<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 000-25103
E-TEK Dynamics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-2337308
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1865 Lundy Avenue
San Jose, California 95131
(Address of principal executive office and zip code)
(408) 546-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES NO X
------ ------
As of January 29, 1999, 61,431,231 shares of the Registrant's common stock were
outstanding.
<PAGE>
E-TEK Dynamics, Inc.
FORM 10-Q
January 1, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Quarter and Six Months Ended January 1,
1999 and December 31, 1997 3
Consolidated Balance Sheets as of January 1, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended January 1, 1999 and
December 31, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
PART I Financial Information
Item 1. Financial Statements
E-TEK Dynamics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------ --------------------------
Jan. 1, Dec. 31, Jan. 1, Dec. 31,
1999 1997 1999 1997
<S> <C> <C> <C> <C>
Net revenues $ 38,708 $ 25,311 $ 71,650 $ 52,620
Cost of goods sold 18,854 11,155 34,843 23,048
-------- -------- -------- --------
Gross profit 19,854 14,156 36,807 29,572
-------- -------- -------- --------
Operating expenses:
Research and development 3,255 1,746 6,331 3,401
Selling, general and administrative 5,748 5,112 11,143 10,310
-------- -------- -------- --------
Total operating expenses 9,003 6,858 17,474 13,711
-------- -------- -------- --------
Operating income 10,851 7,298 19,333 15,861
Interest income 822 428 1,410 781
Interest expense (340) (188) (625) (359)
-------- -------- -------- --------
Income before income taxes 11,333 7,538 20,118 16,283
Provision for income taxes 4,533 3,014 8,047 6,513
-------- -------- -------- --------
Net income 6,800 4,524 12,071 9,770
Convertible Preferred Stock accretion 1,482 2,393 3,882 4,235
-------- -------- -------- --------
Net income available to Common
Stockholders $ 5,318 $ 2,131 $ 8,189 $ 5,535
======== ======== ======== ========
Net Income per share:
Basic $ 0.15 $ 0.10 $ 0.29 $ 0.22
Diluted $ 0.11 $ 0.08 $ 0.20 $ 0.18
Shares used in net income per share
Calculations:
Basic 34,777 21,205 28,350 24,639
Diluted 60,125 55,007 59,219 53,465
</TABLE>
See notes to Consolidated Financial Statements.
3
<PAGE>
E-TEK Dynamics, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Jan. 1, June 30,
1999 1998
---------------- ------------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 80,897 $ 21,918
Accounts receivable 21,860 15,463
Advance to joint venture - 7,000
Inventories 13,453 6,909
Deferred tax assets 7,873 7,873
Other current assets 811 343
--------- ---------
Total current assets 124,894 59,506
Property and equipment, net 42,363 30,872
--------- ---------
Total assets $ 167,257 $ 90,378
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,201 $ 8,281
Accrued liabilities 25,206 16,187
Income taxes payable 562 -
Current portion of capital lease obligations 1,238 1,240
Current portion of long-term debt 3,837 216
--------- ---------
Total current liabilities 41,044 25,924
Capital lease obligations, net of current portion 2,932 3,557
Long-term debt, net of current portion 16,678 10,251
--------- ---------
Total liabilities 60,654 39,732
--------- ---------
Commitments and contingencies:
Mandatorily Redeemable Convertible Preferred Stock,
none authorized, issued or outstanding; no par value,
30,000 shares authorized,
issued and outstanding - 125,144
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value, 25,000 shares
authorized, none issued and outstanding; none
authorized, issued or outstanding - -
Common stock, $0.001 par value, 300,000 shares
authorized, 61,433 shares issued and outstanding;
no par value, 65,000 shares authorized, 27,299
shares issued and outstanding 61 19,468
Additional paid-in capital 194,647 -
Notes receivable from stockholders (15,582) (14,215)
Deferred compensation (5,714) (4,753)
Distribution in excess of net book value (83,901) (83,901)
Retained earnings 17,092 8,903
--------- ---------
Total stockholders' equity 106,603 (74,498)
--------- ---------
Total liabilities and stockholders' equity $ 167,257 $ 90,378
========= =========
</TABLE>
See notes to Consolidated Financial Statements.
4
<PAGE>
E-TEK Dynamics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Jan. 1, Dec. 31,
1999 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,071 $ 9,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,303 3,618
Stock compensation expense 752 200
Imputed interest income (482) (200)
Changes in assets and liabilities:
Accounts receivable (6,397) 3,343
Inventories (6,544) (1,081)
Deferred income taxes - (3,066)
Other current assets (468) (337)
Accounts payable 1,920 1,017
Accrued liabilities 9,019 3,839
Income taxes payable 562 (1,215)
-------- --------
Net cash provided by operating activities 15,736 15,888
-------- --------
Cash flows from investing activities:
Additions to property and equipment (16,794) (6,834)
Payment from joint venture 7,000 -
Maturities and sale of short-term investments - 165
Purchase of short-term investments - (4,143)
-------- --------
Net cash used in investing activities (9,794) (10,812)
-------- --------
Cash flows from financing activities:
Repurchase of Common Stock - (120,000)
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock - 116,123
Proceeds from issuance of Common Stock, net 43,616 68
Principal payments on capital lease obligations (627) (375)
Borrowing on long-term debt 13,330 3,000
Payments on long-term debt (3,282) (78)
-------- --------
Net cash provided by (used in) financing activities 53,037 (1,262)
-------- --------
Net increase in cash and cash equivalents 58,979 3,814
Cash and cash equivalents at beginning of period 21,918 8,259
-------- --------
Cash and cash equivalents at end of period $ 80,897 $ 12,073
======== ========
Supplemental disclosure of cash flow information:
Interest paid 599 533
Income taxes paid 7,485 10,740
</TABLE>
See notes to Consolidated Financial Statements.
5
<PAGE>
E-TEK Dynamics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial data as of January 1, 1999 and December 31,
1997, and for the quarter and six month periods ended January 1, 1999 and
December 31, 1997, have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Registration Statement on Form S-1
declared effective on December 1, 1998.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of January 1, 1999 and for the three
month and six month periods (as applicable) ended January 1, 1999 and December
31, 1997, have been made. The results of operations for the period ended
January 1, 1999 are not necessarily indicative of the operating results for the
full year.
2. Initial Public Offering
On December 2, 1998, the Company completed its initial public offering and sold
4 million shares of its Common Stock at a price of $12.00 per share. Upon the
closing of this offering, all of the Company's Convertible Preferred Stock
converted to Common Stock.
3. Inventories
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Jan. 1, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials............................................. $ 7,226 $ 3,473
Work in process........................................... 4,619 2,216
Finished goods............................................ 1,608 1,220
-------- -------
$ 13,453 $ 6,909
======== =======
</TABLE>
6
<PAGE>
4. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------ -------------------------
Jan. 1, Dec. 31, Jan. 1, Dec.31,
--------- -------- --------- --------
1999 1997 1999 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income .................................... $ 6,800 $ 4,524 $ 12,071 $ 9,770
Convertible Preferred Stock accretion ......... 1,482 2,393 3,882 4,235
-------- -------- -------- --------
Net income available to Common
Stockholders (Basic)......................... 5,318 2,131 8,189 5,535
Convertible Preferred Stock accretion ......... 1,482 2,393 3,882 4,235
-------- -------- -------- --------
Net income available to Common
Stockholders and assumed
Conversions (Diluted)........................ $ 6,800 $ 4,524 $ 12,071 $ 9,770
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share-weighted average common shares......... $ 34,777 21,205 28,350 24,639
Effect of dilutive securities
Common Stock options......................... 1,592 106 1,361 43
Unvested Common Stock subject
to repurchase................................ 4,782 3,696 4,975 2,383
Convertible Preferred Stock.................... 18,974 30,000 24,533 26,400
-------- -------- -------- --------
Denominator for dilutive earnings per
share-adjusted weighted average common
shares and assumed conversions............... 60,125 55,007 59,219 53,465
Basic earnings per share ........................ $ 0.15 $ 0.10 $ 0.29 $ 0.22
-------- -------- -------- -------
Diluted earnings per share ...................... $ 0.11 $ 0.08 $ 0.20 $ 0.18
-------- -------- -------- -------
</TABLE>
5. Recent Financial Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new Statements
of Financial Accounting Standards ("SFAS"). SFAS 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive income
within a financial statement. This statement requires the Company to report
additional information on comprehensive income to supplement the reporting of
income. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Comparative financial statements provided for earlier periods are
required to be reclassified so that comprehensive income is displayed in a
comparative format for all periods presented. SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards for
reporting information about operating segments in annual and interim financial
statements. This statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company has adopted SFAS 130 for fiscal 1999. The adoption of SFAS
130 did not have a material effect on the Company's presentation of its
consolidated financial statements. The Company will adopt SFAS 131 for the year
ending June 30, 1999 and is currently studying its provisions.
7
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of SFAS
133 to have a material impact on the Company's results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Readers are referred to the Risk Factors section in this
report and to the risk factors set out in the Company's Registration Statement
on Form S-1 which describes factors that could cause actual events to differ
from those contained in the forward looking statements.
Overview
The Company generates revenues primarily from the sale of passive optical
components and modules. Revenue from product sales is generally recognized at
the time the product is shipped, with provisions established for estimated
product returns and allowances. A relatively small number of telecommunications
equipment manufacturers have accounted for a significant portion of the
Company's revenue to date. This has historically resulted in an uneven order
flow driven by fluctuating demand for the Company's products.
The fiber optic components industry is characterized by declining average
selling prices (ASPs) resulting from such factors as increased competition and
increasing unit volumes as telecommunication service providers continue to
deploy and expand fiber optic networks. Cost and component size reductions
driven by advances in component technology and manufacturing efficiencies, as
well as the increasing integration of components, are expected to accelerate the
rate of growth in existing optical components markets and enable new markets
such as metropolitan area networks. As a result, telecommunications equipment
manufacturers are increasingly demanding high volume manufacture of low cost,
high performance, integrated components.
The Company is engaged in continuing efforts to expand its manufacturing
capabilities to address anticipated unit volume growth. Beginning in December
1997, the Company increased the size of its San Jose facility from approximately
90,000 square feet to approximately 160,000 square feet and purchased
approximately $17.6 million of capital equipment. The Company increased its
number of employees from 503 in the second quarter fiscal year 1998 to 906 at
the end of the second quarter fiscal year 1999. In addition during 1998, the
Company entered into a joint venture with a Taiwanese company (the "FibX Joint
Venture") to build and operate a fiber optic component manufacturing facility in
Taiwan. The FibX Joint Venture began manufacturing certain products at the FibX
facility in January 1999.
The company's fiscal quarter ends on the Friday that is closest to the end of
the calendar quarter (January 1 for the second quarter in fiscal year 1999). The
fiscal quarter ended January 1, 1999 included 91 days compared to 92 days in the
fiscal quarter ended December 31, 1997. The Company's fiscal year end is always
June 30.
8
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentages of
net revenues represented by certain items reflected in the Company's
Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Quarter ended Six Months ended
-------------------------- --------------------------------
Jan. 1, Dec. 31, Jan. 1, Dec. 31,
-------- --------- --------- ----------
1999 1997 1999 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................... 48.7 44.1 48.6 43.8
------- ------- -------- -------
Gross profit.............................. 51.3 55.9 51.4 56.2
------- ------- -------- -------
Operating expenses:
Research and development.................. 8.4 6.9 8.8 6.5
Selling, general and administrative....... 14.9 20.2 15.6 19.6
------- ------- -------- -------
Total operating expenses............... 23.3 27.1 24.4 26.1
------- ------- -------- -------
Operating income............................ 28.0 28.8 27.0 30.1
Interest income............................. 2.1 1.7 2.0 1.5
Interest expense............................ (0.8) (0.7) (0.9) (0.7)
------- ------- -------- -------
Income before income taxes.................. 29.3 29.8 28.1 30.9
Provision for income taxes.................. 11.7 11.9 11.2 12.3
------- ------- -------- -------
Net income.................................. 17.6% 17.9% 16.9% 18.6%
------- ------- -------- -------
</TABLE>
Quarters Ended January 1, 1999 and December 31, 1997
Net Revenues
Net revenues increased 52.9% to $38.7 million in the second quarter of fiscal
1999 from $25.3 million in the second quarter of fiscal 1998. The revenue
increases were primarily due to increased shipments of the Company's Wavelength
Division Multiplexer components and modules ("WDMs"), Couplers, Isolators, and
Micro-Optic Integrated Components ("MOICs"). Unit volume increases were
partially offset by a decline in ASPs. A relatively small number of customers
have accounted for a significant portion of the Company's total revenue to date,
and the Company expects that this trend will continue for the foreseeable
future.
Gross Profit
Gross profit increased 40.3% to $19.9 million for the second quarter of fiscal
1999 from $14.2 million in the second quarter of fiscal 1998. Cost of goods
sold consists of raw material costs, direct labor costs, warranty costs,
royalties and overhead related to the Company's manufacturing operations. Gross
profit margins declined from 55.9% to 51.3% during these periods primarily due
to declining ASPs and the Company's expansion of its manufacturing capacity to
address unit volume growth. The Company's gross margins in the future may be
affected by a number of factors, including market pricing, fixed costs of adding
manufacturing capacity, manufacturing volumes, efficiencies and yields,
fluctuations in the availability and price of raw materials, product mix and
labor costs.
9
<PAGE>
Research and Development Expenses
Research and development expenses consist of compensation costs for personnel,
depreciation of equipment, and prototype materials. Research and development
expenses were $3.3 million for the second quarter of fiscal 1999 representing
8.4% of net revenues. This represents an 86.4% increase over second quarter of
fiscal 1998 research and development expenses of $1.8 million or 6.8% of
revenues. The increase was primarily due to the increase in research and
development personnel and related expenses. The Company expects that research
and development expenses will continue to increase in fiscal 1999 in absolute
dollars.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation costs for
personnel, sales commissions, travel expenses, marketing programs, professional
services, accounting, human resources, executive management and consulting.
Selling, general and administrative expenses were $5.8 million for the second
quarter of fiscal 1999, representing 14.9% of net revenues. This represents a
12.4% increase over selling, general and administrative expenses for the second
quarter of fiscal 1998 of $5.1 million or 20.2% of net revenues. The increase
in absolute dollars of expenditures over this period reflected the hiring of
additional selling, marketing and administrative personnel and increased
commissions paid on higher revenues. The Company anticipates that its selling,
general and administrative expenses will increase in absolute dollars during
fiscal 1999.
Interest Income and Interest Expense
The Company's interest income was approximately $0.8 million for the second
quarter of fiscal 1999. The Company earns interest income on its cash
investments and also recognized imputed interest income of $0.2 million relating
to notes receivable from stockholders. Interest expense, incurred on borrowings
secured by the Company's property and equipment, and on capital leases, was $0.3
million for the second quarter of fiscal 1999.
Provision for Income Taxes
The Company's combined federal and state income tax provision was 40% for the
second quarter of fiscal 1999, consistent with a tax provision of 40% in the
second quarter of fiscal 1998.
Six Months Ended January 1, 1999 and December 31, 1997
Net Revenues
Net revenues increased 36.2% from $52.6 million for the six months ended
December 31, 1997 to $71.7 million for the six months ended January 1, 1999. The
increase in net revenues reflected higher shipments of the Company's WDMs,
Couplers, Isolators and MOICs. While ASPs declined, unit volumes increased.
10
<PAGE>
Gross Profit
Gross profit increased 24.5% to $36.8 million for the six months ended January
1, 1999 from $29.6 million for the six months ended December 31, 1997. Gross
profit margins declined from 56.2% to 51.4% during these periods, primarily due
to declining ASPs and the additional depreciation on capital expenditures and
other costs associated with the Company's expansion of its manufacturing
capacity.
Research and Development Expenses
Research and development expenses increased 86.2% from $3.4 million for the six
months ended December 31, 1997, which represented 6.5% of revenues, to $6.3
million for the six months ended January 1, 1999, which represented 8.8% of
revenues. The increase was primarily due to the hiring of additional personnel
and the purchase of prototype materials and depreciation on equipment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 8.1% from $10.3 million
for the six months ended December 31, 1997 which represented 19.6% of revenues
to $11.1 million for the six months ended January 1, 1999, which represented
15.6% of revenue. The increase was primarily due to the hiring of additional
selling, general and administrative personnel to support the Company's growth
and due to increases in other expenses.
Interest Income and Interest Expense
Interest income increased from $0.8 million in the six months ended December 31,
1997 to $1.4 million in the six months ended January 1, 1999, primarily due to
recognizing the imputed interest income of $0.5 million related to notes
receivable from stockholders. Interest expense increased from $0.4 million in
the six months ended December 31, 1997 to $0.6 million in the six months ended
January 1, 1999, reflecting a higher level of borrowings.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and met its capital
expenditure requirements primarily through cash flows from operations and
borrowings. The Company's operating activities provided cash of $15.7 million
for the six months ended January 1, 1999 as compared to $15.9 million for the
six months ended December 31, 1997. At January 1, 1999 the Company had cash and
cash equivalents of $80.9 million and working capital of $83.9 million.
Net cash used in investing activities was $9.8 million for the six months ended
January 1, 1999 as compared to $10.8 million for the six months ended December
31, 1997, and consisted primarily of capital expenditures.
Net cash provided by financing activities was $53.0 million for the six months
ending January 1, 1999 as compared to $1.3 million used in financing activities
for the six months ended December 31, 1997. Net cash provided by financing
activities resulted primarily from net proceeds of approximately $43.5 million
from the Company's initial public offering in the six months ended January 1,
1999. In addition, the Company borrowed $13.3 million during this period.
11
<PAGE>
The Company has a $15 million revolving credit agreement. This line of credit
expires on March 31, 1999, is secured by the Company's accounts receivable,
inventories and equipment and is subject to customary restrictive covenants,
including covenants requiring the Company to maintain certain financial ratios
and prohibiting the payment of cash dividends. The borrowings thereunder bear
interest at a rate of LIBOR plus 1.5%. At January 1, 1999, the Company had no
borrowings outstanding under the revolving credit agreement.
Qualitative and Quantitative Disclosure About Market Risk
The following discusses the Company's exposure to market risk related to changes
in interest rates and foreign currency exchange rates. This discussion contains
forward-looking statements that are subject to risks and uncertainties set out
below and in the section of this report entitled "Risk Factors."
Interest Rate Sensitivity
Cash and Cash-Equivalents Owned By the Company. As of January 1, 1999, the
Company had cash and cash equivalents of $80.9 million invested in highly liquid
money market funds or bank accounts with average maturities of less than 90
days. The cash and cash equivalents are subject to interest rate risk and the
Company may receive higher or lower interest income if market interest rates
increase or decrease. A hypothetical increase or decrease in market interest
rates by 10 percent from levels at January 1, 1999 would not have a material
impact on the Company's cash or cash equivalents.
Outstanding Debt and Capital Lease Obligations of the Company. As of January 1,
1999 the Company had outstanding long-term debt and capital lease obligations of
approximately $24.7 million at fixed interest rates ranging from 6.4% to 9.8%.
Because the interest rates on these instruments are fixed, a hypothetical
decrease in market interest rates of 10 percent from levels at January 1, 1999
would not have a material impact on the Company's outstanding debt and capital
lease obligations.
Foreign Currency Exchange Rate Risk
The Company generates a significant portion of its revenues from sales to
companies located outside the United States, principally in Europe. Currently,
all of the Company's international sales are U.S. dollar denominated. As a
result, the Company's operating results could fluctuate significantly based upon
changes in the exchange rates of certain currencies in relation to the U.S.
dollar. The Company does not hedge against foreign currency exchange rate
changes.
Year 2000 Compliance
The Company relies on its systems, applications and control devices in operating
and monitoring all major aspects of its business. The Company recently installed
new Enterprise Resource Planning software at a cost of approximately $1.0
million which the Company believes is Year 2000 compliant. With respect to its
own systems, the Company relies on the representations of its primary software
vendors that their products are Year 2000 compliant. Based in part on these
representations, the Company believes its other systems, software and devices
are also Year 2000 compliant. The Company has reviewed the effect of Year 2000
issues on its other systems, including both its information technology and non-
information technology systems, software and devices, and believes that it is
year 2000 compliant. However, the noncompliance of the Company's systems,
software and devices could
12
<PAGE>
severely disrupt the Company's operations and have a material adverse affect on
its business, financial condition and results of operations.
The Company also relies, directly and indirectly, on external systems of its
customers, suppliers, creditors, financial organizations, utilities providers
and governmental entities, both domestic and international. None of these
systems are under the control of the Company. Consequently, the Company could be
affected through disruptions in the operations of the enterprises with which the
Company interacts. Furthermore, the purchasing frequency and volume of customers
or potential customers may be affected by Year 2000 issues as companies expend
significant resources to make their current systems Year 2000 compliant. Certain
of the Company's customers, including each of the Company's three largest
customers, have requested information from the Company concerning its exposure
to Year 2000 problems, the steps it has taken to resolve any Year 2000 problems
and what level of management attention is being focused on the issue. Similarly,
the Company has sent inquiries to certain of its suppliers requesting
substantially the same information from them. The Company has received
representations from certain of its suppliers, including each of its sole source
suppliers, as to the Year 2000 compliance of their systems and products. The
Company has not assessed the Year 2000 compliance of its customers. If the
Company's customers encounter Year 2000 problems that prevent their products
from functioning properly, these customers may be forced to devote significant
resources to fixing these problems and may reduce or suspend the manufacture of
new telecommunications equipment during such time. As a result, the Company's
sales of fiber optic components to these customers could be materially and
adversely affected. In addition, if the Company's suppliers, particularly its
sole-source suppliers, are unable to manufacture or deliver supplies to the
Company as a result of Year 2000 problems, the Company's ability to manufacture
and sell its products would be materially and adversely affected. The Company
does not currently have in place any contingency plans for its operations if
Year 2000 issues are not resolved in time or go undetected. The incomplete or
untimely resolution of any of these issues could have a material adverse effect
on the Company's business, financial condition and results of operations.
The foregoing is a Year 2000 Readiness Disclosure as defined by the Year 2000
Information and Readiness Disclosure Act of 1998.
Risk Factors
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
report.
Dependence on A Limited Number of Major Customers
The telecommunications equipment industry is dominated by a small number of
large companies and is currently consolidating, thereby further reducing the
number of potential customers in the industry. The loss of one or more of the
Company's largest customers, any reduction or delay in sales to these customers,
the inability of the Company to successfully develop relationships with
additional customers, or any further price concessions could have a material
adverse effect on the Company's business, financial condition and results of
operations.
13
<PAGE>
Fluctuations In Quarterly and Annual Results; Seasonality
The Company's net revenues and operating results have in the past varied and may
in the future vary significantly from quarter to quarter and from year to year
as a result of the size and timing of customer orders, the ability to obtain
sufficient supplies of sole or limited source materials for the Company's
products, the ability to manufacture products on a timely basis, pricing
pressure, customer requirements, and changes in the product mix, among other
factors. Refusal of customers to accept shipped products, returns of products
or difficulties in collecting accounts receivable could result in significant
charges against income, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Limited Number of Product Lines
A small number of products have historically accounted for a majority of the
Company's net revenues. There can be no assurance that the Company will be
successful in developing any other products or taking other steps to mitigate
the risks associated with reduced demand for its existing products. Reduced
demand for the Company's existing products would have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence on Telecommunications Industry
The Company's future success is dependent on the continued growth and success of
the telecommunications industry, which is evolving rapidly as telecommunication
markets around the world deregulate and open to global competition. There can
be no assurance, however, that globalization, deregulation and other trends
causing an increase in the need for bandwidth that are currently driving growth
in the telecommunications industry will continue in a manner that is favorable
to the Company.
Risks Of Long And Unpredictable Sales Cycles; Limited Long - Term Contracts;
Short Lead Times
The period of time between the Company's initial contact with a customer and the
receipt of an actual purchase order may span a year or more. In addition,
customers perform, and require the Company to perform, extensive product
evaluation and testing of new components before purchasing them. Curtailment or
termination of customer purchasing programs, decreases in purchased volumes or
reductions in the purchasing of certain components, particularly if
unanticipated by the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Decline In Average Selling Prices
The fiber optic component industry is very competitive and is characterized by
declining ASPs resulting from factors such as increased competition and greater
unit volumes as telecommunication service providers continue to deploy fiber
optic networks. If the Company is unable to continue to develop and introduce
on a timely basis new products that incorporate features that can be sold at
higher ASPs, as well as reduce its manufacturing costs, there is a risk that the
Company's net revenues and gross margins could decline, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
14
<PAGE>
Competition; Customers as Competitors
The market for fiber optic components is intensely competitive. Many of the
Company's current and potential competitors and customers have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards 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. In addition, consolidation in the
fiber optic component industry could intensify the competitive pressures faced
by the Company. For example, two of the Company's competitors, JDS Fitel, Inc.
and Uniphase Corp., have recently announced their plan to merge. Many of the
Company's competitors manufacture their products in countries offering
significantly lower labor costs than in the United States. In addition, some of
the Company's customers have fiber optic component manufacturing capabilities,
which may represent further competition if those customers choose to manufacture
products internally that they formerly purchased from the Company. There can be
no assurance that the Company will be able to compete successfully with its
existing or new competitors.
Manufacturing and Corporate Expansion Risks
The Company currently manufactures the majority of its products at its
facilities in San Jose, California. The Company is in the process of increasing
its manufacturing capacity at these facilities and additional facilities as well
as adding overseas manufacturing capacity through the FibX Joint Venture. The
development of overseas manufacturing capabilities and the expansion of
corporate facilities entail significant risks, including unanticipated cost
increases, unavailability or late delivery of equipment, unforeseen
environmental or engineering problems, personnel recruitment delays, political
instability, weather interference, any of which could have a material adverse
effect on the start up or operation of new facilities. The Company's
manufacturing and corporate expansion and related capital expenditures are being
made in anticipation of a level of customer orders that may not be sustained
over multiple quarters, if at all. If anticipated levels of customer orders are
not received, the Company will not be able reduce its expenses quickly enough to
prevent a decline in the Company's gross margins and operating income. Such
decline could have a material adverse effect on the Company's business,
financial condition and results of operations. Conversely, in the event the
Company's plans to expand its manufacturing capacity are not implemented on a
timely basis, the Company could face production capacity constraints, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Suppliers
The Company is dependent on a limited number of suppliers of materials for its
products as well as equipment used to manufacture its products. Some of the
Company's suppliers are sole sources. The reliance on a sole or limited number
of suppliers could result in reduced control over pricing, quality and or
delivery problems. Any future difficulty in obtaining sufficient and timely
delivery of materials could result in delays or reductions in product shipments,
cancellation of orders and loss of future business, which could have a material
adverse affect on the Company's business, financial condition and results of
operations.
15
<PAGE>
Dependence on Third Party Sales Representatives, Distributors and Key Employees
The Company sells substantially all of its products through a network of sales
representatives and distributors, the majority of whom have exclusive rights to
sell the Company's products in certain territories. There is a risk that the
Company's sales representatives and distributors may discontinue sales of the
Company's products in order to switch to representing one or more of the
Company's competitors. The loss of, or reduction in sales made by, any of the
Company's key sales representatives or distributors could have a material
adverse effect on the Company's business, financial condition or results of
operations. The success of the Company is dependent, in large part, on the
long-term effectiveness of its executive officers and their continued service to
the Company. The Company's success will also depend in large part upon its
ability to attract and retain highly-skilled technical, managerial, sales and
marketing personnel, particularly those skilled and experienced with fiber
optics. The loss of the services of such key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Technological Change and New Products
The Company expects that new technologies will emerge as competition in the
telecommunications equipment industry increases and the need for higher and more
cost efficient bandwidth expands. The introduction of new products
incorporating new technologies or the emergence of new industry standards could
render the Company's existing products uncompetitive, obsolete or unmarketable.
Products as complex as those offered by the Company may contain defects when
first introduced or as new versions are released and new products often take
longer to develop than originally anticipated. There can be no assurance that
the Company will be able to identify, develop, manufacture, market or support
new or enhanced products successfully or on a timely basis, that Company's new
products will gain market acceptance or that the Company will be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards.
Risks Associated with International Operations; Currency Risks
The Company generates a significant portion of its net revenues from sales to
companies located outside the United States, principally in Europe. As a
result, a significant portion of the Company's sales and operations may continue
to be subject to certain risks, including government controls, export licensing
requirements and restrictions, tariffs and other trade barriers, slower cash
collections, exchange controls and potential adverse tax consequences.
Currently, all of the Company's international sales are U.S. dollar denominated.
As a result, the Company's operating results could fluctuate significantly based
upon changes in the exchange rates of certain currencies in relation to the U.S.
dollar.
Risks Associated With Patents and Intellectual Property Rights
The Company's success will depend, in part, on its ability to protect its
intellectual property. The Company relies primarily on patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
methods to protect its proprietary technologies and processes. There can be no
assurance that such measures will provide meaningful protection for the
Company's proprietary technologies and processes. Despite reasonable
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, develop
similar technology independently or design around the Company's patents. There
can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. The
16
<PAGE>
telecommunications equipment industry is characterized by vigorous protection
and pursuit of intellectual property rights, and the Company has also entered
into certain indemnification obligations in favor of its customers and strategic
partners that could be triggered upon an allegation or finding of the Company's
infringement of other parties' proprietary rights. The Company has in the past
received notifications alleging that it is infringing the intellectual property
rights of third parties. Irrespective of the validity or successful assertion of
such claims, the Company would likely incur significant costs and diversion of
its resources with respect to the defense of such claims, which could also have
a material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated With Potential Acquisitions and Strategic Investments
The Company expects to review acquisition and strategic investment prospects
that would complement its existing product offerings, augment its market
coverage, secure supplies of critical materials or enhance its technological
capabilities. Future acquisitions or investments by the Company, including an
increase in ownership interests in joint ventures, could result in potentially
dilutive issuances of equity securities, large one-time write-offs, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets. Furthermore, acquisitions entail
numerous risks, including difficulties in the assimilation of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns, the
diversion of resources from the Company's existing businesses, products or
technologies, risks of entering geographic and business markets in which the
Company has no or limited prior experience and the potential loss of key
employees of acquired organizations. A failure by the Company to successfully
integrate any businesses, products, technologies or personnel that might be
acquired in the future, could also have a material adverse affect on the
Company's business, financial condition and results of operations.
Environmental and Disaster Risks
The Company owns its headquarter facilities and leases facilities in San Jose.
The Company handles small amounts of hazardous materials as part of its
manufacturing activities. Although the Company believes that it has complied
with all applicable environmental regulations in connection with its operations,
there can be no assurance that the Company will not be required to undertake
environmental remediation in order to comply with current or future
environmental laws. The cost of any remedial actions or the paying of penalties
or damages for environmental matters, regardless of fault, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's facilities are susceptible to damage from earthquakes
as well as from fire, floods, power loss, telecommunications failures and
similar events. The occurrence of any of these events could significantly
disrupt the Company's operations, and could have a material adverse effect on
the Company's business, financial condition and results of operations.
17
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
The Company is involved in disputes and litigation in the normal course of its
business. The Company does not believe that the outcome of any of these
disputes or litigation will have a material adverse effect on the Company's
business, financial condition or results of operations.
Item 2. Changes In Securities and Use of Proceeds
The Company registered the initial public offering of its common stock, par
value $0.001 per share, on a Registration Statement on Form S-1 (File No. 333-
61763) which was declared effective on December 1, 1998. The offering commenced
in August 1998 and closed on December 7, 1998. The managing underwriters of the
offering were Goldman Sachs & Co., Morgan Stanley Dean Witter, Dain Rauscher
Wessels and NationsBanc Montgomery Securities LLC. The Company registered an
aggregate offering of $89.7 million worth of common stock on the Form S-1. A
total of 5,750,000 shares of common stock were sold in the offering at a price
of $12.00 per share, resulting in gross proceeds of $69.0 million. Of these
shares, 4,000,000 were sold by the Company and 1,750,000 were sold by certain
selling stockholders. The gross proceeds to the Company and selling
stockholders were $48.0 million and $21.0 million, respectively. The Company's
portion of the underwriting discount was $3,360,000 and its other expenses
related to the offering totaled approximately $1.1 million. Thus, the Company's
net proceeds from the offering were $43,540,000. From the time of receipt
through January 1, 1999, the Company has applied its net proceeds from the
offering toward working capital.
During the quarter ended January 1, 1999, the Company issued 6,915 shares of its
common stock pursuant to the exercise of stock options at exercise prices
ranging from $2.30 to $3.25. All of these stock options were granted prior to
the Company's initial public offering under one of the Company's various
employee stock option plans. The Company's issuance of shares of its common
stock upon the exercise of these options was exempt from registration pursuant
to Rule 701 promulgated under the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders.
In November 1998, the Company submitted several matters to its security holders
for action by written consent. The following is a brief description of the
matters voted upon at the meeting and a statement of the number of votes cast
for and against and the number of abstentions. There were no broker non-votes
with respect to any matter.
To approve the Company's reincorporation into Delaware.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
To approve and adopt a new 1998 Stock Plan.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
18
<PAGE>
To approve and adopt a new 1998 Stock Option Plan.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
To approve and adopt a new 1998 Employee Stock Purchase Plan.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
To approve an amendment to the Company's 1997 Equity Incentive Plan to increase
the number of shares of common stock reserved for issuance thereunder.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
To approve an amendment and restatement of the Company's Certificate of
Incorporation in connection with the Company's initial public offering.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
To approve certain indemnification agreements to be entered into between the
Company and its officers and directors.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock: FOR: 20,843,712 AGAINST: 0 ABSTAIN: 20,584,937
Preferred Stock: FOR: 15,862,500 AGAINST: 0 ABSTAIN: 137,500
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
27.1 Financial data schedule
(b) Reports on Form 8-K - None
19
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 8, 1999 By /s/ Sanjay Subhedar
---------------------
Sanjay Subhedar
Senior Vice President Operations
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial Information extracted from the Balance
Sheet, Statement of Operation and Statement of Cash Flows included in the
Company's Form 10-Q for the period ending January 1, 1999, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JAN-01-1999
<CASH> 80,897
<SECURITIES> 0
<RECEIVABLES> 28,055
<ALLOWANCES> (6,195)
<INVENTORY> 13,453
<CURRENT-ASSETS> 124,894
<PP&E> 57,193
<DEPRECIATION> (14,830)
<TOTAL-ASSETS> 167,257
<CURRENT-LIABILITIES> 41,044
<BONDS> 16,678
0
0
<COMMON> 61
<OTHER-SE> 106,603
<TOTAL-LIABILITY-AND-EQUITY> 167,257
<SALES> 71,650
<TOTAL-REVENUES> 71,650
<CGS> 34,843
<TOTAL-COSTS> 34,843
<OTHER-EXPENSES> 17,474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (785)
<INCOME-PRETAX> 20,118
<INCOME-TAX> 8,047
<INCOME-CONTINUING> 12,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,071
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.20
</TABLE>
