. Our sales representatives and distributors are independent
organizations that generally have exclusive geographic territories within North
America, Europe and Asia. As of July 31, 2000, we employed 18 people in sales,
marketing and customer service and support who manage key customer accounts and
support our direct sales force, sales representatives and distributors.
Our marketing team promotes our products within the communications industry
as well as gathers and analyzes market research. Our marketing professionals
help us to identify and define next-generation products by working closely with
our customers and our research and development engineers. They also coordinate
our participation in trade shows and design and implement our advertising
effort.
PRODUCT DEVELOPMENT
As of July 31, 2000, we had 36 engineers, 12 of whom hold Ph.D. degrees, and
123 technicians and operators involved in research and development of our
products. Our engineering team has extensive design, package, processing and
software experience in the fields of fiber optic components, integrated optic
interfaces and systems. To date, we have been granted 11 patents by, and have 21
patent applications pending with, the U.S. Patent and Trademark Office for
various technologies and products, including DWDM interleavers, DWDM modules,
multi-channel optic filter arrays, high reliability fused couplers, circulators,
compact optical switches and polarization beam combiners.
Our primary product development center is located in San Jose, California.
We also maintain product development centers in Zhuhai and Fuzhou, China. Our
research and development expense was $3.7 million, $626,000 and $455,000 for the
years ended June 30, 2000, 1999 and 1998. We have increased, and intend to
continue to increase, our research and development budget and staff to enhance
our current fiber optic components and modules and to develop new technologies
and products to serve the next-generation communication markets.
MANUFACTURING
We currently manufacture the majority of our components and modules at our
headquarters in San Jose, California. We also manufacture our products at our
facilities in Zhuhai and Fuzhou, China.
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Each of our facilities maintains complete in-house manufacturing
capabilities including component and module design, integration, production and
testing. We plan to continue to invest resources in manufacturing management,
engineering and quality control. We also plan to continue to develop automated
manufacturing systems to provide higher throughput, improve yields and reduce
our manufacturing costs.
We have recently increased our manufacturing capacity by expanding the size
of our San Jose facility from approximately 25,000 square feet to approximately
100,000 square feet. In addition, we are expanding our manufacturing facilities
in Zhuhai from approximately 30,000 square feet to approximately 110,000 square
feet, and we have leased a 24,000 square foot facility in Beijing and a 45,500
square foot facility in Shanghai. The component and module designs, assembly
procedures, manufacturing processes and quality standards from our U.S.
headquarters are substantially replicated at our China facilities, and all of
the tests are specified to meet strict industry quality standards.
A number of critical raw materials used in manufacturing our products are
acquired from single or limited source suppliers. The inability to obtain
sufficient quantities of those materials may result in delays, increased costs
and reductions in our product shipments. Between January 1997 and August 1999,
we entered into several development agreements with Barr Associates, Inc.
pursuant to which we paid Barr to design, develop and build multiple vacuum
deposition systems for us. These systems are used to produce bandpass filters,
an integral component of our DWDMs. Under the terms of these agreements, we are
entitled to purchase 100% of the bandpass filters produced by Barr on these
systems at a discount. Our discount will continue until our accumulated total
discount on filters produced in all systems equals the total amount of our
payment for the design, development and cost to build the systems.
QUALITY
We have established a quality management system to assure that the products
we provide to our customers meet or exceed industry standards. This system is
based on the international standard ISO 9001. Our U.S. headquarters have been
ISO 9001 certified in research and manufacturing since July 1998. Our Zhuhai
facility has been ISO 9002 certified in manufacturing since January 2000.
COMPETITION
The markets in which we sell our products are highly competitive. Our
overall competitive position depends upon a number of factors, including:
- price;
- availability, performance and reliability of our products;
- the breadth of our product line;
- the ability to win designs through prototyping;
- manufacturing capacity;
- the quality of our manufacturing processes;
- the compatibility of our products with existing communications networks;
and
- our ability to participate in the growth of emerging technologies.
We believe that our principal competitors are the major manufacturers of
optical components and modules, including both 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,
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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 a more limited product line.
Many of these companies have substantially greater financial, engineering
and manufacturing resources as well as greater name recognition and stronger
customer relationships. Some of our customers are companies with which we
currently compete or in the future may compete. In addition, some of our
customers have been or could be acquired by, or enter into strategic relations
with, our competitors. We anticipate that further consolidation will occur in
our industry, thereby possibly increasing competition in our target markets.
INTELLECTUAL PROPERTY
To date, we have been granted 11 patents by, and have 21 patent applications
pending with, the U.S. Patent and Trademark Office covering various technologies
and products. While we rely on patent, copyright, trade secret and trademark law
and restrictions on disclosure to protect our technology, we believe that
factors such as the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. We cannot assure you that others will not develop
technologies that are similar or superior to our technology.
Protecting our intellectual property is critical to the success of our
business. Despite our efforts to protect our proprietary rights, various
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and there can be no assurance that the steps taken by us will prevent
misappropriation of our technology. Moreover, the laws of some foreign
countries, including China, do not protect our proprietary rights as fully as in
the United States.
Substantial litigation regarding intellectual property rights exists in the
optical communications industry. We expect that fiber optic components and
modules may be increasingly subject to third-party infringement claims as the
number of competitors in our industry segments grows and the functionality of
products in different industry segments overlaps. In addition, we believe that
many of our competitors in the optical communications industry have filed or
intend to file patent applications covering aspects of their technology on which
they may claim our technology infringes. We are currently involved in patent
infringement actions with E-TEK Dynamics and Chorum Technologies. For a
description of these actions, see "--Legal Proceedings and Regulatory Matters."
We cannot make any assurances that other third parties will not claim
infringement by us with respect to our technology. Any such claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology could
seriously harm our financial condition.
EMPLOYEES
As of July 31, 2000, we had 648 full-time employees located in the United
States, 159 of whom were engaged in product development, 404 in manufacturing,
30 in quality, 18 in sales, marketing, application support and customer service,
and 37 in general and administration. As of July 31, 2000, we had 804 full-time
employees located in China, five of whom were engaged in product development,
735 in manufacturing, 33 in quality, and 31 in general and administration. None
of our employees are
44
<PAGE>
represented by a labor union. We have not experienced any work stoppages and we
consider our relations with our employees to be good.
FACILITIES
In the United States, we lease a total of approximately 149,650 square feet
in four buildings located in San Jose, California. Of the 149,650 square feet:
- we lease a 62,000 square foot manufacturing facility and 43,270 square
feet of administrative, sales and marketing space pursuant to a lease that
expires in February 2005;
- we lease a 38,000 square foot research and development facility pursuant
to a lease that expires in October 2002; and
- we lease a 6,380 square foot filter coating facility pursuant to a lease
that expires in July 2005.
In China, we lease a total of approximately 209,500 square feet in four
facilities located in Zhuhai, Fuzhou, Beijing and Shanghai. Our Zhuhai
facilities total approximately 130,000 square feet, with the manufacturing
facility totaling approximately 110,000 square feet and 20,000 square feet of
office and dormitory space. The lease for these facilities expires in March
2005. In Fuzhou we maintain an approximately 10,000 square foot research and
development and manufacturing facility pursuant to a lease expiring on
August 2007. Our Beijing facilities total approximately 24,000 square feet and
are used for administration and manufacturing. The lease for these facilities
expires in May 2003. Our Shanghai facilities total approximately 45,500 square
feet and are used for administration, manufacturing and research and
development. The lease for these facilities expires in July 2005. In addition,
in May 2000, we acquired rights to a parcel of land in China which we intend to
use for future expansion of our manufacturing facilities. We have the right to
use this land until May 2050.
LEGAL PROCEEDINGS AND REGULATORY MATTERS
LEGAL PROCEEDINGS
On November 12, 1999, E-TEK Dynamics, Inc., recently acquired by JDS
Uniphase, filed a lawsuit against us in the United States District Court for the
Northern District of California (Case No. C99-04921 CRB) alleging that we have
infringed E-TEK's U.S. Patent No. 5,652,814 relating to fiber optic couplers
based on our manufacture and sale of our DWDM products. E-TEK is seeking an
award for unspecified damages, including treble damages, for intentional and
willful infringement, contributory infringement, inducement to infringe, and
injunctive relief. Our DWDM products generated a majority of our revenues for
the year ended June 30, 2000. An adverse ruling in this matter would materially
adversely affect our financial condition. We are defending ourselves vigorously
in this lawsuit.
On June 16, 2000, Chorum Technologies, Inc. filed a complaint, C.A.
No. 3-00CV0458-M, against us and our subsidiary, Telelight Communications Inc.,
in the U.S. District Court for the Northern District of Texas (Dallas Division).
In the complaint Chorum alleges that we have infringed two U.S. patents
allegedly owned by Chorum relating to fiber optical interleaving, based on our
manufacture of and offer to sell various products including the CFOI-100 series
of fiber optical interleavers. Chorum also alleges that our use of the name
"TrueSlicer" in connection with the public announcement of the CFOI-100 products
is confusingly similar to Chorum's alleged "Slicer" and "Optical Slicer" marks,
and therefore violates section 43(a) of the Lanham Act and various unspecified
Texas state laws. Chorum seeks actual and enhanced damages, injunctive relief,
costs and attorney fees, and other relief. We have not yet responded to the
complaint, but intend to defend ourselves vigorously.
The outcomes of the foregoing lawsuits are inherently uncertain. Our defense
of these lawsuits, regardless of their eventual outcomes, will likely be costly
and time consuming and will divert the
45
<PAGE>
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
could seriously harm our business and financial condition. In the event of an
adverse ruling in either matter:
- we may be liable for significant monetary damages;
- we may be enjoined from manufacturing, selling or offering to sell certain
of our products, including, in respect of the E-TEK litigation, products
that are currently generating a majority of our revenues, and products we
are developing; and
- we may have to engage in a redesign of these products and products we are
developing.
If an injunction were granted that prevents us from selling these products,
we may have to seek a license to continue to sell and offer these products and
products we are developing. We may not be able to secure any license on
commercially reasonable terms, if at all. If we were to settle any of the
foregoing matters and secure a license to continue to sell and offer our
products and those we are developing, the licensing fees could be substantial. A
redesign of our products would result in an interruption in sales that could
extend for some time. We do not have insurance that would indemnify us for any
liability that may be imposed in connection with the legal actions described
above. Accordingly, if any of the foregoing events occur, it could result in a
substantial reduction in our revenue and could result in losses over an extended
period of time, which would have a material adverse effect on our results of
operations.
REGULATORY MATTERS
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 and citizens. 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, and citizens, without export
licenses. In the event these classifications are not obtained, we have
alternatively filed an application to obtain licenses permitting us to disclose
our technology to specified employees. 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. While we do not believe that the results of
this inquiry will materially harm our business, 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.
SCIENTIFIC ADVISORY BOARD
We have established a scientific advisory board to provide specific
expertise in areas of research and development relevant to our business. Our
scientific advisory board meets periodically with our
46
<PAGE>
technical and development personnel and management to discuss our present and
long-term research and development activities. Scientific advisory board members
include:
<TABLE>
<S> <C>
Edward Labuda, Ph.D., Chairman....... Retired Executive Director of the
Lasers and Electro-Optics Society of
the Institute of Electrical and
Electronics Engineers, Inc. and
Retired Vice President and Chief
Operating Officer of the Lightwave
Strategic Business Unit at AT&T
Microelectronics
Charlotte G. Denenberg, Ph.D......... Vice President, Optical
Infrastructure of Metromedia Fiber
Network, Inc.
Randy Giles, Ph.D.................... Technical Manager at Lucent
Technologies, Bell Laboratories
Hans-Joachim Grallert, Ph.D.......... Senior Vice President of Optical
Networks--Development at Siemens AG,
Information and Communications
Networks, Transport Networks
Bertram H. Hui, Ph.D................. Optical Communications Manager of
Intel Capital
David C. Nagel, Ph.D................. Chief Technology Officer of AT&T
Malvin C. Teich, Ph.D................ Professor of Electrical and Computer
Engineering and Professor of Physics
at Boston University
</TABLE>
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Joseph Y. Liu................................. 50 Chief Executive Officer and Director
Frederick R. Fromm............................ 51 President
Alex Hsu...................................... 51 President, Global Manufacturing Operations
Bruce Horn.................................... 49 Chief Financial Officer and Treasurer
Wei-Zhong Li.................................. 40 Chief Technology Officer
Jingyu Xu..................................... 57 Senior Vice President, Engineering
Haiguang Lu................................... 39 Vice President, Manufacturing
Daryl J. Eigen................................ 53 Vice President, Sales and Marketing
Jeff Friedman................................. 31 Associate General Counsel
Ian Jenks(1).................................. 46 Chairman of the Board of Directors
Terence P. Brown(2)........................... 37 Director
Chieh Chang................................... 48 Director
Herbert Chang(1)(2)........................... 38 Director
Leonard J. LeBlanc(2)......................... 59 Director
David Spreng(1)............................... 38 Director
</TABLE>
------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JOSEPH Y. LIU is one of our founders and has served as our Chief Executive
Officer since September 1999. Mr. Liu was our Chairman of the Board from our
inception in 1995 through May 2000 and currently serves as a member of our Board
of Directors. From 1994 to 1995, Mr. Liu was the General Partner of Techlink
Technology Ventures. Prior to 1994, Mr. Liu spent ten years as Chairman and
Chief Executive Officer of Techlink Semiconductor and Equipment Corp., a
semiconductor equipment and technology company. Mr. Liu also serves as a
director of several privately held companies involved in semiconductor
integrated circuit design and manufacturing. Mr. Liu received his B.S. from
Chinese Cultural University, Taiwan and his M.S. from California State
University, Chico.
FREDERICK R. FROMM has served as our President since July 2000. From 1998 to
2000, Mr. Fromm was President and Chief Executive Officer of Siemens Information
and Communications Networks, Inc., a telecommunications company. From 1996 to
1998, Mr. Fromm was President and Chief Executive Officer of Siemens Telecom
Networks, Inc., a telecommunications company. From 1995 to 1996, Mr. Fromm was
President and Chief Executive Officer of Siemens Stromberg-Carlson, Inc., a
telecommunications company. Prior to joining Siemens, Mr. Fromm worked as a
system designer for AT&T Bell Laboratories (now Lucent Technologies), a
communications company. Mr. Fromm received his B.S. in Applied Science and
Engineering and his M.S. in Electrical Engineering from the University of
Wisconsin and his M.B.A. from Florida Atlantic University.
ALEX HSU has served as our President, Global Manufacturing Operations since
August 1999. Prior to joining Oplink, Mr. Hsu held several executive officer
positions with UMAX Technologies, Inc., an imaging and computer products
company, from 1993 to 1999. His positions included Executive Vice President,
General Manager of the Imaging Product Division and Networking Communication
Division and Vice President of Operations. From 1989 to 1993, Mr. Hsu held
various executive positions at the Acer Group, a computer manufacturing and
distribution company. His positions included Vice President of Operations and
General Manager of the New Micro Marketing International, President of
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<PAGE>
Acer Technologies in Malaysia and Vice President of Acer, Inc. Mr. Hsu received
his B.S. in Electrical Engineering and his M.B.A. from National Chiao-Tung
University in Taiwan.
BRUCE HORN has served as our Chief Financial Officer and Treasurer since
April 2000. Prior to joining Oplink, Mr. Horn was a consultant at The Brenner
Group, a consulting firm, from February 2000 to April 2000. From January 1993 to
February 2000, Mr. Horn was the Vice President of Finance and Chief Financial
Officer and from March 1991 to January 1993 he was Director of Finance and Chief
Financial Officer of Larscom Incorporated, a telecommunications company.
Mr. Horn received his B.A. in Accounting from the University of Northern Iowa,
and his M.B.A. in Finance from California State University at Hayward.
WEI-ZHONG LI has served as our Chief Technology Officer since
December 1997. Prior to joining Oplink, from May 1995 to December 1997, Mr. Li
held technical positions with various companies in the fiber optical field,
including Synchronous Communication, Inc., a communications equipment
manufacturing company, Kaifa Technology, Inc., a fiber optics company, MP Inc.,
a fiber optics company, and E-TEK Dynamics, Inc, a fiber optics company. Mr. Li
received his B.S. and M.S. degrees in Electrical Engineering from Beijing
Institute of Technology, China. Mr. Li was the inventor for three approved
patents and has filed seven patents that are pending in the U.S. Patent and
Trademark Office. He is also the author of nine technical papers in the fiber
optic and microwave communications fields.
JINGYU XU has served as our Senior Vice President of Engineering since
November 1999. Prior to joining Oplink, Mr. Xu was the Director of Component
Technology of Chorum Technologies, Inc., a fiber optics company, from February
1998 to November 1999. From February 1990 to February 1998, Mr. Xu held various
research and development and engineering positions at E-TEK Dynamics, Inc.,
including the positions of Director of Engineering Research and Development.
Mr. Xu received his B.S. from Fudan University, China and his M.S. from Shanghai
Jiaotung University, in China.
HAIGUANG LU has served as our Vice President of Manufacturing since
February 1998. Prior to joining Oplink, Mr. Lu was a Production Manager at E-TEK
Dynamics, Inc., from February 1993 to February 1998. Mr. Lu received his B.S. in
Applied Physics and his M.S. in Fiber Optics at Shanghai Jiaotong University.
Mr. Lu received his M.S. in Electrical Engineering at City College of New York.
DARYL J. EIGEN has served as our Vice President of Sales and Marketing since
August 2000. From September 1999 to August 2000, Mr. Eigen was a founder of
eLink Business, a computer and service company. From February 1996 to September
1999, Mr. Eigen was president and Chief Executive Officer of Metalithic Systems
(Now SeaSound, LLC), an audio products and solutions company. From June 1994 to
February 1996, Mr. Eigen was Senior Vice President International of DSC
Communications Corporation (now part of Alcatel), a telecommunications company.
Mr. Eigen received his B.A. in Psychology and his M.S. in Electrical Engineering
from the University of Wisconsin. Mr. Eigen received his Ph.D. in Industrial
Engineering from Northwestern University.
JEFF FRIEDMAN has served as our Associate General Counsel since August 2000.
Prior to joining Oplink, Mr. Friedman was an Assistant United States Attorney
from January 1997 to August 2000. From August 1995 to October 1996,
Mr. Friedman served as a law clerk to the Honorable Manuel L. Real, United
States District Court, Central District of California. From September 1994 to
August 1995, Mr. Friedman was an associate with Wilson, Sonsini, Goodrich &
Rosati. Mr. Friedman received his B.A. in Political Science from the University
of Washington and his J.D. from Santa Clara University School of Law.
IAN JENKS has been a member of our board of directors since April 2000 and
the Chairman of the Board since May 2000. From 1995 to 1998, Mr. Jenks was the
President of the Lasers and Fiber Optics groups of Uniphase Corporation, a fiber
optics company. Mr. Jenks also serves on the board of
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<PAGE>
directors of several privately-held companies. Mr. Jenks received his B.S. in
Aeronautical Engineering from Bristol University in the United Kingdom.
TERENCE P. BROWN has been a member of our board of directors since
August 2000. Since May 2000, Mr. Brown has been Vice President and General
Manager of the Optical Transport Business Unit at Cisco Systems, a networking
solutions company. From November 1999 to May 2000, Mr. Brown was Vice President
of Optical Networking Sales at Cisco Systems. From July 1997 to November 1999,
Mr. Brown was the Vice President of Field Operations at Cerent Corporation, an
optical products company. From July 1993 to July 1997, Mr. Brown was the
Regional Vice President and Regional Sales Director of Advanced Fibre
Communications, a telecommunications company. Mr. Brown received his B.S. in
Electrical Engineering from the University of Notre Dame and a masters degree in
Marketing and Economics from Northwestern University.
CHIEH CHANG has been a member of our board of directors since September
1995. Mr. Chang currently serves as Chief Executive Officer of Programmable
Microelectronics Company, Inc., a fabless semiconductor design company. From
April 1992 to August 1996, Mr. Chang was the Director of Technology at Cirrus
Logic, Inc., a semiconductor company. Mr. Chang received his B.S. in Electrical
Engineering from the National Taiwan University and his M.S. in Electrical
Engineering from UCLA.
HERBERT CHANG has been a member of our board of directors since August 1996.
Since April 1996, Mr. Chang has been President of InveStar Capital, Inc., a
technology venture capital management firm based in Taiwan. From 1994 to 1996,
Mr. Chang was Senior Vice President at WK Technology Fund, a venture capital
fund. Mr. Chang serves on the boards of directors of Silicon Image, Inc., a
manufacturer of semiconductors for high-speed communications applications, and
Marvell Technology Group Ltd., a manufacturer of integrated circuits for
communications-related markets. Mr. Chang received his B.S. from National Taiwan
University and his M.B.A. from National Chiao-Tung University in Taiwan.
LEONARD J. LEBLANC has been a member of our board of directors since July
2000. Mr. LeBlanc was the Executive Vice President and Chief Financial Officer
of Vantive Corporation, a customer relationship management software and solution
company, from August 1998 to January 2000. From March 1996 to July 1997,
Mr. LeBlanc was the Executive Vice President of Finance and Administration and
Chief Financial Officer at Infoseek Corporation, an Internet search and
navigation company. From September 1993 to December 1994, Mr. LeBlanc served as
Senior Vice President, Finance and Administration of GTECH Corporation, a
manufacturer of lottery equipment and systems. From May 1987 to December 1992,
Mr. LeBlanc served as Executive Vice President, Finance and Administration and
Chief Financial Officer of Cadence Design Systems, Inc., an electronic design
automation software company. Mr. LeBlanc received his B.S. and M.S. from the
College of Holy Cross, and his masters degree in finance from George Washington
University.
DAVID SPRENG has been a member of our board of directors since
February 2000. Since September 1998, Mr. Spreng has served as the managing
member of Crescendo Venture Management, LLC. Mr. Spreng was President of IAI
Ventures, Inc., a venture capital company, from March 1996 until
September 1998. He has also served in various capacities at Investment
Advisers, Inc. from 1989 to 1998. Mr. Spreng is also a director of Tut Systems,
a telecommunications equipment company, and Allied Riser Communications, a fiber
optics-based telecommunications company. Mr. Spreng also serves on the board of
several privately-held companies. Mr. Spreng received his B.S. in Finance and
Accounting from the University of Minnesota.
BOARD OF DIRECTORS
Our board of directors currently consists of seven members. Upon the closing
of this offering, the terms of office of the board of directors will be divided
into three classes. As a result, a portion of our
50
<PAGE>
board of directors will be elected each year. The division of the three classes,
the initial directors and their respective election dates will be as follows:
- the class I directors will be Ian Jenks and David Spreng, and their term
will expire at the annual meeting of stockholders to be held in 2001;
- the class II directors will be Chieh Chang and Herbert Chang, and their
term will expire at the annual meeting of stockholders to be held in 2002;
and
- the class III directors will be Joseph Y. Liu, Terence P. Brown and
Leonard J. LeBlanc, and their term will expire at the annual meeting of
stockholders to be held in 2003.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire, will be elected to serve
from the time of election and qualification until the third annual meeting
following their election. In addition, our certificate of incorporation will
provide that the authorized number of directors may be changed only by
resolution of the board of directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may have the effect
of delaying or preventing changes in our control or management.
BOARD COMMITTEES
COMPENSATION COMMITTEE. We established a compensation committee in July
1999. The compensation committee currently consists of Messrs. Ian Jenks,
Herbert Chang and David Spreng. The compensation committee reviews and
recommends to the board of directors the compensation of all of our officers and
directors, including stock compensation and loans, and establishes and reviews
general policies relating to the compensation and benefits of our employees.
AUDIT COMMITTEE. We established an audit committee in July 1999. The audit
committee currently consists of Messrs. Herbert Chang, Terence P. Brown, and
Leonard J. LeBlanc. The audit committee reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent accountants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the current members of our compensation committee is now or has ever
been one of our officers or employees. None of our executive officers currently
serves, or in the past has served, as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our board or compensation committee. Prior to the formation of the
compensation committee, compensation decisions were made by our entire board of
directors.
DIRECTOR COMPENSATION
We do not currently compensate our directors in cash for their service as
members of the board of directors, although directors are eligible to be
reimbursed for expenses incurred in connection with attending board of directors
and committee meetings. During fiscal 2000, we granted an option to purchase
400,000 shares of our common stock to Ian Jenks and an option to purchase
100,000 shares of our common stock to David Spreng, each at an exercise price of
$2.50 per share. In July 2000, we granted an option to purchase 100,000 shares
of our common stock to Leonard J. LeBlanc at an exercise price of $5.00 per
share. In August 2000, we granted Terence P. Brown an option to purchase 100,000
shares of our common stock at an exercise price of $6.00 per share. Mr. Brown
declined to accept the option granted to him, and, as a result, it was canceled.
Each of these options vests 25% of the shares after one year and the remainder
of the shares on a monthly basis over the next three years. Our 2000 Equity
Incentive Plan also provides for the automatic grant of non-statutory stock
options to
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<PAGE>
nonemployee directors. For further information regarding the provisions of the
2000 Equity Incentive Plan, see "--Employee and Director Benefit Plans."
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
We believe that indemnification under our bylaws covers at least negligence
on the part of indemnified parties. Our bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in their capacity as an officer,
director, employee or other agent, regardless of whether the bylaws would permit
indemnification.
We intend to enter into agreements to indemnify our directors and executive
officers prior to completing this offering, in addition to the indemnification
provided for in our bylaws. These agreements, among other things, will provide
for indemnification for judgments, fines, settlement amounts and expenses,
including attorneys' fees incurred by the director, or executive officer in any
action or proceeding, including any action by or in our right, arising out of
the person's services as a director or executive officer, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
The limitation on liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty and
may reduce the likelihood of derivative litigation against our directors and
officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
EXECUTIVE COMPENSATION
The following table presents the compensation earned, awarded or paid for
services rendered to us in all capacities for the fiscal year ended June 30,
2000 by:
- our Chief Executive Officer;
- those persons who were, at June 30, 2000, our five other most highly
compensated executive officers; and
- our former Chief Executive Officer.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Joseph Y. Liu................................... $129,846 -- 5,600,000 --
Chief Executive Officer(1)
Alex Hsu........................................ $136,993 -- 1,840,000 --
President, Global Manufacturing Operations(2)
Haiguang Lu..................................... $129,404 -- -- $ 2,308(5)
Vice President, Manufacturing
Wei-Zhong Li.................................... $124,635 -- -- --
Chief Technology Officer
Qin Zhang....................................... $124,635 -- -- --
Vice President, Marketing(3)
Jingyu Xu....................................... $ 91,539 $13,500 1,000,000 $ 20,000(6)
Senior Vice President, Engineering
Derek Statham................................... $ 37,500 -- -- $ 80,000(7)
Former Chief Executive Officer(4)
</TABLE>
------------------------
(1) Joseph Y. Liu was hired in September 1999.
(2) Alex Hsu was hired in August 1999.
(3) Qin Zhang ceased to be an officer and employee in July 2000.
(4) Derek Statham served as Chief Executive Officer of Oplink from February 1999
until September 1999.
(5) Represents a cash payment in exchange for the cancellation of certain
personal vacation plans on behalf of Oplink.
(6) Represents a relocation allowance.
(7) Represents a severance payment in connection with his termination of
employment with Oplink.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information regarding the number and value of
stock options granted during the fiscal year ended June 30, 2000 to our Chief
Executive Officer and two of the other most highly compensated executive
officers set forth in the Summary Compensation Table above. The other three most
highly compensated executive officers and our former chief executive officer
were not granted stock options during fiscal year 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK APPRECIATION FOR OPTION
SECURITIES OPTIONS GRANTED EXERCISE TERM(3)
UNDERLYING TO EMPLOYEES PRICE PER EXPIRATION ----------------------------------------------
NAME OPTIONS GRANTED DURING PERIOD(1) SHARE(2) DATE 0% 5% 10%
---- --------------- ---------------- --------- ---------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph Y. Liu........ 5,600,000 33.3% $1.65 01/14/10 $52,360,000 $91,099,909 $150,534,536
Alex Hsu............. 1,600,000 9.5% $0.15 09/02/09 17,360,000 28,428,545 45,409,867
240,000 1.4% $1.50 01/14/10 2,280,000 3,940,282 6,487,480
Jingyu Xu............ 800,000 4.8% $0.15 12/07/09 8,680,000 14,214,273 22,704,934
200,000 1.2% $1.80 02/11/10 1,900,000 3,283,568 5,406,233
</TABLE>
------------------------
(1) The percentage of total options granted is based on an aggregate of
16,828,800 options granted by us during the fiscal year ended June 30, 2000,
to our employees.
(2) Options were granted with an exercise price per share equal to the fair
market value of our common stock on the date of grant, as determined by our
board of directors.
(3) The potential realizable value is based on the assumption that our common
stock appreciates at specified annual rates, compounded annually, from the
date of grant until the expiration of the ten-year term. These numbers are
calculated based on Securities and Exchange Commission requirements and do
not reflect our projections or estimates of future stock price growth.
Potential realizable values are computed by:
- multiplying the number of shares of common stock underlying each option
by an assumed initial public offering price of $15.00 per share;
- assuming that the aggregate stock value derived from that calculation
compounds at the annual specified rate shown in the table until the
expiration of the options; and
- subtracting from that result the aggregate option exercise price.
Actual gains, if any, on stock option exercises and common stock holdings
are dependent on the time of such exercise and the future performance of our
common stock.
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AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents information concerning option exercises by our
current and former Chief Executive Officer and five other most highly
compensated executive officers for the fiscal year ended June 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JUNE 30, 2000 AT JUNE 30, 2000(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Y. Liu......... 480,000 $ 5,274,000 170,000 5,430,000 $1,589,500 $50,770,500
Alex Hsu.............. 100,000 1,085,000 100,000 1,640,000 1,085,000 17,470,000
Wei-Zhong Li.......... 1,230,000 13,468,500 554,626 1,495,374 6,073,155 16,374,345
Haiguang Lu........... 1,200,000 13,140,000 213,434 1,306,566 2,337,102 14,306,898
Qin Zhang(2).......... 960,000 10,512,000 453,434 1,306,566 4,965,102 14,306,898
Jingyu Xu............. 116,662 1,265,783 15,926 867,412 172,797 9,081,420
Derek Statham......... 800,000 8,760,000 -- -- -- --
</TABLE>
------------------------
(1) There was no public trading market for our common stock as of June 30, 2000.
Accordingly, these values have been calculated on the basis of an assumed
initial public offering price of $11.00 per share, less the applicable
exercise price.
(2) Qin Zhang ceased to be an officer and an employee in July 2000.
EMPLOYEE AND DIRECTOR BENEFIT PLANS
1995 STOCK PLAN
Our 1995 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 1995 Stock Plan was adopted by our board of directors and
approved by our stockholders in September 1995.
As of July 31, 2000, a total of 76,832 shares of our common stock were
available for future grant under the 1995 Stock Plan. This amount includes
amounts returned to the 1995 Stock Plan. The 1995 Stock Plan has 6 million
shares of our common stock reserved for issuance, of which options to acquire
577,246 shares have been issued and are outstanding as of July 31, 2000 and a
total of 4,385,922 shares have been issued and are outstanding pursuant to the
exercise of options and stock purchase rights granted under the 1995 Stock Plan.
ADMINISTRATION. The 1995 Stock Plan is administered by our board of
directors or a committee consisting of members of our board of directors. The
administrator of our 1995 Stock Plan has the power to determine, among other
things:
- the fair market value of the common stock;
- the selection of the officers, consultants and employees to whom the
option and the stock purchase rights may from time to time be granted;
- whether and to what extent options and stock repurchase rights or any
combination thereof, are granted under such plan;
- the number of shares to be covered by each such award granted under such
plan;
- the form of agreement for use;
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<PAGE>
- the terms and conditions, not inconsistent with the terms of such plan,
including but not limited to the share price;
- the terms and restrictions applicable to stock purchase rights and the
restricted stock purchased by exercising such stock purchase rights; and
- any other determinations with respect to awards under such plan as the
administrator deems appropriate.
OPTIONS. The exercise price of all incentive stock options granted under
the 1995 Stock Plan must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 1995 Stock Plan must be at
least equal to 85% of the fair market value of our common stock on the date of
grant. With respect to any participant who owns stock representing more than 10%
of the voting power of all classes of our outstanding capital stock, the
exercise price of any incentive stock option granted must be at least equal 110%
of the fair market value on the grant date and the term of the incentive stock
option may not exceed five years. The term of all other options granted under
the 1995 Stock Plan may not exceed 10 years.
During any fiscal year, incentive stock options exercised by each optionee
may not exceed $100,000, and any excess of such value shall be treated as
nonstatutory stock option.
Options granted under the 1995 Stock Plan must generally be exercised within
ninety (90) days after the end of the optionee's status as an employee, director
or consultant of ours, within 12 months after the optionee's termination by
death or within 6 months after the optionee's termination by disability, but in
no event later than the expiration of the option's term.
TRANSFERABILITY OF OPTIONS. Options and stock purchase rights granted under
the 1995 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
STOCK PURCHASE RIGHTS. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
CHANGES OF CONTROL. The 1995 Stock Plan provides that in the event of a
change of control of our company, including our merger with or into another
corporation, each outstanding option and stock purchase right shall be assumed
or an equivalent option shall be substituted for by the successor corporation.
If the outstanding options and stock purchase rights are not assumed or
substituted for by the successor corporation, the option will terminate
immediately prior to the consummation of the transaction.
AMENDMENT AND TERMINATION OF THE 1995 STOCK PLAN. The board of directors
will have the authority to amend, suspend or terminate the 1995 Stock Plan, as
long as this action does not affect any shares of common stock previously issued
and sold or any option previously granted under the 1995 Stock Plan. Unless
earlier terminated, the 1995 Stock Plan will terminate automatically 10 years
from the date of obtaining stockholder approval of the amended plan in
September 1995. The board has agreed not to make any further grants under the
1995 Stock Option Plan upon the closing of this offering.
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<PAGE>
1998 STOCK PLAN
Our 1998 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 1998 Stock Plan was adopted by our board of directors and
approved by our stockholders in January 1998.
As of July 31, 2000, a total of 3,178,346 shares of our common stock were
available for future grant under the 1998 Stock Plan. This amount includes
amounts returned to the 1998 Stock Plan, and the increases approved by the Board
of Directors. The 1998 Stock Plan has 33.8 million shares of our common stock
reserved for issuance, of which options to acquire 21,786,498 shares have been
issued and are outstanding as of July 31, 2000 and a total of 8,835,156 shares
have been issued and are outstanding pursuant to the exercise of options and
stock purchase rights granted under the 1998 Stock Plan. On August 18, 2000, the
Board of Directors approved an increase of 3,800,000 shares to the number of
shares of common stock reserved for issuance under the 1998 Stock Plan.
ADMINISTRATION. The 1998 Stock Plan is administered by our board of
directors or a committee consisting of our board of directors. The administrator
of our 1998 Stock Plan has the power to determine, among other things:
- the fair market value of the common stock;
- the selection of the officers, consultants and employees to whom the
option and the stock purchase rights may from time to time be granted;
- whether and to what extent options and stock repurchase rights or any
combination thereof, are granted under such plan;
- the number of shares to be covered by each such award granted under such
plan;
- the form of agreement for use;
- the terms and conditions, that are not inconsistent with the terms of such
plan, including but not limited to the share price;
- the terms and restrictions applicable to stock purchase rights and the
restricted stock purchased by exercising such stock purchase rights; and
- any other determinations with respect to awards under such plan as the
administrator deems appropriate.
OPTIONS. The exercise price of all incentive stock options granted under
the 1998 Stock Plan must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 1998 Stock Plan must be at
least equal to 85% of the fair market value of our common stock on the date of
grant. With respect to any participant who owns stock representing more than 10%
of the voting power of all classes of our outstanding capital stock, the
exercise price of any incentive stock option granted must be at least equal 110%
of the fair market value on the grant date and the term of the incentive stock
option may not exceed five years. The term of all other options granted under
the 1998 Stock Plan may not exceed 10 years.
During any fiscal year, incentive stock options exercised by each optionee
may not exceed $100,000, and any excess of such value shall be treated as
nonstatutory stock option.
Options granted under the 1998 Stock Plan must generally be exercised within
ninety (90) days after the end of the optionee's status as an employee, director
or consultant of ours, within 12 months after the optionee's termination by
death or within 6 months after the optionee's termination by disability, but in
no event later than the expiration of the option's term.
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<PAGE>
TRANSFERABILITY OF OPTIONS. Options and stock purchase rights granted under
the 1998 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
STOCK PURCHASE RIGHTS. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
CHANGES OF CONTROL. The 1998 Stock Plan provides that in the event of a
change of control of our company, including our merger with or into another
corporation, each option and stock purchase right shall be assumed or an
equivalent option shall be substituted for by the successor corporation. If the
outstanding options and stock purchase rights are not assumed or substituted for
by the successor corporation, the option will terminate immediately prior to the
consummation of the transaction.
AMENDMENT AND TERMINATION OF THE 1998 STOCK PLAN. The board of directors
will have the authority to amend, suspend or terminate the 1998 Stock Plan, as
long as this action does not affect any shares of common stock previously issued
and sold or any option previously granted under the 1998 Stock Plan. Unless
earlier terminated, the 1998 Stock Plan will terminate automatically 10 years
from the date of obtaining stockholder approval of the amended plan in
August 1999. The board has agreed not to make any further grants under the 1998
Stock Plan upon completion of this offering.
2000 EQUITY INCENTIVE PLAN
Our 2000 Equity Incentive Plan provides for the grant of stock awards to
employees, directors and consultants. These stock awards include incentive stock
options to employees, including officers and employee directors, and
nonstatutory stock options, stock bonuses and stock purchase rights to
employees, directors and consultants. The 2000 Equity Incentive Plan was adopted
by our board of directors in July 2000 and was approved by our stockholders in
September 2000. The 2000 Equity Incentive Plan will take effect on the effective
date of the initial public offering.
ADMINISTRATION. The 2000 Equity Incentive Plan will be administered by our
board of directors or a committee consisting of members of our board of
directors. The administrator of our 2000 Equity Incentive Plan will have the
power to determine with respect to stock awards granted under the plan, among
other things:
- the selection of the officers, consultants, employees and directors to
whom the stock awards may from time to time be granted;
- whether and to what extent options and stock repurchase rights or any
combination thereof, are granted under such plan;
- the number of shares to be covered by each such award granted under such
plan;
- the form of agreement for use;
- the terms and conditions of stock awards that are not inconsistent with
the terms of such plan, including but not limited to the exercise price
for options granted under the plan;
- the terms and restrictions applicable to stock purchase rights and the
restricted stock purchased by exercising such stock purchase rights; and
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<PAGE>
- any other determinations with respect to stock awards under such plan as
the administrator deems appropriate.
OPTIONS. The exercise price of all incentive stock options granted under
the 2000 Equity Incentive Plan must be at least equal to the fair market value
of the common stock on the date of grant. The exercise price of nonstatutory
stock options and stock purchase rights granted under the 2000 Equity Incentive
Plan will be determined by the administrator, but must be at least equal to 85%
of the fair market value of our common stock on the date of grant. With respect
to any participant who owns stock representing more than 10% of the voting power
of all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal 110% of the fair market
value on the grant date and the term of the incentive stock option must not
exceed five years. The term of all other options granted under the 2000 Equity
Incentive Plan may not exceed 10 years.
During any fiscal year, incentive stock options exercised by each optionee
may not exceed $100,000, any excess of such value shall be treated as
nonstatutory stock option.
Options granted under the 2000 Equity Incentive Plan must generally be
exercised within ninety (90) days after the end of the optionee's status as an
employee, director or consultant of ours, or within 12 months after the
optionee's termination by reason of his or her disability or within 18 months
after the optionee's termination by reason of his or her death, but in no event
later than the expiration of the option's term.
Acceptable consideration for the purchase of common stock issued under the
2000 plan will be determined by the board of directors and may include cash,
common stock previously owned by the optionee, a deferred payment arrangement
and other legal consideration approved by the board.
SECTION 162(M) LIMIT. Section 162(m) of the Internal Revenue Code of 1986
denies an income tax deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1 million, unless the compensation constitutes
"performance-based compensation." In order to ensure that option grants under
the 2000 Equity Incentive Plan constitute "performance-based compensation," no
person may be granted options under the 2000 Equity Incentive Plan covering more
than 5,000,000 shares of common stock in any calendar year. Under its general
authority to grant options, the board of directors has the implicit authority to
reprice outstanding options or to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. Both the original and new options will count toward the Section 162(m)
limitation.
STOCK PURCHASE RIGHTS. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement will be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
RESTRICTIONS ON TRANSFERABILITY OF STOCK AWARDS. Except as otherwise
provided in a stock award, options and stock purchase rights granted under the
2000 Equity Incentive Plan are generally not transferable by the optionee, and
each option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
CHANGES OF CONTROL. The 2000 Equity Incentive Plan provides that in the
event of a change in control of Oplink including our merger with or into another
corporation, or a sale of substantially all of our assets, each stock award
shall be assumed or an equivalent stock award substituted for by the successor
corporation. If the outstanding stock awards are not assumed or substituted for
by the
59
<PAGE>
successor corporation, then the vesting of such stock awards shall accelerate
immediately prior to the consummation of the transaction and will terminate with
the consummation of the transaction.
AUTHORIZED SHARES. When the 2000 Equity Incentive Plan takes effect, it
will have a total of 20,000,000 shares of our common stock reserved for issuance
under the plan. No options, stock bonuses or stock purchase rights have been
granted under the plan. On each January 1 beginning on January 1, 2001, and
ending January 1, 2010, this reserve will automatically be increased by the
greater of the total number of shares of common stock for which stock options,
stock bonuses and stock purchase rights were granted in the preceding calendar
year, or 5.0% of the total outstanding common stock on that date on a fully
diluted basis; provided, that the board may designate a smaller number of shares
by which the reserve will increase on a particular date. Shares of common stock
which are covered by a stock option granted under the plan which has expired or
terminated without having been exercised will be added to the above reserve of
the plan. Over the ten-year term of the 2000 Equity Incentive Plan, no more than
50,000,000 shares may be reserved for issuance pursuant to the exercise of
incentive stock options.
AMENDMENT AND TERMINATION OF THE 2000 EQUITY INCENTIVE PLAN. The board will
have the authority to amend, suspend or terminate the 2000 Equity Incentive
Plan, as long as this action does not affect any shares of common stock
previously issued and sold or any option previously granted under the 2000
Equity Incentive Plan. Unless earlier terminated, the 2000 Equity Incentive Plan
will terminate automatically one day prior to the tenth anniversary of the date
of the adoption of the plan by the board.
2000 NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS
The 2000 Equity Incentive Plan provides for the automatic grant of
nonstatutory stock options to purchase shares of common stock to our
non-employee directors.
AUTOMATIC GRANTS. Upon the completion of this offering, beginning 2001, on
the day after our annual stockholders' meeting, any person who is then a
non-employee director and who is elected at such annual meeting will
automatically be granted an option to purchase 72,000 shares of common stock.
These grants will vest over a three-year period and will vest on a monthly
basis. Any non-employee director who is elected or appointed to the board during
a three-year term will automatically be granted an option to purchase a pro rata
portion of shares based on the number of months remaining in the term.
ADMINISTRATION. The board of directors will administer automatic option
grants to non-employee directors, unless and until it delegates administration
to a committee.
TERMS OF OPTIONS. Options granted to non-employee directors will generally
be subject to the following terms:
- the exercise price of options granted will be equal to the fair market
value of our common stock on the date of grant;
- no option granted may be exercised after the expiration of 10 years from
the date it was granted;
- options granted will not be transferable other than by will or by the laws
of descent and distribution and will be exercisable during the life of the
optionee only by the optionee;
- an optionee may designate a beneficiary, who may exercise the option
following the optionee's death; and
- an optionee whose service relationship with us or any of our affiliates,
whether as a non-employee director of the company or subsequently as an
employee, director or consultant of
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either the company or one of our affiliates, ceases for any reason may
exercise vested options for the term provided in the option agreement,
which is generally 12 months, or 18 months in the event of the optionee's
death. However, an option may not be exercised after the expiration of its
term.
CHANGES OF CONTROL. The 2000 Equity Incentive Plan will provide that in the
event of a change of control of our company, including our merger with or into
another corporation, or a sale of substantially all of our assets, each option
held by a non-employee director granted under the automatic grant provisions of
the 2000 Equity Incentive Plan shall immediately vest in full.
2000 EMPLOYEE STOCK PURCHASE PLAN
In July 2000, our board of directors adopted the 2000 Employee Stock
Purchase Plan which authorizes the issuance of shares of our common stock
pursuant to purchase rights granted to our employees or to employees of any of
our affiliates. We expect that the 2000 purchase plan will be approved by our
stockholders in September 2000. The purchase plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code. The
purchase plan provides a means by which employees may purchase our common stock
through payroll deductions. As of the date hereof, no shares of common stock
have been purchased under the purchase plan.
ADMINISTRATION. The purchase plan is administered by the board of
directors. The board of directors may delegate authority to administer the
purchase plan to a committee. Subject to the terms of the plan, the board of
directors or its authorized committee, determines when and how rights to
purchase shares will be granted and the provisions of each offering of rights.
Under the plan, we may specify offerings with a duration of not more than 27
months, and may specify shorter purchase periods within each offering. The first
offering will begin on the effective date of this offering and be approximately
26 months in duration, with purchases occurring every six months. Unless
otherwise determined by the board of directors, common stock is purchased for
accounts of employees participating in the purchase plan at a price per share
equal to the lower of:
- 85% of the fair market value of a share of our common stock on the date of
commencement of participation in the offering; or
- 85% of the fair market value of a share of our common stock on the date of
purchase.
ELIGIBILITY. The purchase plan is implemented by offerings of rights to
eligible employees. Generally, all regular employees, including executive
officers, who work at least 20 hours per week and are customarily employed by us
or by one of our affiliates for at least five months per calendar year may
participate in the purchase plan and may authorize payroll deductions of up to
20% of their earnings for the purchase of stock under the purchase plan.
Eligible employees may be granted rights only if the rights, together with any
other rights granted under all employee stock purchase plans, do not permit such
employee's rights to purchase our stock to accrue at a rate which exceeds
$25,000 of the fair market value of such stock for each calendar year in which
such rights are outstanding. No employee shall be eligible for the grant of any
rights under the purchase plan if immediately after such rights are granted,
such employee has voting power over 5% or more of our outstanding capital stock
measured by vote or value.
CHANGES OF CONTROL. The purchase plan provides that in the event of a
change of control of our company, including our merger with or into another
corporation, or a sale of substantially all of our assets as described in the
plan, the surviving entity may assume or substitute for rights outstanding under
the purchase plan. If the surviving entity does not assume or substitute for
outstanding rights, then the board of directors has discretion to cause:
- the rights to continue in full force and effect; or
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- a participant's accumulated payroll deductions to be used to purchase
shares, immediately prior to the change in control, and their outstanding
rights thereafter to be terminated.
AUTHORIZED SHARES. The purchase plan initially authorizes the issuance of
4,000,000 shares of common stock under the purchase plan which amount will be
increased each January 1, beginning January 1, 2001, and ending January 1, 2010,
by the greater of the total number of shares issued under the plan during the
preceding calendar year or 1.5% of the number of shares of common stock
outstanding on that date. However, the board of directors has the authority to
designate a smaller number of shares by which the authorized number of shares of
common stock will be increased on that date. A maximum of 20,000,000 shares may
be issued during the term of the purchase plan.
AMENDMENT AND TERMINATION OF THE PLAN. The board has the authority to
amend, suspend or terminate the purchase plan. Unless earlier terminated, the
purchase plan will terminate automatically one day prior to the tenth
anniversary of the date of the adoption of the plan by the Board.
401(k) PLAN
In January 1997, we adopted the Oplink Communications, Inc. 401(k) Profit
Sharing Plan, which covers all of our eligible employees who have completed one
month of service and are at least 21 years old. The 401(k) Plan excludes from
participation all collectively bargained and non-resident alien employees. The
401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue
Code of 1986 and the 401(k) Plan trust is intended to qualify under Section
501(a) of the Internal Revenue Code. All contributions to the 401(k) Plan by
eligible employees or by us, and the investment earnings thereon are not taxable
to such employees until withdrawn, and any contributions we may make are
expected to be deductible by us when made. Our eligible employees may elect to
reduce their eligible compensation by up to 15%, subject to statutorily
prescribed limits, and to have such compensation reductions contributed on their
behalf to the 401(k) Plan. The 401(k) Plan permits, but does not require, us to
make matching contributions to the 401(k) Plan. To date, we have not made any
matching contributions.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below,
since July 1, 1997, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
INVESTOR RIGHTS AGREEMENT
We have entered into an agreement with Cisco Systems and the holders of our
preferred stock, including entities with which our directors are affiliated,
that provides these stockholders certain rights relating to the registration of
their shares of common stock issuable upon conversion of the preferred stock.
The preferred stock will convert to common stock on a one-to-one ratio
immediately prior to this offering. The weighted average price of the preferred
stock is $0.53. These registration rights do not apply to this offering, but
will survive this offering and will terminate no later than eight years after
the closing date of this offering. This agreement also entitles some of the
holders of our preferred stock to rights to receive financial information
regarding us and a right of first refusal to purchase shares of our stock we
issue, both of which rights terminate upon the closing of this offering.
INDEMNIFICATION AGREEMENTS
We expect to enter into indemnification agreements with each of our
directors and executive officers prior to completing this offering. These
indemnification agreements and our certificate of incorporation and bylaws
require us to indemnify our directors and executive officers to the fullest
extent permitted by Delaware law. Please see "Management--Limitations on
Directors' Liability and Indemnification."
EMPLOYMENT AGREEMENTS, OFFICER LOANS AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into an employment agreement with Frederick R. Fromm, our
President. Under the terms of the agreement, Mr. Fromm is entitled to an annual
salary of $250,000, a $1 million supplemental life insurance policy in favor of
Mr. Fromm's designee and a relocation bonus of $50,000.
Mr. Fromm received an option to purchase 1,600,000 shares of our common
stock. The option is subject to the following vesting schedule: 25% of the
shares shall vest one year after the start of his employment at Oplink with the
balance vesting equally on a monthly basis thereafter. In the event of a change
of control within the first year of his employment, the higher of 25% of the
shares, or shares having a value of $10 million, shall immediately vest. In the
event of termination without cause within the first year of his employment, the
higher of 12.5% of the shares, or shares having a value of $5 million, shall
immediately vest. Mr. Fromm also has the right to purchase up to 50,000 shares
of our common stock at the then current fair market value under the 2000 Equity
Incentive Plan for each year of his employment.
In July 2000, we loaned Mr. Fromm an aggregate principal amount of $400,000.
The loan accrues interest at the rate of 6.5% per annum. The outstanding
principal and any accrued and unpaid interest is due and payable in two equal
installments on July 2002 and July 2004.
We have entered into change of control arrangements with three of our
directors, Ian Jenks, Leonard J. LeBlanc and David Spreng, that provide for full
acceleration of all unvested options in the event of a change of control. In
September 2000, we entered into change of control agreements with
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Joseph Y. Liu, our Chief Executive Officer, and Bruce Horn, our Chief Financial
Officer, that provide for full acceleration of all unvested options in the event
of a change of control if Mr. Liu or Mr. Horn is involuntarily terminated
without cause or voluntary terminates his employment for good reason one month
prior to or 13 months after a change in control. The form of option grant notice
for automatic grants to non-employee directors under our 2000 Equity Incentive
Plan also provides for full acceleration of all unvested options in the event of
a change of control for all such grants following the closing of this offering.
We have entered into an agreement with Jeff Friedman, our Associate General
Counsel, that provides for acceleration of 1/48th of his total options for each
month he is employed with the Company during his first year of employment and an
additional 25% of his total options if Mr. Friedman is terminated without cause
following a change of control.
We have also entered into an agreement with Daryl J. Eigen, our Vice
President of Sales and Marketing, that provides for acceleration of 25% of the
unvested options if Mr. Eigen is terminated without cause following a change of
control which occurs prior to August 28, 2001.
STOCK SALES
The following executive officers, directors and holders of more than 5%
percent of our capital stock purchased shares of our stock in the amounts set
forth below during the last three fiscal years.
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON ----------------------------------------------
STOCK SERIES B SERIES C SERIES D SERIES E
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Joseph Y. Liu.......................... 480,000 -- -- -- --
Alex Hsu............................... 100,000 -- -- -- --
Wei-Zhong Li........................... 1,230,000 -- -- -- --
Haiguang Lu............................ 1,200,000 -- -- -- --
Qin Zhang (1).......................... 960,000 -- -- -- --
Jingyu Xu.............................. 116,662 -- -- -- --
Chieh Chang (2)........................ -- 812,736 -- 366,664 --
Herbert Chang (3)...................... -- 14,444,448 3,000,000 3,973,360 2,500,000
David Spreng (4)....................... -- -- -- -- 7,500,000
5% STOCKHOLDERS
The InveStar Entities (3).............. -- 14,444,448 3,000,000 3,973,360 2,500,000
Hui Chuan and H.S. Liu (5)............. -- 7,033,336 1,000,000 -- --
Chao-Jung and Chen Hwa Chang (6)....... -- -- -- 520,000 61,000
Yi Hou and Zhimin Liu.................. 8,225,280 -- -- -- --
The Crescendo Entities (4)............. -- -- -- -- 7,500,000
</TABLE>
------------------------
(1) Qin Zhang ceased to be an officer and an employee in July 2000.
(2) Consists entirely of shares held in the Chieh and Lily Chang Trust, for
which Mr. Chang is a trustee.
(3) Consists of 14,444,448 shares of Series B Preferred Stock and 1,000,000
shares of Series E Preferred Stock held by InveStar Burgeon Venture
Capital, Inc.; 1,000,000 shares of Series C Preferred Stock, 2,648,896
shares of Series D Preferred Stock and 1,000,000 shares of Series E
Preferred Stock held by InveStar Excelsus Venture Capital (Int'l), Inc.,
LDC; 1,000,000 shares of Series C Preferred Stock and 250,000 shares of
Series E Preferred Stock held by InveStar Dayspring Venture Capital, Inc.;
and 1,000,000 shares of Series C Preferred Stock, 1,324,464 shares of
Series D Preferred Stock and 250,000 shares of Series E Preferred Stock held
by Forefront Venture Partners, L.P. Mr. Herbert Chang, one of our directors,
is the Managing Partner of Forefront Venture Partners, L.P. and the
President of InveStar Burgeon Venture Capital, Inc., InveStar Dayspring
Venture Capital, Inc. and InveStar Excelsus Venture Capital (Int'l), Inc.,
LDC.
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Mr. Chang disclaims beneficial ownership of these shares except to the
extent of his pecuniary or partnership interests.
(4) Consists of 7,140,692 shares held by Crescendo III, L.P., 212,078 shares
held by Crescendo III Executive Fund, L.P., and 147,232 shares held by
Crescendo III, GbR. Mr. Spreng, one of our directors, is the managing member
of Crescendo Venture Management, LLC. Mr. Spreng disclaims beneficial
ownership of the shares held by the Crescendo Entities.
(5) Hui Chuan and H.S. Liu are the parents of Joseph Y. Liu, our Chief Executive
Officer and director.
(6) Chao-Jung and Chen Hwa Chang are the parents-in-law of Joseph Y. Liu, our
Chief Executive Officer and director.
We have also issued 5,000,000 shares of Series E Preferred Stock to
WorldView Technology Partners.
RECENT OPTION GRANTS
On July 12, 2000, we granted an option to purchase 100,000 shares of common
stock to Leonard J. LeBlanc, a member of our board of directors, at an exercise
price of $5.00 per share. Additionally, on July 12, 2000, we granted an option
to purchase 100,000 shares of common stock to Edward Labuda, the Chairman of our
scientific advisory board and our former director, also at an exercise price of
$5.00 per share. On August 10, 2000, we granted an option to purchase 1,600,000
shares of common stock to Frederick R. Fromm, our President, at an exercise
price of $5.25 per share. On August 18, 2000, we granted options to purchase
200,000 shares of common stock to Jeff Friedman, our Associate General Counsel,
and 100,000 shares of common stock to Terence P. Brown, a member of our board of
directors, each at an exercise price of $6.00 per share. Mr. Brown declined to
accept the option granted to him, and, as a result, it was canceled. On
August 28, 2000, we granted an option to purchase 600,000 shares of common stock
to Daryl J. Eigen, our Vice President of Sales and Marketing, at an exercise
price of $6.25 per share.
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. Our policy is to require that a majority of the independent and
disinterested outside directors on our board of directors approve all future
transactions between us and our officers, directors, principal stockholders and
their affiliates. These transactions will continue to be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
CISCO SYSTEMS
In August 2000, we issued a promissory note in the amount of $50.0 million
to Cisco Systems, one of our largest customers for the quarter ended June 30,
2000. Mr. Terence P. Brown, a member of our board of directors, is Vice
President and General Manager of the Optical Transport Business Unit at Cisco
Systems. The note will convert automatically into shares of common stock upon
the closing of this offering. In connection with the issuance of the note, Cisco
Systems became a party to our Third Amended and Restated Rights Agreement, and
is thereby entitled to registration rights with respect to the shares of common
stock issuable upon conversion of the note.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 31, 2000, and as adjusted to reflect
the sale of common stock offered by this prospectus, by:
- each of the individuals listed in the "Summary Compensation Table;"
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially 5% or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each stockholder named
in the table has sole voting and investment power with respect to the shares
shown as beneficially owned by them. This table assumes conversion of all of our
outstanding preferred stock upon completion of this offering and also includes
shares owned by a spouse as community property. Percentage of ownership is based
on 136,764,422 shares of common stock outstanding on July 31, 2000 and
154,414,354 shares of common stock outstanding after completion of this
offering, without giving effect to the exercise of the underwriters'
over-allotment option. Unless otherwise indicated, the address of each of the
individuals named below is: c/o Oplink Communications, Inc., 3469 North First
Street, San Jose, California 95134.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Joseph Y. Liu (1)........................................... 1,879,992 1.4% 1.2%
Wei-Zhong Li (2)............................................ 1,978,327 1.4 1.3
Haiguang Lu (3)............................................. 1,556,654 1.1 1.0
Qin Zhang(4)................................................ 1,426,656 1.0 *
Derek Statham(5)............................................ 800,000 * *
Alex Hsu (6)................................................ 433,329 * *
Jingyu Xu (7)............................................... 166,660 * *
Herbert Chang (8)........................................... 24,397,808 17.8 15.8
David Spreng (9)............................................ 7,500,000 5.5 4.9
Chieh Chang (10)............................................ 5,979,400 4.4 3.9
Ian Jenks................................................... -- * *
Terence P. Brown............................................ -- * *
Leonard J. LeBlanc.......................................... -- * *
All current directors and executive officers as a group
(15 persons)(11).......................................... 43,892,170 31.9 28.4
5% STOCKHOLDERS
The InveStar Entities (12).................................. 23,917,808 17.5 15.5
Chao-Jung and Chen Hwa Chang................................ 14,081,000 10.3 9.0
Hui-Chuan and H.S. Liu...................................... 12,533,336 9.2 8.0
Yi Hou and Zhimin Liu....................................... 8,225,280 6.0 5.3
The Crescendo Entities (9).................................. 7,500,000 5.5 4.9
</TABLE>
------------------------
* Represents less than 1%.
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(1) Includes 1,399,992 shares issuable upon the exercise of options that will
be exercisable within 60 days of July 31, 2000, subject to our right to
repurchase such shares based on the vesting schedule. Of the options to
purchase the 1,399,992 shares, Mr. Liu transferred an undivided one-half
tenancy in common interest in the options to purchase 1,339,386 shares to
his spouse, Emmy Y. Liu, and an undivided one-half tenancy in common
interest in the options to purchase 1,339,386 shares to family trusts for
the benefit of Mr. Liu and his family members of which Mr. Liu is the
trustee. Mrs. Liu and the family trusts accepted such interests in the
options subject to the original terms of the options.
(2) Includes 748,327 shares issuable upon the exercise of options that will be
exercisable within 60 days of July 31, 2000.
(3) Includes 129,990 shares issuable upon the exercise of options that will be
exercisable within 60 days of July 31, 2000.
(4) Qin Zhang ceased to be an officer and employee in July 2000.
(5) Derek Statham ceased to be an officer and employee in September 1999.
(6) Includes 233,329 shares issuable upon the exercise of options that will be
exercisable within 60 days of July 31, 2000.
(7) Includes 49,998 shares issuable upon the exercise of options that will be
exercisable within 60 days of July 31, 2000.
(8) Consists of 480,000 shares issuable upon the exercise of options that will
become exercisable within 60 days of July 31, 2000 and 23,917,808 shares
held by the InveStar Entities. Herbert Chang, one of our directors, is the
Managing Partner of Forefront Venture Partners, L.P. and the President of
InveStar Burgeon Venture Capital, Inc., InveStar Dayspring Venture Capital,
Inc. and InveStar Excelsus Venture Capital (Int'l), Inc., LDC. Mr. Chang
has voting and investment control over the shares. Mr. Chang disclaims
beneficial ownership of the shares held by the InveStar Entities, except to
the extent of his pecuniary or partnership interests.
(9) Consists of 7,140,690 shares held by Crescendo III, L.P., 212,078 shares
held by Crescendo III Executive Fund, L.P., and 147,232 shares held by
Crescendo III, GbR. David Spreng, one of our directors, is the managing
member of Crescendo Venture Management, LLC. Jeffrey Tollefson and Anthony
Daffer, general partners of the Crescendo Entities, and Mr. Spreng have
voting and investment control over the shares. Messrs. Tollefson, Daffer
and Spreng each disclaim beneficial ownership of the shares held by the
Crescendo Entities, except to the extent of his pecuniary or partnership
interests. The address for the Crescendo Entities is 480 Copper Street,
Suite 300, Palo Alto, CA 94301.
(10) Includes 5,179,400 shares issuable upon conversion of preferred stock held
in the Chieh and Lily Chang Trust, for which Mr. and Mrs. Chang serve as
trustees.
(11) Includes 3,041,636 shares issuable upon the exercise of options that will
be exercisable within 60 days of July 31, 2000.
(12) Consists of 15,444,448 shares held by InveStar Burgeon Venture Capital,
Inc., 4,648,896 shares held by InveStar Excelsus Venture Capital
(Int'l), Inc., LDC, 1,250,000 shares held by InveStar Dayspring Venture
Capital, Inc. and 2,574,464 shares held by Forefront Venture Partners,
L.P. The address for the InveStar Entities is 3600 Pruneridge Avenue,
Suite 300 Santa Clara, CA 95051.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 400 million shares of common stock, $0.001 par value, and 20 million shares
of undesignated preferred stock, $0.001 par value. The following description of
our capital stock does not purport to be complete and is subject to, and
qualified in its entirety by, our certificate of incorporation and bylaws, which
we have included as exhibits to the registration statement of which this
prospectus forms a part.
COMMON STOCK
As of July 31, 2000, there were 136,764,422 shares of common stock
outstanding, held of record by 154 stockholders. This amount assumes the
conversion of all outstanding shares of preferred stock into common stock, which
is to occur upon the closing of this offering. In addition, as of July 31, 2000,
there were 22,363,744 shares of common stock subject to outstanding options and
warrants to purchase 268,904 shares of common stock and 80,000 shares of
Series C preferred stock. Upon completion of this offering, there will be
154,414,354 shares of common stock outstanding, assuming conversion into common
stock of the promissory note issued to Cisco Systems based on a public offering
price of $15.00 per share, and assuming no exercise of outstanding stock options
or warrants or the underwriters' over-allotment option.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
See "Dividend Policy." In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common stock
to be issued upon the closing of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
All of our outstanding shares of convertible preferred stock will convert
into shares of common stock on a one-to-one basis immediately prior to
completion of this offering. Following the completion of this offering, our
board of directors will have the authority, without any further action by our
stockholders, to designate and issue up to 20 million shares of preferred stock
in one or more series and to designate the rights, preferences and privileges of
each series, any or all of which may be greater than the rights of the common
stock. The effect of the issuance of any shares of preferred stock upon the
rights of holders of the common stock might include, among other things,
restricting dividends on the common stock, diluting the voting power of the
common stock, impairing the liquidation rights of the common stock and delaying
or preventing a change in control of Oplink without further action by the
stockholders. We have no present plans to issue any shares of preferred stock.
WARRANTS
At July 31, 2000, there were outstanding warrants to purchase a total of
268,904 shares of common stock and 80,000 shares of Series C preferred stock.
The warrants to purchase common stock and Series C preferred stock will expire
in January 2002 and March 2003, respectively, unless earlier exercised. Upon
completion of this offering, the Series C preferred stock warrant will become
exercisable for shares of common stock.
REGISTRATION RIGHTS
The holders of 115,489,616 shares of common stock, as converted, and the
holder of a warrant to purchase 80,000 shares of common stock, as converted, or
their permitted transferees are entitled to
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certain rights with respect to registration of the shares under the Securities
Act at any time after 180 days following the closing of this offering. Under the
terms of the agreements between us and the holders of the registrable
securities, upon the written request from holders of of at least 30% of the
registrable securities then outstanding, the holders may require on two
occasions that we, at our expense, file a registration statement under the
Securities Act, with respect to the registrable securities, provided that at
least 30% of the registrable securities then outstanding would be included in
the proposed registration or the anticipated public offering price of the
proposed registration would exceed $10 million. In addition, any holder of the
registrable securities then outstanding may at our expense require that we
register their shares for public resale on Form S-3 or similar short-form
registration, provided that we are eligible to use Form S-3 or similar
short-form registration, and provided further that the value of the securities
to be registered is at least $500,000. Furthermore, in the event we elect to
register any of our shares of common stock after this offering for purposes of
effecting any public offering, the holders of registrable securities are
entitled, at our expense, to include their shares of common stock in the
registration, subject to the right of the underwriters to reduce the number of
shares proposed to be registered in view of market conditions.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise and the removal of incumbent directors. These
provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
DELAWARE LAW. We are subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless, with exceptions, the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder, and an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years prior to the determination of interested stockholder
status, did own 15% or more of a corporation's voting stock. The existence of
this provision would be expected to have an anti-takeover effect with respect to
transactions not approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
CERTIFICATE OF INCORPORATION AND BYLAWS PROVISIONS. Our certificate of
incorporation and bylaws require that any action required or permitted to be
taken by our stockholders must be effected at a duly called annual or special
meeting of the stockholders and may not be effected by a consent in writing. In
addition, special meetings of our stockholders may be called only by the board
of directors or certain of our officers. Our certificate of incorporation and
bylaws also provide that, beginning upon the closing of this offering, our board
of directors will be divided into three classes, with each class serving
staggered three-year terms, and that certain amendments of the certificate of
incorporation and of the bylaws require the approval of holders of at least
66.7% of the voting power of all outstanding stock. These provisions may have
the effect of deterring hostile takeovers or delaying changes in control or
management of Oplink.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Bank of New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
reduce market prices prevailing from time to time. Furthermore, since only a
limited number of shares will be available for sale shortly after this offering
because of contractual and legal restrictions on resale described below, sales
of substantial amounts of common stock in the public market after the
restrictions lapse could reduce the market price of our stock and our ability to
raise equity capital in the future.
Upon completion of the offering, we will have 154,414,354 shares of common
stock outstanding, assuming conversion into common stock of the promissory note
issued to Cisco Systems based on a public offering price of $15.00 per share,
and assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options and warrants and based upon the number of shares
outstanding as of July 31, 2000. Of these shares, the 13,700,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining shares held by existing stockholders, and any shares purchased by
affiliates in this offering, will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Our executive officers, directors
and stockholders holding at least five percent of our outstanding securities
will hold 75,690,150 shares of the restricted shares. Restricted shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act, which
are summarized below.
Subject to the operation of lock-up agreements described below, upon
completion of this offering, the holders of 115,489,616 shares of common stock,
or their transferees, will be entitled to certain rights to require the
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by our affiliates, immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
LOCK-UP AGREEMENTS
We, our officers, directors and stockholders holding approximately
130,212,260 shares of common stock have agreed that, for a period of 180 days
from the date of the final prospectus, we and they will not, subject to some
exceptions, transfer or otherwise dispose of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock. As
a result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144 and 701 of the Securities
Act discussed below, shares subject to these lock-up agreements may not be sold
until the shares are released from the agreements or the agreements expire or
unless prior written consent is received from Robertson Stephens, Inc. Any early
waiver of the lock-up agreements by the underwriters, which, if granted, could
permit sales of a substantial number of shares and could adversely affect the
trading price of our shares, may not be accompanied by an advance public
announcement by us.
RULE 144
In general, under Rule 144, beginning 90 days after the date of the final
prospectus, a person or persons whose shares are aggregated, who has
beneficially owned restricted shares for at least one year, including a person
who may be deemed our Rule 144 affiliate, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of our common stock then outstanding;
or
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- the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a notice on Form 144 with respect
to the proposed sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. We are unable to estimate accurately the number of restricted shares that
will be sold under Rule 144 because this will depend in part on the market price
of our common stock, the personal circumstances of the seller and other factors.
Under Rule 144(k), a person who is not deemed to have been our Rule 144
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the shares proposed to be sold, would
be entitled to sell those shares under Rule 144(k) without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Therefore, subject to the lock-up agreements, these shares may be sold
upon completion of this offering.
RULE 701
Beginning 90 days after the date of this prospectus as of July 31, 2000,
23,446,822 shares of common stock issuable upon exercise of the options granted
by us prior to the effective date of the registration statement will be eligible
for sale in the public market pursuant to Rule 701 under the Securities Act,
subject to the lock-up agreements. In general, Rule 701 permits resales of
shares issued under specified compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act in reliance upon Rule 144, but
without compliance with restrictions, including the holding period requirements,
contained in Rule 144.
REGISTRATION STATEMENTS ON FORM S-8
Following this offering, we intend to file under the Securities Act one or
more registration statements on Form S-8 to register all of the shares of our
common stock eligible for this form of registration statement:
- issuable upon exercise of outstanding options granted pursuant to our
stock option and equity incentive plans;
- reserved for future option grants pursuant to individual option agreements
or these plans; and
- that we intend to offer for sale to our employees pursuant to our employee
stock purchase plan.
These registration statements are expected to become effective upon filing.
Shares covered by these registration statements will be subject to vesting
provisions and subject to expiration of the lock-up agreements. In the case of
Rule 144 affiliates only, these shares will also remain subject to the
restrictions of Rule 144 other than the holding period requirement.
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UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our common stock by
non-U.S. holders. As used herein, "non-U.S. holder" means any person or entity
that holds our common stock, other than:
- an individual citizen or resident of the U.S.;
- a corporation or partnership created or organized in or under the laws of
the U.S., or of any state of the U.S. or the District of Columbia, other
than any partnership treated as foreign under U.S. Treasury Regulations;
- an estate the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source; or
- in general, a trust if a court within the U.S. may exercise primary
supervision over the administration of the trust and if one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
This summary is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, existing, temporary and proposed U.S. Treasury Regulations
promulgated thereunder and administrative and judicial interpretations of each,
all as of the date hereof and all of which are subject to change, possibly on a
retroactive basis. This summary is for general information only. It does not
address aspects of U.S. federal taxation other than income and estate taxation,
and does not address all aspects of U.S. federal income and estate taxation.
This summary does not discuss all the tax consequences that may be relevant to a
non-U.S. holder in light of the holder's particular circumstances, for instance,
insurance companies, tax-exempt organizations, broker-dealers, and financial
institutions. In addition, this summary does not address any state, local, or
foreign tax considerations that may be relevant to a non-U.S. holder's decision
to purchase shares of our common stock.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES, AS WELL AS OTHER
U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES, AND THE NON-U.S. TAX
CONSEQUENCES, TO THEM OF OWNING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
INCOME TAX
DIVIDENDS
Subject to the discussion below, dividends paid to a non-U.S. holder
generally will be subject to withholding of U.S. income tax at the rate of 30%
of the amount of the dividend, or such lower rate as may be prescribed by an
applicable income tax treaty.
However, if dividends we pay are effectively connected with a non-U.S.
holder's conduct of a trade or business in the U.S. and, if a tax treaty
applies, are attributable to a U.S. permanent establishment, or, if the holder
is an individual, a "fixed base" of the non-U.S. holder, the 30% withholding tax
generally will not apply, and the non-U.S. holder generally will be subject to
tax on such dividends on a net basis in the same manner as holders that are U.S.
persons, provided the non-U.S. holder files appropriate IRS forms with us. An
additional branch profits tax of 30%, or such lower rate as may be prescribed by
an applicable income tax treaty, may apply if the non-U.S. holder is a
corporation.
Under current U.S. Treasury Regulations, in determining whether a holder is
eligible for the benefits of an income tax treaty, dividends paid to an address
in a foreign country are presumed to be paid to a resident of that country,
absent knowledge to the contrary. However, under new U.S. Treasury Regulations
generally effective for dividend payments made after December 31, 2000, a
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non-U.S. holder desiring to claim the benefits of an applicable tax treaty must
satisfy certification and other requirements and must provide us with a taxpayer
identification number unless an exception applies. In addition, under these new
Treasury Regulations, in the case of common stock held by a foreign partnership,
this certification requirement may be applied to the partners, and not the
partnership, and the partnership must provide certain information, including a
U.S. taxpayer identification number. These new regulations also provide
look-through rules for tiered partnerships. A non-U.S. holder that is eligible
for a reduced rate of U.S. withholding tax pursuant to a tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
DISPOSITION OF OUR COMMON STOCK
Generally, non-U.S. holders will not be subject to U.S. federal income tax,
or withholding thereof, in respect of gain recognized on a disposition of our
common stock unless:
- the gain is effectively connected with the holder's conduct of a trade or
business within the U.S., or, if a tax treaty applies, is attributable to
a permanent establishment or fixed base of the holder in the U.S.; in any
such case such gain will be subject to regular graduated U.S. income tax
rates and the branch profits tax described above may also apply if the
non-U.S. holder is a corporation;
- in the case of a non-U.S. holder who is a non-resident alien individual
and holds our common stock as a capital asset, the holder is present in
the U.S. for 183 or more days in the taxable year of the sale and other
conditions are met;
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes and certain other conditions are met;
we do not believe we are or have been a United States real property
holding corporation and do not expect to become one in the future; or
- the holder is subject to tax pursuant to U.S. federal income tax
provisions applicable to certain U.S. expatriates.
ESTATE TAX
If an individual non-U.S. holder owns, or is treated as owning, our common
stock at the time of his or her death, such stock would be includable in the
individual's gross estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax imposed on the estates of nonresident aliens,
in the absence of a contrary provision contained in an applicable tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides or is
established.
Under current law, dividends paid on our common stock to a non-U.S. holder
at an address outside the U.S. are generally exempt from backup withholding tax,
imposed at a 31% rate, and U.S. information reporting requirements, but not from
regular withholding tax as discussed above. Backup withholding tax and
information reporting generally will apply to dividends paid to a non-U.S.
holder at an address in the U.S. if the holder fails to establish an exemption
or to furnish other information. Under the Treasury Regulations that are
applicable to dividends paid after December 31, 2000, a
73
<PAGE>
non-U.S. person must generally provide proper documentation establishing the
person's non-U.S. status to a withholding agent in order to avoid backup
withholding tax.
BROKER SALES
Payments of proceeds from the sale of our common stock by a non-U.S. holder
made to or through a U.S. office of a broker are generally subject to both
information reporting and backup withholding tax unless the holder certifies its
non-U.S. status under penalties of perjury or otherwise establishes entitlement
to an exemption. Payments of proceeds from the sale of our common stock by a
non-U.S. holder made to or through a non-U.S. office of a broker generally will
not be subject to information reporting or backup withholding. However, payments
made to or through certain non-U.S. offices, including the non-U.S. offices of a
U.S. broker and foreign brokers with certain types of relationships to the U.S.,
are generally subject to information reporting, but not backup withholding,
unless the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes entitlement to an exemption.
Backup withholding is not an additional tax. A non-U.S. holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing an appropriate claim for refund with the IRS.
Non-U.S. holders should consult their tax advisors regarding the application
of information reporting and backup withholding in their particular situation,
including the availability of an exemption from such requirements and the
procedures for obtaining such an exemption, as well as the effect of the new
Treasury Regulations generally effective for payments made after December 31,
2000.
74
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
Robertson Stephens, Inc., CIBC World Markets Corp., J.P.
Morgan Securities Inc. and UBS Warburg LLC, have severally agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us the number of shares of common stock set forth below opposite their
respective names. The underwriters are committed to purchase and pay for all
shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Robertson Stephens, Inc.....................................
CIBC World Markets Corp.....................................
J.P. Morgan Securities Inc..................................
UBS Warburg LLC.............................................
-------
Total...................................................
=======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any offer in whole or in part.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to
2,055,000 additional shares of common stock to cover over-allotments, if any, at
the public offering price less the underwriting discount set forth on the cover
page of this prospectus. If the underwriters exercise their over-allotment
option to purchase any of the 2,055,000 additional shares of common stock, the
underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares to be
purchased by each of them bears to the total number of shares of common stock
offered in this offering. If purchased, these additional shares will be sold by
the underwriters on the same terms as those on which the shares offered hereby
are being sold. We will be obligated, pursuant to the over-allotment option, to
sell shares to the underwriters to the extent the over-allotment option is
exercised. The underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.
75
<PAGE>
The following table shows the per share and total underwriting discounts and
commissions to be paid by us to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
NO EXERCISE OF
OVER- FULL EXERCISE OF
ALLOTMENT OVER-ALLOTMENT
-------------- ----------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $1,725,000.
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act of 1933, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers and directors and stockholders collectively
holding approximately 96.9% of our common stock have agreed, subject to
specified exceptions, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
common stock or any options or warrants to purchase any shares of common stock,
or any securities convertible into or exchangeable for shares of common stock
owned as of the date of this prospectus or thereafter acquired directly by those
holders or with respect to which they have the power of disposition, without the
prior written consent of Robertson Stephens, Inc. This restriction terminates
after the close of trading of the shares on the 180th day of (and including) the
day the shares commenced trading on the Nasdaq National Market. However,
Robertson Stephens, Inc. may, in its sole discretion and at any time or from
time to time before the termination of the 180-day period, without notice,
release all or any portion of the securities subject to lock-up agreements.
There are no existing agreements between the representatives and any of our
shareholders or optionholders who have executed a lock-up agreement providing
consent to the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of Robertson Stephens, Inc., subject to
certain exceptions, consent to the disposition of any shares held by
shareholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options under existing stock option and incentive
plans provided that those options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
LISTING
We have approval to list our common stock on the Nasdaq National Market
under the symbol "OPLK."
76
<PAGE>
SYNDICATE SHORT SALES
The representatives have advised us that, on behalf of the underwriters,
they may make short sales of our common stock in connection with this offering,
resulting in the sale by the underwriters of a greater number of shares than
they are required to purchase pursuant to the underwriting agreement. The short
position resulting from those short sales will be deemed a "covered" short
position to the extent that it does not exceed the 2,055,000 shares subject to
the underwriters' over-allotment option and will be deemed a "naked" short
position to the extent that it exceeds that number. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the trading price of the common stock in the open market
that could adversely affect investors who purchased shares in the offering. The
underwriters may reduce or close out their covered short position either by
exercising the over-allotment option or by purchasing shares in the open market.
In determining which of these alternatives to pursue, the underwriters will
consider the price at which shares are available for purchase in the open market
as compared to the price at which they may purchase shares through the
over-allotment option. Any "naked" short position will be closed out by
purchasing shares in the open market. Similar to the other stabilizing
transactions described below, open market purchases made by the underwriters to
cover all or a portion of their short position may have the effect of preventing
or retarding a decline in the market price of our common stock following this
offering. As a result, our common stock may trade at a price that is higher than
the price that otherwise might prevail in the open market.
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Exchange Act of 1934, they may engage in transactions, including
stabilizing bids or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "penalty bid" is an arrangement permitting the
representatives to claim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by that underwriter or syndicate member is purchased by
the representatives in the open market pursuant to a stabilizing bid or to cover
all or part of a syndicate short position. The representatives have advised us
that stabilizing bids and open market purchases may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any time.
DIRECTED SHARE PROGRAM
At our request, certain of the underwriters have reserved up to
five percent of the shares of common stock for sale in this offering at the
initial public offering price to our directors, officers and employees and
persons who are otherwise associated with us. The number of shares of common
stock available for sale to the general public will be reduced to the extent
these individuals purchase reserved shares. Any reserved shares which are not
purchased will be offered by the underwriters on the same basis as the other
shares of common stock offered in this offering. We have agreed to indemnify
these underwriters against various liabilities and expenses, including
liabilities under the Securities Act of 1933, in connection with the sales of
directed shares.
77
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters
will be passed upon for the underwriters by Latham & Watkins, Los Angeles,
California. Cooley Godward LLP holds an option to purchase 150,000 shares of our
common stock.
EXPERTS
The consolidated financial statements of Oplink Communications, Inc. as of
June 30, 1999 and 2000, and for each of the three years in the period ended
June 30, 2000, included in this prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The financial statements of Telelight Communications Inc. as of
December 31, 1998 and 1999, for the year ended December 31, 1999 and for the
periods from April 20, 1998 (date of inception) to December 31, 1998 and 1999,
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedule that were filed with the registration
statement may be inspected without charge at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part of the
registration statement may be obtained from the SEC upon payment of the
prescribed fee. The Securities and Exchange Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with the requirements of the Securities Exchange Act will file
periodic reports, proxy statements and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements and other
information will be available for inspection and copying at the regional
offices, public reference facilities and web site of the Securities and Exchange
Commission referred to above.
78
<PAGE>
OPLINK COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Oplink Communications, Inc.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet................................ F-3
Consolidated Statement of Operations...................... F-4
Consolidated Statement of Mandatorily Redeemable
Convertible Preferred Stock and Stockholders' (Deficit)
Equity.................................................. F-5
Consolidated Statement of Cash Flows...................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Pro Forma Combined Financial Information
Overview.................................................. F-27
Unaudited Pro Forma Combined Statement of Operations...... F-29
Notes to Unaudited Pro Forma Combined Financial
Information............................................. F-30
Telelight Communication Inc.
Report of Independent Accountants......................... F-31
Balance Sheet............................................. F-32
Statement of Operations................................... F-33
Statement of Shareholders' Equity......................... F-34
Statement of Cash Flows................................... F-35
Notes to Financial Statements............................. F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Oplink Communications, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of mandatorily redeemable convertible
preferred stock and stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Oplink Communications, Inc. and
its subsidiaries at June 30, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
August 29, 2000,
except as to the second
paragraph of Note 1,
which is as of
September 6, 2000
F-2
<PAGE>
OPLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
------------------- 2000
1999 2000 (SEE NOTE 12)
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,757 $ 26,665
Accounts receivable, net.................................. 1,904 10,100
Inventories............................................... 2,274 11,308
Prepaid expenses.......................................... 855 3,974
Deferred tax assets....................................... -- 1,080
------- --------
Total current assets.................................... 9,790 53,127
Property and equipment, net................................. 1,828 21,270
Intangible assets........................................... -- 20,600
Other assets................................................ 93 935
------- --------
Total assets............................................ $11,711 $ 95,932
======= ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,277 $ 15,188
Accrued liabilities....................................... 876 6,767
Current portion of capital lease obligations.............. -- 419
Borrowings under the line of credit....................... -- 135
------- --------
Total current liabilities............................... 4,153 22,509
Capital lease obligations, non current...................... -- 1,267
Deferred tax liability...................................... 0 2,958
------- --------
Total liabilities....................................... 4,153 26,734
------- --------
Convertible Preferred Stock, $0.001 par value; 110,183,344
shares authorized; issued and outstanding: 81,996,648
shares in 1999; 110,103,344 shares in 2000; and zero pro
forma (unaudited);
Liquidation value $58,370 in 2000....................... 12,083 58,373 $ --
------- -------- --------
Commitments and contingencies (Note 9)
Stockholders' (deficit) equity:
Common Stock, $0.001 par value, 400,000,000 shares
authorized; issued and outstanding: 2,280,000 shares in
1999; 24,457,878 shares in 2000; and 134,561,222 shares
(unaudited) pro forma................................... 2 24 134
Additional paid-in capital................................ 6,542 61,253 119,516
Deferred stock compensation............................... (3,505) (17,986) (17,986)
Accumulated deficit....................................... (7,564) (32,466) (32,466)
------- -------- --------
Total stockholders' (deficit) equity.................... (4,525) 10,825 $ 69,198
------- -------- ========
Total liabilities, convertible preferred stock and
stockholders' (deficit) equity...................... $11,711 $ 95,932
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
OPLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1998 1999 2000
-------- ----------- ------------
<S> <C> <C> <C>
Revenues................................................ $ 2,493 $ 9,094 $ 39,048
Cost of revenues........................................ 2,964 7,225 33,344
-------- ----------- ------------
Gross profit (loss)................................... (471) 1,869 5,704
-------- ----------- ------------
Operating expenses:
Research and development.............................. 455 626 3,686
Sales and marketing................................... 527 802 2,695
General and administrative............................ 683 826 4,173
Amortization of deferred compensation*................ -- 3,032 12,740
In-process research and development................... -- -- 7,020
Amortization of goodwill.............................. -- -- 981
-------- ----------- ------------
Total operating expenses............................ 1,665 5,286 31,295
-------- ----------- ------------
Loss from operations.................................... (2,136) (3,417) (25,591)
Interest income (expense)............................... 14 75 681
Other (expense) income, net............................. (26) (132) 8
-------- ----------- ------------
Net loss................................................ $ (2,148) $ (3,474) $ (24,902)
======== =========== ============
Net loss per share: Basic and diluted................... $ (4.67) $ (2.37) $ (3.18)
======== =========== ============
Weighted average shares............................... 459,616 1,463,342 7,839,650
======== =========== ============
Pro forma net loss per share: Basic and diluted
(unaudited)........................................... $ (0.24)
============
Pro forma weighted average shares (unaudited)........... 104,537,892
============
* Allocation of amortization of deferred compensation:
Cost of revenues...................................... $ -- $ 705 $ 2,269
Research and development.............................. -- 646 1,801
Sales and marketing................................... -- 526 1,312
General and administrative............................ -- 1,155 7,358
-------- ----------- ------------
$ -- $ 3,032 $ 12,740
======== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
OPLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
----------------------- --------------------- PAID-IN STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
------------ -------- ---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30,
1996.................... 24,000,000 $ 600 -- $ -- $ -- $ -- $ (534)
Issuance of Series B
Preferred Stock at $0.09
per share............... 22,726,208 2,046 -- -- -- -- --
Issuance of Common Stock
warrant................. -- -- -- -- 7 -- --
Net loss.................. -- -- -- -- -- -- (1,397)
------------ ------- ---------- ---- ------- -------- --------
Balance as of June 30,
1997.................... 46,726,208 2,646 -- -- 7 -- (1,931)
Exercise of stock
options................. -- -- 2,080,000 2 1 -- --
Stock options issued to
consultants............. -- -- -- -- 10 -- --
Repurchase of Common
Stock................... -- -- (960,000) (1) (18) -- (11)
Issuance of Series B
Preferred Stock at $0.09
per share............... 8,043,808 724 -- -- -- -- --
Issuance of Series C
Preferred Stock for at
$0.25 per share......... 12,000,000 3,000 -- -- -- -- --
Issuance of Series C
warrants................ -- 3 -- -- -- -- --
Net loss.................. -- -- -- -- -- -- (2,148)
------------ ------- ---------- ---- ------- -------- --------
Balance at June 30,
1998.................... 66,770,016 6,373 1,120,000 1 -- -- (4,090)
Exercise of stock
options................. -- -- 1,160,000 1 5 -- --
Issuance of Series D
Preferred Stock at
$0.375 per share........ 15,226,632 5,710 -- -- -- -- --
Deferred stock
compensation............ -- -- -- -- 6,537 (6,537) --
Amortization of deferred
compensation............ -- -- -- -- -- 3,032 --
Net loss.................. -- -- -- -- -- -- (3,474)
------------ ------- ---------- ---- ------- -------- --------
Balance at June 30,
1999.................... 81,996,648 12,083 2,280,000 2 6,542 (3,505) (7,564)
Exercise of stock
options................. -- -- 8,737,878 9 647 -- --
Issuance of Series D
Preferred Stock at
$0.375 per share........ 6,106,696 2,290 -- -- -- -- --
Issuance of Series E
Preferred Stock at $2.00
per share............... 22,000,000 44,000 -- -- (24) -- --
Deferred stock
compensation............ -- -- -- -- 27,221 (27,221) --
Amortization of deferred
compensation............ -- -- -- -- -- 12,740 --
Issuance of common stock
in connection with
acquisition............. -- -- 13,440,000 13 26,867 -- --
Net loss.................. -- -- -- -- -- -- (24,902)
------------ ------- ---------- ---- ------- -------- --------
Balance at June 30,
2000.................... 110,103,344 $58,373 24,457,878 $ 24 $61,253 $(17,986) $(32,466)
============ ======= ========== ==== ======= ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
(DEFICIT) EQUITY
----------------
<S> <C>
Balance as of June 30,
1996.................... $ (534)
Issuance of Series B
Preferred Stock at $0.09
per share............... --
Issuance of Common Stock
warrant................. 7
Net loss.................. (1,397)
--------
Balance as of June 30,
1997.................... (1,924)
Exercise of stock
options................. 3
Stock options issued to
consultants............. 10
Repurchase of Common
Stock................... (30)
Issuance of Series B
Preferred Stock at $0.09
per share............... --
Issuance of Series C
Preferred Stock for at
$0.25 per share......... --
Issuance of Series C
warrants................ --
Net loss.................. (2,148)
--------
Balance at June 30,
1998.................... (4,089)
Exercise of stock
options................. 6
Issuance of Series D
Preferred Stock at
$0.375 per share........ --
Deferred stock
compensation............ --
Amortization of deferred
compensation............ 3,032
Net loss.................. (3,474)
--------
Balance at June 30,
1999.................... (4,525)
Exercise of stock
options................. 656
Issuance of Series D
Preferred Stock at
$0.375 per share........ --
Issuance of Series E
Preferred Stock at $2.00
per share............... (24)
Deferred stock
compensation............ --
Amortization of deferred
compensation............ 12,740
Issuance of common stock
in connection with
acquisition............. 26,880
Net loss.................. (24,902)
--------
Balance at June 30,
2000.................... $ 10,825
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
OPLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,148) $(3,474) $(24,902)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and
equipment............................................. 179 267 1,231
Amortization of goodwill and intangible assets.......... -- -- 1,375
Amortization of deferred compensation................... -- 3,032 12,740
Provision for excess and obsolete inventory............. 224 555 4,659
Acquired in-process research and development............ -- -- 7,020
Issuance of warrants.................................... 3 -- --
Stock options issued in exchange for services........... 10 -- --
Deferred tax assets..................................... -- -- (1,080)
Change in assets and liabilities:
Accounts receivable................................... (509) (1,207) (8,087)
Inventories........................................... (184) (2,545) (13,591)
Prepaid expenses...................................... (174) (480) (3,118)
Other assets.......................................... -- (61) (892)
Accounts payable...................................... 280 2,802 11,890
Accrued liabilities................................... 210 574 5,679
------- ------- --------
Net cash used in operating activities............... (2,109) (537) (7,076)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (411) (1,355) (18,388)
Cash acquired in business combination..................... -- -- 436
------- ------- --------
Net cash used in investing activities............... (411) (1,355) (17,952)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Convertible Preferred Stock..... 3,724 5,710 46,266
Proceeds from issuance of Common Stock upon the exercise
of options, net of repurchases.......................... (27) 6 657
Proceeds from borrowings under line of credit............. -- -- --
Repayment of line of credit............................... (350) -- 135
Repayment of capital lease obligations.................... -- -- (122)
------- ------- --------
Net cash provided by financing activities........... 3,347 5,716 46,936
------- ------- --------
Net increase in cash and cash equivalents................... 827 3,824 21,908
Cash and cash equivalents, beginning of year................ 106 933 4,757
------- ------- --------
Cash and cash equivalents, end of year...................... $ 933 $ 4,757 $ 26,665
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest expense.......... $ 33 $ 29 $ 22
======= ======= ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital lease....... $ -- $ -- $ 1,808
======= ======= ========
Deferred compensation related to Common Stock option
grants to employees..................................... $ -- $ 6,537 $ 27,221
======= ======= ========
Issuance of Common Stock in connection with acquisition... $ -- $ -- $ 26,880
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
THE COMPANY
Oplink Communications, Inc. (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 Communications, Inc., a designer and
manufacturer of passive fiber optic components in Sunnyvale, California and
Fuzhou China. The Company conducts its business within one business segment and
has no organizational structure dictated by product, service lines, geography or
customer type.
REINCORPORATION
On July 12, 2000 the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 400,000,000 shares of $0.001
par value Common Stock and 20,000,000 shares of $0.001 par value convertible
Preferred Stock. The Board of Directors has the authority to issue the
undesignated convertible Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof. The par value and
shares of Common Stock and convertible Preferred Stock authorized, issued and
outstanding at each balance sheet date presented, and for each period presented
in the consolidated statement of stockholders' deficit have been retroactively
adjusted to reflect the reincorporation. This reincorporation became effective
on September 6, 2000.
STOCK SPLIT
On August 18, 2000, the Board of Directors approved, subject to stockholder
approval, a two-for-one stock split. The consolidated financial statements and
all references to Common Stock and Preferred Stock contained in these
consolidated financial statements and notes thereto give retroactive effect to
the stock split. Stockholder approval is expected to occur prior to the
effectiveness of the Company's initial public offering.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries Zhuhai Oplink Communications, Inc. ("Zhuhai"),
Fuzhou Oplink Communications, Inc. ("Fuzhou") and Telelight Communication Inc.
("Telelight"). Zhuhai, Fuzhou and Telelight were formed in April 1999,
March 2000 and April 2000, respectively. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
F-7
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company's cash
equivalents consist of money market funds and short-term deposits.
REVENUE RECOGNITION
The Company derives its revenue from the sale of fiber optic components and
integrated optical modules. Revenue from product sales is recognized at the
later of shipment of the product or customer acceptance, if applicable, and only
if collectibility is probable. Sales to distributors do not include the right to
return, exchange products or price protection. Revenue from sales to one
customer for which the terms of the sale includes an acceptance period is not
recognized until after receipt of written customer acceptance. Provisions for
return allowances and warranties are recorded at the time revenue is recognized
based on the Company's historical experience.
FOREIGN CURRENCY TRANSLATIONS
The functional currency of the Company's foreign subsidiaries is the local
currency. In consolidation, assets and liabilities are translated at year-end
currency exchange rates and revenue and expense items are translated at average
currency exchange rates prevailing during the period. Gains and losses from
foreign currency translation are accumulated as a separate component of
stockholders' equity. At June 30, 2000, such amounts were not material. Realized
gains and losses resulting from foreign currency transactions are included in
the consolidated statement of operations.
FAIR VALUE
The Company's financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities,
borrowings under lines of credit and capital lease obligations are reported at
cost, which approximates their fair values due to their relatively short
maturity.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, and accounts
receivable. Substantially all of the Company's cash and cash equivalents are
managed or held by two financial institutions. At times, such deposits may be in
excess of the amount of the insurance provided on such deposits. To date, the
Company has not experienced any losses on such deposits. The Company's accounts
receivable are derived from revenue earned from customers located in the United
States and Asia. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts based upon
the expected collection of its outstanding receivable balance.
F-8
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table summarizes the revenues from customers in excess of 10%
of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Customer A.......................................... -- 39% 43%
Customer B.......................................... 11% 14% --
Customer C.......................................... 16% -- --
Customer D.......................................... 15% -- --
Customer E.......................................... -- -- 16%
Customer F.......................................... -- -- 11%
</TABLE>
At June 30, 2000, two customers accounted for 41% and 15% of total accounts
receivable, respectively.
The Company operates in a highly competitive environment subject to rapid
technological change and emergence of new technology. Although management
believes its products and services are transferable to emerging technologies,
rapid changes in technology could have an adverse financial impact on the
Company.
A substantial portion of the Company's manufacturing operations are located
in China and are subject to the laws and regulations of China. 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.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. The inventory of the Company is
subject to rapid technological changes that could have an adverse affect on its
realization in future periods. Due to rapid technological changes, the Company
provides reserves for excess and obsolete inventory based on the Company's
estimates of inventory to be sold or consumed over the next twelve months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the useful lives of the assets ranging from
three to five years. Leasehold improvements are amortized using the
straight-line method based upon the shorter of the estimated useful lives or the
lease term of the respective assets.
IMPAIRMENT OF LONG-LIVED ASSETS
Periodically, the Company evaluates the recoverability of the net carrying
value of its property, plant and equipment and its intangible assets by
comparing the carrying values to the estimated future undiscounted cash flows. A
deficiency in these cash flows relative to the carrying amounts is an indication
of the need for a write-down due to impairment. The impairment write-down would
be the difference between the carrying amounts and the fair value of these
assets. A loss on impairment would be recognized by a charge to earnings.
F-9
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
If an asset being tested for recoverability was acquired in a business
combination, the goodwill that arose in that business combination is included as
part of the asset in determining recoverability. Goodwill is allocated to the
asset being tested for recoverability on a pro rata basis using the relative
fair values of the long-lived assets and identifiable intangible assets
acquired. In instances where goodwill is identified with assets that are subject
to an impairment loss, the carrying amount of the identified goodwill shall be
eliminated before making any reduction in the carrying amount of impaired
long-lived assets and identifiable intangible assets.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts, and for net
operating loss and tax credit carryforwards. The Company records a valuation
allowance against deferred tax assets when it is more likely than not that such
assets will not be realized.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with SOP 97-3,
"Reporting of Advertising Costs." Advertising costs for the years ended
June 30, 1998, 1999 and 2000 were $38,000, $47,000, and $142,000, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees using
the intrinsic value method of Accounting Principles Board opinion No. 25,
"Accounting for Stock issued to Employees," and, accordingly, presents
disclosure of pro forma information required under SFAS No. 123, "Accounting for
Stock-Based Compensation." Stock and other equity instruments issued to-non
employees are accounted for in accordance with SFAS No. 123 and Emerging Issues
Task Force Issue No. 96-18 and valued using the Black-Scholes option-pricing
model.
COMPREHENSIVE INCOME
The Company's comprehensive loss approximated net losses for all periods
presented.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with 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 attributable to holders of Common Stock by the
weighted average number of shares of Common Stock outstanding during the period.
F-10
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 share and per share data):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1998 1999 2000
-------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR:
Net loss attributable to holders of Common Stock......... $ (2,148) $ (3,474) $ (24,902)
======== ========== ==========
DENOMINATOR:
Weighted average shares outstanding...................... 459,616 1,463,342 7,839,650
======== ========== ==========
Denominator for basic and diluted calculations........... 459,616 1,463,342 7,839,650
======== ========== ==========
Net loss per share:
Basic and diluted........................................ $ (4.67) $ (2.37) $ (3.18)
======== ========== ==========
</TABLE>
The following tables sets forth potential shares of Common Stock that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1998 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Series A Preferred Stock............................... 24,000,000 24,000,000 24,000,000
Series B Preferred Stock............................... 30,770,016 30,770,016 30,770,016
Series C Preferred Stock............................... 12,000,000 12,000,000 12,000,000
Series D Preferred Stock............................... -- 15,226,632 21,333,328
Series E Preferred Stock............................... -- -- 22,000,000
Warrants to purchase Common Stock...................... 268,904 268,904 268,904
Warrants to purchase Series C.......................... 80,000 80,000 80,000
Options to purchase Common Stock....................... 3,920,000 23,111,832 24,962,888
---------- ----------- -----------
71,038,920 105,457,384 135,415,136
========== =========== ===========
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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 of SFAS No. 133 until
fiscal years beginning after June 15, 2000. Management does not believe that the
adoption of SFAS No. 137 will have a material impact on its operations of
financial position.
F-11
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In December 1999, the Securities and Exchange Commission ("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 Financial Accounting Standards Board 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 prior to March 31, 2000 did not have a material impact on the financial
statements. Management does not expect that the adoption of the remaining
provisions will have a material effect on the financial position or results of
operations of the Company.
In various areas, including revenue recognition, accounting standards and
practices continue to evolve. Additionally, the SEC is preparing to issue
interpretative guidance relating to SAB 101, and the FASB's Emerging Issues Task
Force continues to address revenue related accounting issues. The management of
the Company believes it is in compliance with all of the rules and related
guidance as they currently exist. However, any changes to generally accepted
accounting principles in these areas could impact the Company's future
accounting for its operations.
F-12
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable...................................... $2,088 $10,662
Less: Allowance for doubtful accounts.................... (184) (562)
------ -------
$1,904 $10,100
====== =======
INVENTORIES:
Raw materials............................................ $2,110 $11,454
Work-in-process.......................................... 267 3,038
Finished goods........................................... 298 1,275
------ -------
2,675 15,767
Less: Reserves........................................... (401) (4,459)
------ -------
$2,274 $11,308
====== =======
PROPERTY AND EQUIPMENT:
Equipment................................................ $2,338 $21,455
Leasehold improvements................................... 122 1,550
------ -------
2,460 23,005
Less: Accumulated depreciation and amortization.......... (632) (1,735)
------ -------
$1,828 $21,270
====== =======
INTANGIBLE ASSETS:
Technology............................................... $ -- $ 6,276
Patents and other........................................ -- 1,119
Goodwill................................................. -- 14,580
------ -------
-- 21,975
Less: Accumulated amortization........................... -- (1,375)
------ -------
$ -- $20,600
====== =======
</TABLE>
At June 30, 2000, property and equipment includes $1,808,000 of computer
equipment and internal-use software under capital leases entered into beginning
March 2000. Accumulated depreciation of assets under capital leases totaled
$147,000 at June 30, 2000.
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
ACCRUED LIABILITIES:
Payroll and related expenses.............................. $393 $2,066
Income taxes payable...................................... -- 1,080
Other..................................................... 483 3,621
---- ------
$876 $6,767
==== ======
</TABLE>
F-13
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--TELELIGHT ACQUISITION
ACQUISITION
In February 2000, the Company entered into a definitive agreement to acquire
Telelight Communication Inc. ("Telelight") in a merger transaction to be
accounted for as a purchase business combination. This acquisition was
consummated on April 6, 2000. The purchase price comprised 13,440,000 shares of
Common Stock valued at $26,880,000. The Company also anticipates incurring
approximately $200,000 in acquisition expenses, including primarily legal fees
and other direct transaction costs. The total purchase price aggregated
$27,080,000 and was allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed on the basis of their relative fair values as
follows:
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets of Telelight............................ $ 1,043
Deferred tax liability arising from the acquisition......... (2,958)
In-process research and development......................... 7,020
Technology.................................................. 6,276
Patents..................................................... 1,086
Assembled workforce......................................... 33
Goodwill.................................................... 14,580
-------
$27,080
=======
</TABLE>
The net tangible assets consist primarily of cash and cash equivalents,
accounts receivable, inventory property and equipment, accounts payable and
other liabilities.
The developed technologies acquired in the Telelight acquisition were the
Optical Circulator product and filter products. These products have yet to gain
market acceptance or receive certain industry-standard qualifications. Given
these facts and the commodity nature of these products, minimal value was
attributed to them in the purchase price allocation.
The in-process research and development consisted of an Optical Wavelength
Interleaver product that, as of the date of acquisition, had not yet reached
technological feasibility and had no alternative future use. The Optical
Wavelength Interleaver is a compact, high performance fiber optic product that
segments optical signals by wavelengths. This product makes channel spacing
smaller, thereby increasing the number of channels on a fiber optic network.
The value of the Optical Wavelength Interleaver was determined by estimating
the net cash flows from the sale of the products resulting from the completion
of this project, reduced by the portion of the net cash flows from the revenue
attributable to core technology. The resulting cash flows were then discounted
back to their present value using a discount rate of 35%. The fair value
assigned to the core technology totaled $6,245,000, and is being amortized over
the expected life of its cash flows of four years. At the time of the
acquisition this project was approximately 80% complete. The fair value assigned
to the in-process research and development totaled $7,020,000, and was charged
to expense at the time of the acquisition. The Company has incurred
approximately $50,000 of expense subsequent to the acquisition, and in May 2000
the first qualified prototype was completed and technological feasibility was
achieved.
The value of certain patents being assigned to Oplink was determined using
the relief from royalty methodology, which assumes that the value of the asset
equals the amount a third party would pay to
F-14
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--TELELIGHT ACQUISITION (CONTINUED)
use the asset and capitalize on the related benefits of the assets. The fair
value assigned to patents of $1,086,000 is being amortized over their expected
useful life of four years.
Goodwill is being amortized on a straight line basis of the estimated period
of benefit of four years.
Presented below are the combined unaudited pro forma revenue, net loss and
net loss per share of Oplink and Telelight for the years ended June 30, 1999 and
2000, respectively. The unaudited pro forma information gives effect to this
acquisition as if it had occurred at the beginning of each period presented (in
thousands except share and per share data).
<TABLE>
<CAPTION>
YEAR END JUNE 30,
--------------------------
1999 2000
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenue........................................... $ 9,134 $ 39,639
Net Loss.......................................... (9,347) (22,309)
Net loss per share
Basic and diluted............................... $ (0.11) $ (0.19)
=========== ============
Weighted average shares........................... 86,293,476 114,856,581
=========== ============
</TABLE>
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
ocurred if the transaction had been consummated at the dates indicated, nor is
it necessarily indicative of future operating results of the combined companies.
NOTE 5--INCOME TAXES:
Consolidated loss before income taxes includes non-U.S. income of
approximately $68,000 for the year ended June 30, 2000.
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current tax expense:
Federal......................................... $ -- $ -- $ 850
State........................................... -- -- 230
------- ------- -------
-- -- 1,080
------- ------- -------
Deferred tax benefit:
Federal......................................... $ -- $ -- $ (850)
State........................................... -- -- (230)
------- ------- -------
-- -- (1,080)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-15
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES: (CONTINUED)
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves................................... $ 288 $ 3,226
Net operating loss carryforwards........................ 1,339 924
Research and development credit carryforward............ 102 318
------- -------
Gross deferred tax asset................................ 1,730 4,468
Valuation allowance..................................... (1,730) (3,388)
------- -------
Net deferred tax assets................................... $ -- $ 1,080
======= =======
Deferred tax liability:
Deferred tax liability arising from the acquisition..... $ -- $(2,958)
======= =======
</TABLE>
Reconciliation of the statutory federal income tax to the Company's
effective tax:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 2000
-------- --------
<S> <C> <C>
Tax at federal statutory rate............................... (34)% (34)%
State tax, net of federal benefit........................... (1) (1)
Research credit carryforward................................ (1) (1)
Stock compensation.......................................... 30 17
Increase in valuation allowance............................. 6 8
In-process research and development......................... -- 10
Other....................................................... -- 1
--- ---
Provision for taxes......................................... --% --%
=== ===
</TABLE>
Based on available objective evidence at June 30, 1999, management believed
that, based on a number of factors, the available objective evidence created
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance was recorded. At June 30, 2000, based on a
change in the available objective evidence, management believes it is more
likely than not that some portion of the net deferred tax asset will not be
fully realizable. Accordingly, the Company has recorded a partial valuation
allowance against its net deferred tax assets at June 30, 2000, 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
expense expected to be paid during fiscal 2001, which is related to 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.
F-16
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES: (CONTINUED)
At June 30, 2000, the Company has approximately $2 million of Federal and
$2 million of State net operating loss carryforwards. Because of certain changes
in ownership of the Company in 1998 and 1999, there is an annual limitation of
approximately $600,000 on the use of the net operating loss carryforwards
pursuant to section 382 on the Internal Revenue Code.
NOTE 6--RELATED PARTY TRANSACTIONS:
INVESTOR RIGHTS AGREEMENT
The Company has entered into an agreement with the holders of its preferred
stock, including entities with which its directors are affiliated, that provides
these stockholders certain rights relating to the registration of their shares
of common stock issuable upon conversion of the preferred stock. These rights do
not apply to this offering, but will survive this offering and will terminate no
later than eight years after the closing date of this offering. This agreement
also entitles the holders of the Company's preferred stock to rights to receive
financial information regarding the Company and a right of first refusal to
purchase shares of its stock issued, both of which rights terminate at the close
of this offering.
INDEMNIFICATION AGREEMENTS
The Company expects to enter into indemnification agreements with each of
its directors and officers prior to completing this offering. These
indemnification agreements and its certificate of incorporation and bylaws
require the Company to indemnify its directors and officers to the fullest
extent permitted by Delaware law.
SALES TO INVESTOR
Beginning from July 1, 1998, the Company sold products to a customer who is
also one of the shareholders of the Company's Series D mandatorily redeemable
preferred stock. Sales to this customer totaled $47,000 and $524,000 for the
years ended June 30, 1999 and 2000, respectively. Receivables from this customer
totaled $368,000 at June 30, 2000.
NOTE 7--CONVERTIBLE PREFERRED STOCK:
At June 30, 2000, the Company is authorized to issue 110,183,344 shares of
convertible preferred stock ("Preferred Stock"), as follows (in thousands):
<TABLE>
<CAPTION>
SHARES LIQUIDATION
------------------------ PREFERENCE
AUTHORIZED OUTSTANDING AMOUNT
---------- ----------- -----------
<S> <C> <C> <C>
Series A.................................... 24,000 24,000 $ 600
Series B.................................... 30,770 30,770 2,770
Series C.................................... 12,080 12,000 3,000
Series D.................................... 21,334 21,334 8,000
Series E.................................... 22,000 22,000 44,000
------- ------- -------
110,184 110,104 $58,370
======= ======= =======
</TABLE>
F-17
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CONVERTIBLE PREFERRED STOCK: (CONTINUED)
Because the holders of Preferred Stock have the right to require the Company
to redeem their stock in preference to the holders of Common Stock upon the sale
or liquidation of the Company (see below) at amounts equal to their original
purchase price, such Preferred Stock is considered mandatorily redeemable and
classified outside of permanent equity. The carrying value of the Preferred
Stock equals its liquidation value.
The rights, preferences, privileges and restrictions thereof are set forth
in the Company's Amended and Restated Articles of Incorporation, and are
summarized below:
DIVIDENDS
The holders of Series A, Series B, Series C, Series D and Series E Preferred
Stock are entitled to receive noncumulative dividends at the annual rate of
$0.002, $0.0072, $0.02, $0.03 and $0.16 per share, respectively, if and when
declared by the Board of Directors. To date, the Board of Directors has not
declared any dividends.
LIQUIDATION PREFERENCE
In the event of any liquidation or winding up of the Company, including a
merger, sale of substantially all the assets, or reorganization of the Company,
the holders of Preferred Stock shall be entitled to receive in preference to the
holders of Common Stock an amount equal to $0.025 per share of Series A, $0.09
per share of Series B, $0.25 per share of Series C Preferred, $0.375 per share
of Series D Preferred Stock and $2.00 per share of Series E Preferred Stock,
plus any declared and unpaid dividends. All remaining assets, if any, shall be
distributed pro rata to the holders of the Common Stock and Preferred Stock (on
an as-if-converted basis).
The Series A, B, C, D and E Preferred Stock shall rank on a parity as to the
receipt of the respective preferential amounts for each such series upon the
occurrence of liquidation. If, upon the occurrence of such an event, the assets
and funds thus distributed among the holders of Series A, B, C, D and E
Preferred Stock are insufficient to permit full payment to such holders, then
the entire assets and funds legally available for distribution shall be
distributed ratably among the holders of Series A, B, C, D and E Preferred Stock
in proportion to the preferential amount each is entitled to receive.
CONVERSION
Each share of Series A, Series B, Series C, Series D and Series E Preferred
Stock is convertible into one share of Common Stock, at the option of the
holder. The conversion ratio is subject to certain adjustments for dilution.
Each share of Preferred Stock shall be automatically converted into Common
Stock, at the then applicable conversion rate, upon the closing of an
underwritten public offering of shares of the Company which results in a per
share public offering price (prior to underwriter commissions and expenses) of
at least $4.00 per share and aggregate proceeds of $50,000,000.
VOTING RIGHTS
The Series A, B, C, D and E Preferred Stock will be entitled to vote, along
with the holders of Common Stock, on all matters on an as-if-converted basis. In
addition, the Series A, B, C, D and E Preferred Stock will also have class and
series votes as provided by law, provided that Series B, voting
F-18
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CONVERTIBLE PREFERRED STOCK: (CONTINUED)
together as a single class, and Series E, voting together as a single class,
shall be entitled to elect one member of the Company's Board of Directors,
respectively, while the Common Stock (including the Preferred Stock on an
as-converted basis) shall be entitled to elect the remaining members of the
Company's Board of Directors.
COVENANTS
Under the terms of the Preferred Stock agreements, the Company is required
to comply with certain covenants, including the timely submissions of certain
financial data. At June 30, 2000, the Company was in violation of the covenant
regarding the timely submission of financial data. Waivers obtained subsequent
to year end have allowed the Company to remain in compliance with such covenants
through fiscal year 2001.
WARRANTS
In January 1997, the Company obtained a line of credit of $500,000 to fund
the Company's operations. In connection with obtaining this line of credit and
in exchange for the waiver of bank fees, the Company issued to the bank a
warrant to purchase 268,904 shares of Common Stock. Under the terms of the
agreement, the warrant was immediately exercisable with a five year term at an
exercise price of $0.1488 per share. The most reliably determinable value
assigned to this warrant by the Company was the value of the waived bank fee
which amounted to $7,000 and was charged to operations during 1997. In
March 1998, this line of credit was increased to $1,000,000. In connection with
obtaining this increase, the Company issued an additional warrant to purchase
80,000 shares of Series C Convertible Preferred Stock. Under the terms of this
agreement, the warrant was immediately exercisable with a five year term at an
exercise price of $0.25 per share. The most reliably determinable value assigned
to this warrant by the Company was the value of the waived bank fee which
amounted to $3,000 and was charged to operations during 1998. The line of credit
expired in January of 1999. There were no borrowings under the line of credit as
of June 30, 1999 or 2000.
NOTE 8--STOCK OPTION PLANS
In September 1995, the Board of Directors adopted the 1995 Stock Option Plan
(the "1995 Plan"). In January 1998, the Board of Directors adopted the 1998
Stock Option Plan (the "1998 Plan"). The 1995 Plan and 1998 Plan provide for the
issuance of incentive and nonqualified stock options to employees, directors and
consultants of the Company. Under the 1995 Plan and 1998 Plan, options to
purchase 6,000,000 and 33,800,000 shares of Common Stock, respectively, have
been authorized for grant. Options granted under both plans must be granted with
exercise prices not less than 100% and 85% for incentive and nonqualified stock
options, respectively, of the estimated fair value of the Company's Common Stock
on the date of grant, as determined by the Board of Directors. Options granted
to stockholders who own greater than 10% of the Company's outstanding stock must
be issued with exercise prices not less than 110% of the estimated fair value of
the Company's Common Stock on the date of grant, as determined by the Board of
Directors. Options under the both the 1995 Plan and 1998 Plan generally become
exercisable at a rate of 25% during the first year of the vesting period and
then at a rate of 1/48 per month thereafter. Options will expire, if not
exercised, upon the earlier of 10 years from the date of grant or generally 90
days after termination as an employee of the Company.
In April 1996, the Company granted options to purchase 120,000 shares of
Common Stock to a non-employee in exchange for services with an exercise price
of $0.0063 per share and which vested
F-19
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK OPTION PLANS (CONTINUED)
over a two year term. The value assigned to these stock options by the Company
was not significant during the year ended June 30, 1996. In accordance with SFAS
No. 123, the Company then remeasured the valuation of these stock options
annually at each balance sheet date over the vesting period. During the year
ended June 30, 1997, the incremental value assigned to these options was not
significant. During the year ended June 30, 1998, the incremental value assigned
to these stock options was $10,000 and was included as a component of general
and administrative expenses.
During the years ended June 30, 1999 and 2000, in connection with the
granting of stock options to employees and members of the Board of Directors
with exercise prices subsequently determined to be below fair value, the Company
recorded deferred stock compensation aggregating $6,537,000 and $27,221,000,
respectively. These amounts are being amortized into expense over the vesting
period of the related options, generally four years using the method set out in
FASB Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested
tranche of options is accounted for as a separate option grant awarded for past
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. This results is higher
compensation expense in the earlier vesting periods of the related options.
Amortization expense associated with deferred stock compensation totaled
$3,032,000 for the year ended June 30, 1999 and $12,740,000 for the year ended
June 30, 2000.
Information with respect to 1995 and 1998 stock option plan activity for the
three years ended June 30, 2000 is set forth below:
<TABLE>
<CAPTION>
EMPLOYEES NON-EMPLOYEES
----------------------------- -----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997................. 11,096,000 $0.0082 -- $ --
Options Granted...................... -- -- -- --
Options Exercised.................... (2,080,000) 0.0024 -- --
Options canceled..................... (5,096,000) 0.0089 -- --
---------- ------- ---------- -------
Balance, June 30, 1998................. 3,920,000 $0.0104 -- --
Options Granted...................... 19,756,000 0.0500 768,000 0.0500
Options Exercised.................... (1,160,000) 0.0050 -- --
Options canceled..................... (172,168) 0.0500 -- --
---------- ------- ---------- -------
Balance, June 30, 1999................. 22,343,832 $0.0454 768,000 0.0500
Options Granted...................... 16,330,800 1.2962 498,000 2.0570
Options Exercised.................... (7,637,878) 0.0239 (1,100,000) 0.8945
Options canceled..................... (6,093,866) 0.2250 (146,000) 0.2934
---------- ------- ---------- -------
Balance, June 30, 2000................. 24,942,888 $0.8270 20,000 $1.8000
========== ======= ========== =======
</TABLE>
As of June 30, 2000, 76,832 and 2,782,402 options remain available for grant
under the 1995 Plan and 1998 Plan, respectively.
F-20
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK OPTION PLANS (CONTINUED)
As of June 30, 2000 the options outstanding and exercisable under both the
1995 and 1998 Plans are presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE AT
AT JUNE 30, 2000 JUNE 30, 2000
------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
REMAINING
NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------------- ----------- ---------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Employees:
$0.0063 800,000 5.8 $0.0063 800,000 $0.0063
0.0125 525,780 6.5 0.0125 482,974 0.0125
0.0500 8,062,336 8.6 0.0500 1,646,516 0.0500
0.1500 4,542,172 9.3 0.1500 7,886 0.1500
0.7500 560,000 9.5 0.7500 -- 0.7500
1.5000 6,184,600 9.5 1.5000 1,158,204 1.5000
1.8000 1,529,000 9.6 1.8000 -- 1.8000
2.0000 367,200 9.8 2.0000 -- 2.0000
2.5000 2,017,600 9.9 2.5000 -- 2.5000
4.0000 354,200 9.9 4.0000 -- 4.0000
---------- ---------
24,942,888 8.9 $0.8270 4,095,580 $0.4473
========== =========
Non-Employees:
$1.8000 20,000 9.8 $1.8000 -- $1.8000
========== =========
</TABLE>
PRO FORMA STOCK-BASED COMPENSATION
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss for the years ended
June 30, 1998, 1999 and 2000 would have been increased to the pro forma amounts
indicated in the following table (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................... $(2,148) $(3,474) $(24,902)
======= ======= ========
Pro forma...................................... $(2,148) $(3,592) $(28,329)
======= ======= ========
Net loss per share basic and diluted:
As reported.................................... $ (4.67) $ (2.37) $ (3.18)
======= ======= ========
Pro forma...................................... $ (4.67) $ (2.45) $ (3.61)
======= ======= ========
</TABLE>
F-21
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK OPTION PLANS (CONTINUED)
The Company calculated the fair value of each option grant on the date of
grant in accordance with SFAS No. 123 using the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate.............................. 6.09% 5.01% 6.47%
Expected life of option.............................. 5 5 5
Expected dividends................................... --% --% --%
Volatility........................................... 60% 60% 60%
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made each
year.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases its facilities under non-cancelable operating leases. The
leases require the Company to pay taxes, maintenance and repair costs. Future
minimum lease payments under the Company's non-cancelable operating leases,
including operating leases entered into subsequent to June 30, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
2001........................................................ $ 3,159
2002........................................................ 3,302
2003........................................................ 2,458
2004........................................................ 2,277
2005........................................................ 1,425
Thereafter.................................................. 70
-------
$12,691
=======
</TABLE>
Rent expense for all operating leases was approximately $101,000, $172,000
and $569,000 in 1998, 1999, and 2000, respectively.
CAPITAL LEASES
In 2000, the Company entered into a capital lease for equipment in the
amount of $1.8 million with interest accruing at the rate of 6.69%.
F-22
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum lease payments required under the lease are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending June 30,
2001........................................................ $ 573
2002........................................................ 662
2003........................................................ 662
2004........................................................ --
-------
Total minimum lease payments................................ 1,897
Less: Amount representing interest.......................... (211)
-------
Present value of net minimum lease payments................. $ 1,686
Current portion of capital lease obligations................ 419
-------
Capital lease obligations, non current...................... $ 1,267
=======
</TABLE>
LITIGATION
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 year ended June 30, 2000.
An unfavorable ruling in this matter would have a material adverse effect on the
Company's financial condition and reported results of operations.
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.
The Company, with the assistance of 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.
NOTE 10--SEGMENT REPORTING:
In 1998, the Company adopted FAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. Operating segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated resources and in assessing performance.
The Company has determined that it has one reportable segment: fiber optic
components and module product sales. This segment consists of organizations
located in the United States and the People's Republic of China which develop,
manufacture, and/or market fiber optic networking components.
F-23
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--SEGMENT REPORTING: (CONTINUED)
The breakdown of sales by geographic customer destination and property plant
and equipment, net are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Sales:
United States.................................... $2,493 $6,986 $30,974
Asia............................................. -- 1,314 2,312
Other............................................ -- 794 5,762
------ ------ -------
Totals......................................... $2,493 $9,094 $39,048
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Property, plant, and equipment, net:
United States.................................... $ 740 $1,456 $16,142
People's Republic of China....................... -- 372 5,128
------ ------ -------
Totals......................................... $ 740 $1,828 $21,270
====== ====== =======
</TABLE>
NOTE 11--401(k) PLAN:
In 1997, the Company adopted a defined contribution retirement savings plan
under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all employees who meet minimum age and service requirements and
allows participants to defer a portion of their annual compensation on a pretax
basis. All employees are eligible to participate three months after employment.
Matching contributions are at the discretion of the Company. The Company made no
matching contribution to the plan during the three years ended June 30, 2000.
NOTE 12--PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA STOCKHOLDERS' EQUITY:
Upon the closing of the Company's initial public offering, all outstanding
Preferred Stock will be automatically converted into Common Stock. The pro forma
effect of this conversion has been presented as a separate column in the
Company's consolidated balance sheet, assuming the conversion had occurred as of
June 30, 2000. Pro forma basic and diluted net loss per common share have been
computed as described in Note 2 and also give effect to common equivalent shares
from preferred stock that will automatically convert upon the closing of the
Company's initial public offering (using the "as-if-converted method") for the
three years ended June 30, 2000.
F-24
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA STOCKHOLDERS' EQUITY:
(CONTINUED)
A reconciliation of the numerator and denominator used in the calculation or
pro forma basic and fully diluted net loss per common share follows (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
2000
-----------
<S> <C>
Net loss.................................................... $ (24,902)
===========
Shares used in computing basic and diluted net loss per
share..................................................... 7,839,650
Assumed conversion of all convertible preferred stock from
date of issuance.......................................... 96,698,242
Weighted average shares used in computing pro forma basic
and diluted net loss per share............................ 104,537,892
Pro forma basic and diluted net loss per share.............. $ (0.24)
===========
</TABLE>
NOTE 13--SUBSEQUENT EVENTS:
2000 EQUITY INCENTIVE PLAN
In July, 2000 the Company adopted the 2000 Equity Incentive Plan, which
provides for the grant of 20,000,000 stock awards to employees, directors and
consultants. These stock awards include incentive stock options to employees,
including officers and employee directors, and nonstatutory stock options, stock
bonuses and stock purchase rights to employees, directors and consultants. The
2000 Equity Incentive Plan was adopted by the Company's board of directors in
July 2000 and is expected to be approved by its stockholders prior to completing
this offering. The 2000 Equity Incentive Plan will take effect on the effective
date of the initial public offering.
2000 NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS
In July 2000, the Company adopted the 2000 Equity Incentive Plan, which
provides for the automatic grant of nonstatutory stock options to purchase
shares of common stock to its non-employee directors.
AUTOMATIC GRANTS. Upon the completion of this offering, beginning 2001, on
the day after the Company's annual stockholders' meeting, any person who is then
a non-employee director and who is elected at such annual meeting will
automatically be granted an option to purchase 72,000 shares of common stock.
These grants will vest on a monthly basis over a three-year period. Any
non-employee director who is elected or appointed to the board during a
three-year term will automatically be granted an option to purchase a pro rata
portion of shares based on the number of months remaining in the term.
2000 EMPLOYEE STOCK PURCHASE PLAN
In July 2000, our board of directors adopted the 2000 Employee Stock
Purchase Plan, which authorizes the issuance of 4,000,000 shares of its common
stock pursuant to purchase rights granted to its employees or to employees of
any of its affiliates. The Company expects that the 2000 Employee Stock Purchase
Plan will be approved by its stockholders prior to completing this offering. The
Employee Stock Purchase Plan is intended to qualify as an employee stock
purchase plan within the
F-25
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--SUBSEQUENT EVENTS: (CONTINUED)
meaning of Section 423 of the Code. The purchase plan provides a means by which
employees may purchase the Company's common stock through payroll deductions.
The 2000 Employee Stock Purchase Plan will take effect on the effective date of
the inital public offering, and, as of the date hereof, no shares of common
stock have been purchased under the purchase plan.
COMMON STOCK
Subsequent to June 30, 2000, the Company granted options to employees to
purchase 5,204,900 shares of common stock at a weighted average exercise price
of $5.58 per share that will result in additional deferred stock compensation of
$22.8 million.
Subsequent to June 30, 2000, the Company granted options to non-employees to
purchase 340,000 shares of common stock at a weighted average exercise price of
$5.71 per share that will result in additional deferred stock compensation of
$2.4 million.
Subsequent to June 30, 2000, the Company approved an increase of 3,800,000
shares in the number of shares of common stock reserved for issuance under the
1998 Stock Plan.
CAPITAL LEASES
In July 2000, the Company entered in a capital lease agreement which
provides for borrowings of up to $7.4 million. Interest accrues at an annual
rate of 6.69%. The lease expires in 2004.
CONVERTIBLE NOTE PAYABLE
On August 28, 2000, the Company received $50,000,000 in exchange for a note
payable to Cisco Systems, Inc. The note payable accrues interest at a rate of 8%
per annum. Upon the closing of the Company's initial public offering, the note
payable and any unpaid accrued interest will automatically be converted into
shares of the Company's Common Stock at a price per share equal to 85% of the
initial public offering price per share. Upon the closing of the Company's
initial public offering, the Company expects to record selling and marketing
expenses of $8.8 million, representing the fair value of the discount feature of
this note payable and accrued interest of $362,000 on the note payable.
OPTION GRANTS (UNAUDITED)
During September of 2000, the Company granted 1,580,000 options to employees
to purchase 1,014,500 shares of common stock at a weighted average exercise
price of $7.85 per share. Additionally, 150,000 options to purchase 150,000
shares of common stock with a weighted average exercise price of $5.81 per share
were forfeited. The net deferred stock compensation recorded as a result of
these events was $2.8 million.
F-26
<PAGE>
OPLINK COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
In February, 2000, the Company entered into a definitive agreement to
acquire Telelight Communication Inc. ("Telelight") in a merger transaction to be
accounted for as a purchase business combination. The acquisition was
consummated April 6, 2000. The purchase price comprised 13,440,000 shares of
Common Stock valued at $26,880,000. The Company also anticipates incurring
approximately $200,000 in acquisition expenses, including primarily legal fees
and other direct transaction costs. The total purchase price aggregated
$27,080,000.
The purchase price was allocated to the assets acquired, including tangible
and intangible assets, and liabilities assumed based upon the fair value of such
assets and liabilities on the date of the acquisition. The total estimated
purchase cost of the acquisition has been allocated to assets and liabilities
based on management's estimates of their fair value and an appraisal of certain
intangible assets with the excess costs over the net assets acquired allocated
to goodwill. The aggregate purchase price was allocated as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets of Telelight............................ $ 1,043
Deferred tax liability arising from the acquisition......... (2,958)
Developed technology........................................ 31
Core technology............................................. 6,245
In-process research and development......................... 7,020
Patents..................................................... 1,086
Assembled workforce......................................... 33
Goodwill.................................................... 14,580
-------
$27,080
=======
</TABLE>
The net tangible assets of Telelight consist primarily of cash and cash
equivalents, accounts receivable, inventory, property and equipment, accounts
payable and other liabilities.
The developed technologies acquired in the Telelight acquisition were the
Optical Circulator product and filter products. These products have yet to gain
market acceptance or receive certain industry-standard qualifications. Given
these facts and the commodity nature of these products, minimal value was
attributed to them in the purchase price allocation.
The in-process research and development consisted of an Optical Wavelength
Interleaver product that, as of the date of acquisition, had not yet reached
technological feasibility and had no alternative future use. The Optical
Interleaver is a compact high performance fiber optic product that segments
optical signals by wavelengths. This product makes channel spacing smaller,
thereby increasing the number of channels on a fiber optic network.
The value of the Optical Wavelength Interleaver was determined by estimating
the net cash flows from the sale of the products resulting from the completion
of this project, reduced by the portion of the net cash flows from the revenue
attributable to core technology. The resulting cash flows were then discounted
back to their present value using a discount rate of 35%. The fair value
assigned to the core technology totaled $6,245,000, and is being amortized over
the expected life of its cash flows of four years. At the time of the
acquisition this project was approximately 80% complete. The fair value assigned
to the in-process research and development totaled $7,020,000, and was charged
to expense at the time of the acquisition. The Company has incurred
approximately $50,000 of expense subsequent to
F-27
<PAGE>
OPLINK COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
the acquisition, and in May 2000 the first qualified prototype was completed and
technological feasibility was achieved.
The value of certain patents being assigned to Oplink was determined using
the relief from royalty methodology, which assumes that the value of the asset
equals the amount a third party would pay to use the asset and capitalize on the
related benefits of the assets. The fair value assigned to patents of $1,086,000
is being amortized over its expected life of four years.
Goodwill is being amortized on a straight line basis of the estimated period
of benefit of four years.
The accompanying unaudited pro forma combined statements of operations
presents the results of operations of Oplink for the year ended June 30, 2000,
combined with the statement of operations of Telelight for the same period,
except in the case of Telelight statement of operations data, information is
combined through April 6, 2000, the effective date which Telelight was acquired
by Oplink. The unaudited pro forma combined statement of operations gives effect
to this acquisition as if it had occurred as of July 1, 1999.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or the financial position of the combined companies.
F-28
<PAGE>
OPLINK COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OPLINK TELELIGHT
---------- ----------------
YEAR ENDED
PERIOD FROM PRO FORMA
JUNE 30, JULY 1, 1999 TO -----------------------------
2000 APRIL 6, 2000 ADJUSTMENTS COMBINED
---------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 39,048 $ 591 $ -- $ 39,639
Cost of revenues.......................... 33,344 434 1,387 (A) 35,165
---------- ----- ------- ------------
Gross profit (loss)....................... 5,704 157 (1,387) 4,474
---------- ----- ------- ------------
Operating expenses:
Research and development................ 3,686 202 -- 3,888
Sales and marketing..................... 2,695 11 -- 2,706
General and administrative.............. 4,173 276 -- 4,449
Amortization of deferred compensation... 12,740 -- -- 12,740
In-process research and development..... 7,020 -- (7,020)(D) --
Amortization of goodwill................ 981 -- 2,733 (B) 3,714
---------- ----- ------- ------------
Total operating expenses.............. 31,295 489 (4,287) 27,497
---------- ----- ------- ------------
Loss from operations...................... (25,591) (332) 2,900 (23,023)
Interest income........................... 681 24 -- 705
Other income, net......................... 8 1 -- 9
---------- ----- ------- ------------
Net loss.................................. $ (24,902) $(307) $ 2,900 $ (22,309)
========== ===== ======= ============
Net loss per share:
Basic and diluted....................... $ (3.18) $ (0.19)
========== ============
Weighted average shares................. 7,839,650 114,856,581 (C)
========== ============
</TABLE>
F-29
<PAGE>
OPLINK COMMUNICATIONS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The following adjustments were applied to Oplink's historical financial
statements and those of Telelight to arrive at the pro forma combined financial
information.
(A) To record the amortization of identifiable intangible assets related to the
acquisition of Telelight as if the transaction occurred on July 1, 1999.
Identifiable intangible assets recorded in relation to the acquisition were
approximately $7.4 million and are being amortized on a straight-line basis
over four years.
(B) To record the amortization of goodwill related to the acquisition of
Telelight as if the transaction occurred on July 1, 1999. Goodwill recorded
in relation to the acquisition was approximately $14.6 million and is being
amortized on a straight-line basis over four years.
(C) Weighted average shares used to calculate pro forma basic and diluted net
loss per share for the period presented is computed using the weighted
average number of Oplink Common Stock outstanding for the period presented,
13,440,000 shares of Oplink Common Stock issued to the former shareholders
of Telelight as if such shares were issued as of July 1, 1999 and also gives
effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public
offering using the "as-if-converted" method.
(D) This adjustment removes the $7,020,000 write-off of in-process research and
development because this charge is not expected to have a continuing impact
on the Company.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Telelight Communication Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Telelight Communication Inc. (a
company in the development stage) at December 31, 1998 and 1999 and the results
of its operations and its cash flows for the year ended December 31, 1999, and
for the periods from April 20, 1998 (date of inception) to December 31, 1998 and
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
May 24, 2000
F-31
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999 MARCH 31, 2000
---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 746,244 $ 664,050 $ 436,565
Accounts receivable................................... -- 109,712 108,853
Inventory............................................. -- 176,758 102,970
Prepaid expenses and other current assets............. 7,420 10,688 --
---------- ---------- ----------
Total current assets.............................. 753,664 961,208 648,388
Property and equipment, net............................. 98,849 247,960 417,516
Other assets............................................ 4,800 4,500 9,820
---------- ---------- ----------
Total assets...................................... $ 857,313 $1,213,668 $1,075,724
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 6,275 $ 110,810 $ 19,567
Accrued liabilities................................... 834 16,286 12,663
---------- ---------- ----------
Total current liabilities......................... 7,109 127,096 32,230
---------- ---------- ----------
Shareholders' equity:
Common Stock: no par value; 100,000 shares authorized;
issued and outstanding; 91,800 shares at
December 31, 1998 and 100,000 shares at
December 31, 1999 and March 31, 2000................ 1,370,000 1,728,785 1,728,785
Receivable from shareholder........................... (450,000) -- --
Accumulated deficit................................... (69,796) (642,213) (685,291)
---------- ---------- ----------
Total shareholders' equity........................ 850,204 1,086,572 1,043,494
---------- ---------- ----------
Total liabilities and shareholders' equity...... $ 857,313 $1,213,668 $1,075,724
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
APRIL 20, 1998 APRIL 20, 1998 APRIL 20, 1998
(DATE OF (DATE OF THREE MONTHS ENDED (DATE OF
INCEPTION) TO YEAR ENDED INCEPTION) TO MARCH 31, INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------- MARCH 31,
1998 1999 1999 1999 2000 2000
--------------- ------------- --------------- --------- -------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............. $ -- $ 358,993 $ 358,993 $ 445 $271,763 $ 630,756
Cost of revenues...... -- 262,963 262,963 182 199,359 462,322
-------- --------- --------- --------- -------- ---------
Gross profit.......... -- 96,030 96,030 263 72,404 168,434
-------- --------- --------- --------- -------- ---------
Operating expenses:
Research and
development....... 21,298 332,935 354,233 78,771 24,387 378,620
Sales and
marketing......... -- 668 668 60 9,998 10,666
General and
administrative.... 55,519 367,371 422,890 80,932 88,318 511,208
-------- --------- --------- --------- -------- ---------
Total operating
expenses........ 76,817 700,974 777,791 159,763 122,703 900,494
Loss from
operations.......... (76,817) (604,944) (681,761) (159,500) (50,299) (732,060)
Interest and other
income.............. 7,021 32,527 39,548 7,913 7,221 46,769
-------- --------- --------- --------- -------- ---------
Net loss.............. $(69,796) $(572,417) $(642,213) $(151,587) $(43,078) $(685,291)
======== ========= ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK RECEIVABLE DURING THE TOTAL
--------------------- FROM DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER STAGE EQUITY
-------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash.... 91,800 $1,370,000 $ -- $ -- $1,370,000
Issuance of common stock in exchange
for shareholder receivable......... -- -- (450,000) -- (450,000)
Net loss............................. -- -- -- (69,796) (69,796)
------- ---------- --------- --------- ----------
Balance at December 31, 1998......... 91,800 1,370,000 (450,000) (69,796) 850,204
Issuance of common stock in exchange
of services........................ 8,200 358,785 -- -- 358,785
Repayment of shareholder
receivable......................... -- 450,000 -- 450,000
Net loss............................. -- -- -- (572,417) (572,417)
------- ---------- --------- --------- ----------
Balance at December 31, 1999......... 100,000 1,728,785 -- (642,213) 1,086,572
Net loss (unaudited)................. -- -- -- (43,078) (43,078)
------- ---------- --------- --------- ----------
Balance at March 31, 2000
(unaudited)........................ 100,000 $1,728,785 $ -- $(685,291) $1,043,494
======= ========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
APRIL 20, 1998 APRIL 20, 1998 THREE MONTHS APRIL 20, 1998
(DATE OF (DATE OF ENDED (DATE OF
INCEPTION) TO YEAR ENDED INCEPTION) TO MARCH 31, INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------- MARCH 31,
1998 1999 1999 1999 2000 2000
--------------- ------------- --------------- --------- --------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.......................... $ (69,796) $(572,417) $(642,213) $(151,587) $ (43,078) $(685,291)
Adjustments to reconcile net loss
to net cash (used in) operating
activities:
Depreciation and
amortization................ 4,407 44,342 48,749 6,341 14,663 63,412
Common Stock issued to
employees and consultants
for services rendered....... -- 358,785 358,785 89,696 -- 358,785
Changes in current assets and
liabilities:
Accounts receivable......... -- (109,712) (109,712) (445) 859 (108,853)
Inventory................... -- (176,758) (176,758) -- 73,788 (102,970)
Prepaid expense and other
assets.................... (12,220) (2,968) (15,188) -- 5,368 (9,820)
Accounts payable............ 6,275 104,535 110,810 (2,589) (91,243) 19,567
Accrued liabilities......... 834 15,452 16,286 6,730 (3,623) 12,663
--------- --------- --------- --------- --------- ---------
Net cash provided by
operating activities.... (70,500) (338,741) (409,241) (51,854) (43,266) (452,507)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment....................... (103,256) (193,453) (296,709) (45,929) (184,219) (480,928)
--------- --------- --------- --------- --------- ---------
Net cash used in investing
activities.............. (103,256) (193,453) (296,709) (45,929) (184,219) (480,928)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of Common
Stock........................... 920,000 450,000 1,370,000 -- -- 1,370,000
--------- --------- --------- --------- --------- ---------
Net cash provided by
financing activities.... 920,000 450,000 1,370,000 -- -- 1,370,000
--------- --------- --------- --------- --------- ---------
Net increase/(decrease) in cash and
cash equivalents.................. 746,244 (82,194) 664,050 (97,783) (227,485) 436,565
Cash and cash equivalents at
beginning of year................. -- 746,244 -- 746,244 664,050 --
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of
year.............................. $ 746,244 $ 664,050 $ 664,050 $ 648,461 $ 436,565 $ 436,565
========= ========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING:
Common stock issued in exchange
for note receivable from
shareholder..................... $ 450,000 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
Common stock issued to employees
for services rendered........... $ -- $ 358,785 $ 358,785 $ 89,696 $ -- $ 358,785
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Telelight Communication Inc. (the "Company") was incorporated in State of
California on April 20, 1998 for the purpose of developing and selling fiber
optic components and subsystems which are designed specifically to increase
capacity and bandwidth of fiber optic communications and data communications
networks. The Company is in the developmental stage and, since inception, has
devoted substantially all of its time and efforts to developing products,
raising capital and recruiting personnel. As described in Note 5, the Company
was acquired by Oplink Communications, Inc. on April 6, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The interim consolidated financial statements at March 31, 2000 and for the
three months ended March 31, 1999 and 2000 are unaudited but, in the opinion of
management, has been prepared on the same basis as the annual consolidated
financial statements and include all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of its
financial position at such date and its operating results and cash flows for
those periods. Results for the interim period are not necessarily indicative of
the results to be expected for the entire year, or any future period.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of the product or
customer acceptance, which ever is later. Provisions for estimated future
product returns are recognized upon product shipment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
Inventory includes principally raw materials and is stated at the lower of
cost or market, with cost being determined using the first-in-first-out FIFO
inventory method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, generally five to seven years.
F-36
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENDITURES
Costs related to research, design, and development of products are charged
to research and development expense as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). To date, no
stock-based compensation has been undertaken.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents. The Company's
cash and cash equivalents are deposited with one major financial institution in
the United States. Deposits in this institution may exceed the amount of
insurance provided on such deposits. For financial instruments consisting of
cash and cash equivalents, other current assets, accounts payable, and accrued
liabilities included in the Company's financial statements, the carrying amounts
approximate fair value due to their short maturities.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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, 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.
Currently, the Company does not hold derivative instruments or engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 provides guidance for revenue
F-37
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
recognition under certain circumstances. The Company has evaluated the impact of
SAB 101 and believes that it's adoption will not have a material impact on its
results of operations.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT:
Machinery and equipment.................... $102,920 $292,123 $476,342
Furniture and fixtures..................... 336 1,586 1,586
Leasehold improvements..................... -- 3,000 3,000
-------- -------- --------
103,256 296,709 480,928
Less: Accumulated depreciation............. (4,407) (48,749) (63,412)
-------- -------- --------
$ 98,849 $247,960 $417,516
======== ======== ========
ACCRUED LIABILITIES
Payroll.................................... $ -- $ 4,006 $ 4,724
Payroll taxes.............................. -- 11,344 4,065
Other...................................... 834 936 3,874
-------- -------- --------
$ 834 $ 16,286 $ 12,663
======== ======== ========
</TABLE>
NOTE 3--INCOME TAXES:
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... $ 25 $ 111
Reserves and other........................................ -- 1
Credit carryforwards...................................... -- 7
---- -----
Total deferred tax assets............................... 25 119
DEFERRED TAX LIABILITY:
Depreciation and amortization............................. (7) (6)
---- -----
Total deferred tax assets............................... 18 113
Valuation allowance......................................... (18) (113)
---- -----
Net deferred tax assets..................................... $ -- $ --
==== =====
</TABLE>
F-38
<PAGE>
TELELIGHT COMMUNICATION INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES: (CONTINUED)
Reconciliation of the statutory federal income tax to the Company's
effective tax:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Tax at Federal statutory rate............................... (34) (34)
State, net of Federal benefit............................... (6) (7)
Meals and entertainment..................................... -- --
Change in valuation allowance............................... 41 43
Research and development credit benefit..................... (1) (2)
--- ---
Provision for taxes......................................... -- --
=== ===
</TABLE>
At December 31, 1999, the Company had approximately $278,000 of federal and
$279,000 of state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 2018 and 2006,
respectively.
The Company has research credit carryforwards of approximately $3,500 and
$3,000 for Federal and California income tax purposes, respectively. If not
utilized, the federal credit will expire in various amounts beginning in 2018.
The California research credit can be carried forward indefinitely.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more that 50%, as defined, over a three
year period.
NOTE 4--COMMITMENTS:
LEASES
The Company leases office space under a noncancelable operating lease with
an expiration date in 2000. Rent expense for the year ended December 31, 1999
and 1998 was $56,420 and $12,513, respectively.
Future minimum lease payments under the noncancelable operating lease are
$37,240 in 2000.
NOTE 5--SUBSEQUENT EVENTS:
In April 2000, the Company was acquired by Oplink Communications, Inc.
("Oplink"). All of the outstanding shares of common stock of the company were
exchanged for 13,440,000 shares of Oplink.
F-39
<PAGE>
[OPLINK LOGO]
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[OPLINK LOGO]
13,700,000 SHARES
COMMON STOCK
Oplink Communications, Inc. is offering 13,700,000 shares of its common
stock. This is our initial public offering and no public market currently exists
for our shares. We have approval for quotation of our common stock on the Nasdaq
National Market under the symbol "OPLK." We anticipate that the initial public
offering price will be between $14.00 and $16.00 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Oplink Communications, Inc...................... $ $
</TABLE>
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Oplink Communications, Inc. has granted the underwriters a 30-day option to
purchase up to an additional 2,055,000 shares of common stock to cover
over-allotments.
------------------------
ROBERTSON STEPHENS INTERNATIONAL
CIBC WORLD MARKETS
J.P. MORGAN SECURITIES LTD.
UBS WARBURG LLC
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
Robertson Stephens, Inc., CIBC World Markets Corp., J.P. Morgan Securities Inc.
and UBS Warburg LLC, have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth below opposite their respective names. The
underwriters are committed to purchase and pay for all shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Robertson Stephens, Inc. and Robertson Stephens
International, Ltd........................................
CIBC World Markets Corp. and CIBC World Markets plc.........
J.P. Morgan Securities Inc. and J.P. Morgan Securities
Ltd. .....................................................
UBS Warburg LLC.............................................
-------
Total...................................................
=======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any offer in whole or in part.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to
2,055,000 additional shares of common stock to cover over-allotments, if any, at
the public offering price less the underwriting discount set forth on the cover
page of this prospectus. If the underwriters exercise their over-allotment
option to purchase any of the 2,055,000 additional shares of common stock, the
underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares to be
purchased by each of them bears to the total number of shares of common stock
offered in this offering. If purchased, these additional shares will be sold by
the underwriters on the same terms as those on which the shares offered hereby
are being sold. We will be obligated, pursuant to the over-allotment option, to
sell shares to the underwriters to the extent the over-allotment option is
exercised. The underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.
75
<PAGE>
The following table shows the per share and total underwriting discounts and
commissions to be paid by us to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
NO EXERCISE OF
OVER- FULL EXERCISE OF
ALLOTMENT OVER-ALLOTMENT
-------------- ----------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $1,725,000.
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act of 1933, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers and directors and stockholders holding
approximately 96.9% of our common stock have agreed, subject to specified
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock
or any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or thereafter acquired directly by those holders
or with respect to which they have the power of disposition, without the prior
written consent of Robertson Stephens, Inc. This restriction terminates after
the close of trading of the shares on the 180th day of (and including) the day
the shares commenced trading on the Nasdaq National Market. However, Robertson
Stephens, Inc. may, in its sole discretion and at any time or from time to time
before the termination of the 180-day period, without notice, release all or any
portion of the securities subject to lock-up agreements. There are no existing
agreements between the representatives and any of our shareholders or
optionholders who have executed a lock-up agreement providing consent to the
sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of Robertson Stephens, Inc., subject to
certain exceptions, consent to the disposition of any shares held by
shareholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options under existing stock option and incentive
plans provided that those options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
LISTING
We have approval to list our common stock on the Nasdaq National Market
under the symbol "OPLK."
76
<PAGE>
SYNDICATE SHORT SALES
The representatives have advised us that, on behalf of the underwriters,
they may make short sales of our common stock in connection with this offering,
resulting in the sale by the underwriters of a greater number of shares than
they are required to purchase pursuant to the underwriting agreement. The short
position resulting from those short sales will be deemed a "covered" short
position to the extent that it does not exceed the 2,055,000 shares subject to
the underwriters' over-allotment option and will be deemed a "naked" short
position to the extent that it exceeds that number. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the trading price of the common stock in the open market
that could adversely affect investors who purchased shares in the offering. The
underwriters may reduce or close out their covered short position either by
exercising the over-allotment option or by purchasing shares in the open market.
In determining which of these alternatives to pursue, the underwriters will
consider the price at which shares are available for purchase in the open market
as compared to the price at which they may purchase shares through the
over-allotment option. Any "naked" short position will be closed out by
purchasing shares in the open market. Similar to the other stabilizing
transactions described below, open market purchases made by the underwriters to
cover all or a portion of their short position may have the effect of preventing
or retarding a decline in the market price of our common stock following this
offering. As a result, our common stock may trade at a price that is higher than
the price that otherwise might prevail in the open market.
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Exchange Act of 1934, they may engage in transactions, including
stabilizing bids or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "penalty bid" is an arrangement permitting the
representatives to claim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by that underwriter or syndicate member is purchased by
the representatives in the open market pursuant to a stabilizing bid or to cover
all or part of a syndicate short position. The representatives have advised us
that stabilizing bids and open market purchases may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any time.
DIRECTED SHARE PROGRAM
At our request, certain of the underwriters have reserved up to
five percent of the shares of common stock for sale in this offering at the
initial public offering price to our directors, officers and employees and
persons who are otherwise associated with us. The number of shares of common
stock available for sale to the general public will be reduced to the extent
these individuals purchase reserved shares. Any reserved shares which are not
purchased will be offered by the underwriters on the same basis as the other
shares of common stock offered in this offering. We have agreed to indemnify
these underwriters against various liabilities and expenses, including
liabilities under the Securities Act of 1933, in connection with the sales of
directed shares.
77
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by us in connection with the sale of our
common stock being registered. All amounts shown are estimates except for the
registration fee, the NASD filing fee and the Nasdaq National Market fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 49,912
NASD filing fee............................................. 19,406
Nasdaq National Market fee.................................. 95,000
Blue sky qualification fees and expenses.................... 7,500
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 750,000
Accounting fees and expenses................................ 500,000
Transfer agent and registrar fees........................... 25,200
Miscellaneous............................................... 27,982
----------
Total..................................................... $1,725,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law, permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Articles and Bylaws provide
that the Registrant shall indemnify its directors, officers, employees and
agents to the full extent permitted by the Delaware General Corporation Law,
including circumstances in which indemnification is otherwise discretionary
under Delaware law. In addition, the Registrant has entered into separate
indemnification agreements with its directors and executive officers which
require the Registrant, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from acts or omissions not in good faith or willful
misconduct).
These indemnification provisions and the indemnification agreements entered
into between the Registrant and its executive officers and directors may be
sufficiently broad to permit indemnification of the Registrant's executive
officers and directors for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act.
The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception, we have sold and issued the following unregistered
securities:
(1) From December 1997 to September 2000, we granted stock options to
purchase an aggregate of 55,802,700 shares of common stock at exercise
prices ranging from $0.00125 to $9.00 per share to employees, consultants,
directors and other service providers pursuant to our 1995 Stock Plan and
1998 Stock Plan.
(2) In September 1995, we sold an aggregate of 24,000,000 shares of
Series A preferred stock to six purchasers at a price per share of $0.025
for an aggregate purchase price of $600,000. Shares
II-1
<PAGE>
of Series A preferred stock are convertible into shares of common stock at
the rate of one share of common stock for each share of Series A preferred
stock outstanding.
(3) In August 1996 and August 1997, we sold an aggregate of 30,770,016
shares of Series B preferred stock to 19 purchasers at a price per share of
$0.09 for an aggregate purchase price of $2,769,301.44. Shares of Series B
preferred stock are convertible into shares of common stock at the rate of
one share of common stock for each share of Series B preferred stock
outstanding.
(4) In January 1997, we issued warrants to purchase 268,904 shares of
common stock, at an exercise price of $0.14875 per share, to GBC Venture
Capital, Inc., a lender, in connection with a loan agreement.
(5) In February 1998, we sold an aggregate of 12,000,000 shares of
Series C preferred stock to 10 purchasers at a price per share of $0.25 for
an aggregate purchase price of $3,000,000. Shares of Series C preferred
stock are convertible into shares of common stock at the rate of one share
of common stock for each share of Series C preferred stock outstanding.
(6) In March 1998, we issued warrants to purchase 80,000 shares of
Series C preferred stock, at an exercise price of $0.25 per share, to GBC
Venture Capital, Inc., a lender, in connection with a loan agreement.
(7) In March 1999 and July 1999 we sold an aggregate of 21,333,328
shares of Series D preferred stock to 14 purchasers at a price per share of
$0.375 for an aggregate purchase price of $7,999,998. Shares of Series D
preferred stock are convertible into shares of common stock at the rate of
one share of common stock for each share of Series D preferred stock
outstanding.
(8) In February 2000, we sold an aggregate of 22,000,000 shares of
Series E preferred stock to 66 purchasers at a price per share of $2.00 for
an aggregate purchase price of $44,000,000. Shares of Series E preferred
stock are convertible into shares of common stock at the rate of one share
of common stock for each share of Series E preferred stock outstanding.
(9) In August 2000, we issued a convertible promissory note in the
amount of $50,000,000 to Cisco Systems, Inc. The note will convert
automatically into shares of common stock upon the closing of this offering.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under Section 4(2) of the Securities Act
or by virtue of Rule 701 promulgated thereunder in that they were offered and
sold either pursuant to a written compensatory benefit plan or pursuant to a
written contract relating to compensation, as provided by Rule 701.
The sale and issuance of securities described in paragraphs (2), (3), (4),
(5), (6), (7), (8) and (9) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) of the Securities Act or
Regulation D promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1(1) Form of Underwriting Agreement.
3.1(1) Amended and Restated Certificate of Incorporation of Oplink,
as currently in effect.
3.2(1) Amended and Restated Certificate of Incorporation of Oplink,
to be in effect immediately following the closing of the
offering.
3.3(1) Bylaws of Oplink, as currently in effect.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(1) Third Amended and Restated Rights Agreement, dated as of
February 7, 2000 by and among Oplink and the investors
listed on Exhibit A attached thereto.
5.1(1) Opinion of Cooley Godward LLP.
10.1+(1) Development Contract Agreements, by and among Oplink and
Barr Associates, Inc. dated as of January 1997, July 9,
1998, March 17, 1999, April 14, 1999 and August 1999.
10.2+(1) General Purchase Agreement dated June 18, 2000 by and
between Oplink and Cierra Photonics Inc.
10.3+(1) Manufacturers Representative/Distributor Contract dated
January 26, 1998, by and between Oplink and DBX
Communications Inc.
10.4+(1) Purchase Agreement dated July 20, 1999 by and between Oplink
and Lucent Technologies Inc.
10.5+(1) Purchase Agreement dated November 3, 1999 by and between
Oplink and Lucent Technologies Inc.
10.6+(1) Purchase Agreement dated November 17, 1999 by and between
Oplink and Lucent Technologies Inc.
10.7+(1) Agreement dated July 2, 1999 by and between Oplink and
Corning Incorporated.
10.8(1) Building Floor Lease dated March 2000 by and between Fuzhou
Oplink Communications, Inc. and Fuzhou Kang Shun Guang
Telecommunications Co., Ltd.
10.9(1) Building Use Contract dated March 28, 2000 by and between
Zhuhai Oplink Communications, Inc. and Guangdong Zhuhai
High Technology Results Industrialization Demonstration
Base Company, Ltd.
10.10(1) Supplementary Contract I dated March 28, 2000 by and between
Zhuhai Oplink Communications, Inc. and Guangdong Zhuhai
High Technology Results Industrialization Demonstration
Base Company, Ltd.
10.11(1) Supplementary Contract II dated March 28, 2000 by and
between Zhuhai Oplink Communications, Inc. and Guangdong
Zhuhai High Technology Results Industrialization
Demonstration Base Company, Ltd.
10.12(1) State-owned Land Use Rights Assignment Contract dated
May 16, 2000 by and between Oplink Communications Inc. and
Zhuhai Bonded Area Management Committee.
10.13(1) Sublease dated March 1, 2000 by and between Oplink and Steag
RTP Systems.
10.14(1) Consent to Sublease Agreement dated March 2000 by and among
Oplink, Steag RTP Systems and Carlyle Forhen Trust.
10.15(1) Lease Agreement dated July 21, 1995 by and between SBC&D
Co., Inc. and AG Associates, Inc., as amended by the First
Amendment dated July 21, 1995 and the Second Amendment
dated December 3, 1997.
10.16(1) Representative Agreement dated May 2, 2000, by and among
Oplink and Wavetec.
10.17+(1) Lease Agreement dated July 13, 2000, by and between Agilent
Technologies, Inc. and Oplink.
10.17.1+(1) Lease Agreement dated June 29, 2000 by and between Agilent
Technologies, Inc. and Oplink.
10.18(1) Sublease Agreement dated February 29, 2000 by and among Wyse
Technology Inc. and Oplink and Wyse Technology Investments
Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.19(1) Amended and Restated Lease Agreement dated March 19, 1993 by
and between Wyse Technology Investments, Inc. and Wyse
Technology, Inc.
10.20(1) Amendment No. 1 to Sublease Agreement dated April 14, 2000
and Amendment No. 2 dated September 1, 2000 by and among
Oplink, Wyse Technology Inc. and Wyse Technology
Investments Inc.
10.21(1) Employment Letter Agreement by and between Oplink and
Frederick R. Fromm dated August 10, 2000.
10.22(1) Lease dated July 24, 2000 by and between Oplink and San Jose
Technology Properties, LLC.
10.23(1) Stock Option Agreement dated May 10, 2000 by and between
Oplink and David Spreng.
10.24(1) Stock Option Agreement dated May 10, 2000 by and between
Oplink and Bruce Horn.
10.25(1) Stock Option Agreements dated May 10, 2000 by and between
Oplink and Ian Jenks.
10.26(1) Oplink's 2000 Equity Incentive Plan.
10.27(1) Oplink's 2000 Employee Stock Purchase Plan.
10.28(1) Oplink's 1995 Stock Plan.
10.29(1) Oplink's 1998 Stock Plan.
10.30(1) Note Purchase Agreement by and between Oplink and Cisco
Systems, Inc. and Convertible Promissory Note each dated
August 28, 2000.
10.31(1) Oplink Form of Indemnity Agreement.
10.32(1) Employment Letter Agreement by and between Oplink and
Daryl J. Eigen dated August 15, 2000.
10.33 Employment Letter Agreement by and between Oplink and Jeff
Friedman dated August 15, 2000.
10.34(1) Lease Agreement dated May 8, 2000 by and between Beijing
Oplink Communications, Inc. and Zhonz He Realtor
Development Co.
10.35(1) Lease Agreement dated August 18, 2000 by and between the
preparatory office of Shanghai Oplink
Communications, Inc. and Shanghai Jia Yi Industrial
Development Co., Ltd.
10.36(1) Change of Control Agreement by and between Oplink and
Joseph Y. Liu dated September 17, 2000.
10.37(1) Change of Control Agreement by and between Oplink and Bruce
Horn dated September 17, 2000.
21.1(1) Subsidiaries of Oplink.
23.1 Consent of PricewaterhouseCoopers LLP
23.2(1) Consent of Cooley Godward LLP. (See Exhibit 5.1.)
24.1(1) Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
------------------------
(+) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(1) Previously filed.
II-4
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Oplink Communications, Inc.
Our audits of the financial statements referred to in our report dated
August 29, 2000, except as to second paragraph of Note 1, which is as of
September 6, 2000, appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule listed in Item 16(a) of
such Registration Statement. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
August 29, 2000
II-5
<PAGE>
SCHEDULE II
OPLINK COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGED TO AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Fiscal year ended June 30, 1998.................... $ -- $ 66 $ -- $ 66
Fiscal year ended June 30, 1999.................... 66 124 6 184
Fiscal year ended June 30, 2000.................... 184 380 2 562
Reserve for excess and obsolete inventory:
Fiscal year ended June 30, 1998.................... 44 224 136(1) 132
Fiscal year ended June 30, 1999.................... 132 555 286(1) 401
Fiscal year ended June 30, 2000.................... 401 4,659 601(1) 4,459
</TABLE>
------------------------
(1) Deductions represent the scrapping of related inventory against which the
reserve was provided.
II-6
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act,
the information omitted from the form of this prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 15 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against these liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by a director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether the indemnification by it is against public policy as
expressed in the Securities Act of 1933, and will be governed by the final
adjudication of this issue.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in the denomination and registered in the
names required by the Underwriters to permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 6 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 27th day of September, 2000.
<TABLE>
<S> <C> <C>
OPLINK COMMUNICATIONS, INC.
By: /s/ BRUCE HORN
-----------------------------------------
Bruce Horn
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 6 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------ Chief Executive Officer September 27, 2000
Joseph Y. Liu (Principal Executive Officer)
/s/ BRUCE HORN Chief Financial Officer
------------------------------------ (Principal Financial and September 27, 2000
Bruce Horn Accounting Officer)
*
------------------------------------ Chairman of the Board September 27, 2000
Ian Jenks
*
------------------------------------ Director September 27, 2000
Terence P. Brown
*
------------------------------------ Director September 27, 2000
Chieh Chang
*
------------------------------------ Director September 27, 2000
Herbert Chang
*
------------------------------------ Director September 27, 2000
Leonard J. LeBlanc
*
------------------------------------ Director September 27, 2000
David Spreng
</TABLE>
<TABLE>
<S> <C>
*By: /s/ BRUCE HORN
-------------------------------
Bruce Horn
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1(1) Form of Underwriting Agreement.
3.1(1) Amended and Restated Certificate of Incorporation of Oplink,
as currently in effect.
3.2(1) Amended and Restated Certificate of Incorporation of Oplink,
to be in effect immediately following the closing of the
offering.
3.3(1) Bylaws of Oplink, as currently in effect.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(1) Third Amended and Restated Rights Agreement, dated as of
February 7, 2000 by and among Oplink and the investors
listed on Exhibit A attached thereto.
5.1(1) Opinion of Cooley Godward LLP.
10.1+(1) Development Contract Agreements, by and among Oplink and
Barr Associates, Inc. dated as of January 1997, July 9,
1998, March 17, 1999, April 14, 1999 and August 1999.
10.2+(1) General Purchase Agreement dated June 18, 2000 by and
between Oplink and Cierra Photonics Inc.
10.3+(1) Manufacturers Representative/Distributor Contract dated
January 26, 1998, by and between Oplink and DBX
Communications Inc.
10.4+(1) Purchase Agreement dated July 20, 1999 by and between Oplink
and Lucent Technologies Inc.
10.5+(1) Purchase Agreement dated November 3, 1999 by and between
Oplink and Lucent Technologies Inc.
10.6+(1) Purchase Agreement dated November 17, 1999 by and between
Oplink and Lucent Technologies Inc.
10.7+(1) Agreement dated July 2, 1999 by and between Oplink and
Corning Incorporated.
10.8(1) Building Floor Lease dated March 2000 by and between Fuzhou
Oplink Communications, Inc. and Fuzhou Kang Shun Guang
Telecommunications Co., Ltd.
10.9(1) Building Use Contract dated March 28, 2000 by and between
Zhuhai Oplink Communications, Inc. and Guangdong Zhuhai
High Technology Results Industrialization Demonstration
Base Company, Ltd.
10.10(1) Supplementary Contract I dated March 28, 2000 by and between
Zhuhai Oplink Communications, Inc. and Guangdong Zhuhai
High Technology Results Industrialization Demonstration
Base Company, Ltd.
10.11(1) Supplementary Contract II dated March 28, 2000 by and
between Zhuhai Oplink Communications, Inc. and Guangdong
Zhuhai High Technology Results Industrialization
Demonstration Base Company, Ltd.
10.12(1) State-owned Land Use Rights Assignment Contract dated
May 16, 2000 by and between Oplink Communications Inc. and
Zhuhai Bonded Area Management Committee.
10.13(1) Sublease dated March 1, 2000 by and between Oplink and Steag
RTP Systems.
10.14(1) Consent to Sublease Agreement dated March 2000 by and among
Oplink, Steag RTP Systems and Carlyle Forhen Trust.
10.15(1) Lease Agreement dated July 21, 1995 by and between SBC&D
Co., Inc. and AG Associates, Inc., as amended by the First
Amendment dated July 21, 1995 and the Second Amendment
dated December 3, 1997.
10.16(1) Representative Agreement dated May 2, 2000, by and among
Oplink and Wavetec.
10.17+(1) Lease Agreement dated July 13, 2000, by and between Agilent
Technologies, Inc. and Oplink.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.17.1+(1) Lease Agreement dated June 29, 2000 by and between Agilent
Technologies, Inc. and Oplink.
10.18(1) Sublease Agreement dated February 29, 2000 by and among Wyse
Technology Inc. and Oplink and Wyse Technology Investments
Inc.
10.19(1) Amended and Restated Lease Agreement dated March 19, 1993 by
and between Wyse Technology Investments, Inc. and Wyse
Technology, Inc.
10.20(1) Amendment No. 1 to Sublease Agreement dated April 14, 2000
and Amendment No. 2 dated September 1, 2000 by and among
Oplink, Wyse Technology Inc. and Wyse Technology
Investments Inc.
10.21(1) Employment Letter Agreement by and between Oplink and
Frederick R. Fromm dated August 10, 2000.
10.22(1) Lease dated July 24, 2000 by and between Oplink and San Jose
Technology Properties, LLC.
10.23(1) Stock Option Agreement dated May 10, 2000 by and between
Oplink and David Spreng.
10.24(1) Stock Option Agreement dated May 10, 2000 by and between
Oplink and Bruce Horn.
10.25(1) Stock Option Agreements dated May 10, 2000 by and between
Oplink and Ian Jenks.
10.26(1) Oplink's 2000 Equity Incentive Plan.
10.27(1) Oplink's 2000 Employee Stock Purchase Plan.
10.28(1) Oplink's 1995 Stock Plan.
10.29(1) Oplink's 1998 Stock Plan.
10.30(1) Note Purchase Agreement by and between Oplink and Cisco
Systems, Inc. and Convertible Promissory Note each dated
August 28, 2000.
10.31(1) Oplink Form of Indemnity Agreement.
10.32(1) Employment Letter Agreement by and between Oplink and
Daryl J. Eigen dated August 15, 2000.
10.33 Employment Letter Agreement by and between Oplink and Jeff
Friedman dated August 15, 2000.
10.34(1) Lease Agreement dated May 8, 2000 by and between Beijing
Oplink Communications, Inc. and Zhonz He Realtor
Development Co.
10.35(1) Lease Agreement dated August 18, 2000 by and between the
preparatory office of Shanghai Oplink
Communications, Inc. and Shanghai Jia Yi Industrial
Development Co., Ltd.
10.36(1) Change of Control Agreement by and between Oplink and
Joseph Y. Liu dated September 17, 2000.
10.37(1) Change of Control Agreement by and between Oplink and Bruce
Horn dated September 17, 2000.
21.1(1) Subsidiaries of Oplink.
23.1 Consent of PricewaterhouseCoopers LLP
23.2(1) Consent of Cooley Godward LLP. (See Exhibit 5.1.)
24.1(1) Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
------------------------
(+) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(1) Previously filed.
