<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 April 2, 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 X NO
------ ------
As of April 2, 1999, 61,424,128 shares of the Registrant's common stock were
outstanding.
<PAGE>
E-TEK Dynamics, Inc.
FORM 10-Q
April 2, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Quarter and
Nine Months Ended April 2, 1999 and March 31, 1998 3
Consolidated Balance Sheets as of April 2, 1999 and June
30, 1998 4
Consolidated Statements of Cash Flows for the Nine Months
Ended April 2, 1999 and March 31, 1998 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 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
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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 Nine Months Ended
------------------- ---------------------
Apr. 2, Mar. 31, Apr. 2, Mar. 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $ 49,472 $ 23,729 $121,122 $ 76,349
Cost of goods sold 24,495 11,182 59,338 34,230
--------- --------- --------- ----------
Gross profit 24,977 12,547 61,784 42,119
--------- --------- --------- ----------
Operating expenses:
Research and development 4,233 1,921 10,564 5,322
Selling, general and administrative 7,065 5,168 18,208 15,478
--------- --------- --------- ----------
Total operating expenses 11,298 7,089 28,772 20,800
--------- --------- --------- ----------
Operating income 13,679 5,458 33,012 21,319
Interest income 1,185 514 2,595 1,295
Interest expense (417) (112) (1,042) (471)
--------- --------- --------- ----------
Income before income taxes 14,447 5,860 34,565 22,143
Provision for income taxes 5,779 2,439 13,826 8,952
--------- --------- --------- ----------
Net income 8,668 3,421 20,739 13,191
Convertible Preferred Stock accretion - 2,393 3,882 6,628
--------- --------- --------- ----------
Net income available to Common
Stockholders $ 8,668 $ 1,028 $ 16,857 $ 6,563
========= ========= ========= ==========
Net Income per share:
Basic $ 0.15 $ 0.05 $ 0.44 $ 0.28
Diluted $ 0.14 $ 0.06 $ 0.34 $ 0.24
Shares used in net income per share Calculations:
Basic 57,720 21,258 38,244 23,512
Diluted 63,719 57,222 60,910 54,717
</TABLE>
See Notes to Consolidated Financial Statements.
3
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E-TEK Dynamics, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 2, June 30,
1999 1998
------------ -------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 83,743 $ 21,918
Accounts receivable 26,102 15,463
Advance to joint venture - 7,000
Inventories 17,508 6,909
Deferred tax assets 7,873 7,873
Other current assets 1,656 343
------------ -------------
Total current assets 136,882 59,506
Property and equipment, net 52,863 30,872
Long-term investments 10,665 -
------------ -------------
Total assets $ 200,410 $ 90,378
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,043 $ 8,281
Accrued liabilities 26,447 16,187
Income taxes payable 2,748 -
Current portion of capital lease obligations 1,234 1,240
Current portion of long-term debt 5,830 216
------------ -------------
Total current liabilities 51,302 25,924
Capital lease obligations, net of current portion 2,609 3,557
Long-term debt, net of current portion 20,796 10,251
Deferred Income Taxes 3,481
------------ -------------
Total liabilities 78,188 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, 61,424 shares issued and outstanding;
no par value, 65,000 shares authorized, 27,299
shares issued and outstanding 61 19,468
Additional paid-in capital 199,693 -
Notes receivable from stockholders (14,377) (14,215)
Deferred compensation (5,014) (4,753)
Distribution in excess of net book value (83,901) (83,901)
Retained earnings 25,760 8,903
------------ -------------
Total stockholders' equity 122,222 (74,498)
------------ -------------
Total liabilities and stockholders' equity $ 200,410 $ 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>
Nine Months Ended
Apr. 2, Mar. 31,
1999 1998
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,739 $ 13,191
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,382 4,777
Stock compensation expense 1,126 637
Imputed interest income (721) (400)
Changes in assets and liabilities:
Accounts receivable (10,639) 3,731
Inventories (10,599) (836)
Deferred income taxes - (3,066)
Other current assets (1,313) (175)
Accounts payable 6,762 (429)
Accrued liabilities 10,260 5,123
Income taxes payable 2,748 (506)
------------- -------------
Net cash provided by operating activities 26,745 22,047
------------- -------------
Cash flows from investing activities:
Additions to property and equipment (30,373) (10,891)
Payment from joint venture 7,000 -
Long-term investments (1,964) -
Maturities and sale of short-term investments - 10,143
Purchase of short-term investments - (4,143)
------------- -------------
Net cash used in investing activities (25,337) (4,891)
------------- -------------
Cash flows from financing activities:
Repurchase of Common Stock - (120,000)
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock, net - 116,123
Proceeds from issuance of Common Stock, net 43,518 107
Principal payments on capital lease obligations (953) (524)
Principal repayments on notes receivable from
stockholders 1,694 -
Borrowings on long-term debt 20,175 3,000
Payments on long-term debt (4,017) (129)
------------- -------------
Net cash provided by(used in) financing activities 60,417 (1,423)
------------- -------------
Net increase in cash and cash equivalents 61,825 15,733
Cash and cash equivalents at beginning of period 21,918 8,259
------------- -------------
Cash and cash equivalents at end of period $ 83,743 $ 23,992
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 1,020 $ 784
Income taxes paid $ 11,078 $ 12,470
</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 April 2, 1999 and March 31,
1998, and for the quarter and nine month periods ended April 2, 1999 and March
31, 1998, have been prepared by us 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 our
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 April 2, 1999 and for the quarter
and nine months (as applicable) ended April 2, 1999 and March 31, 1998, have
been made. The results of operations for the period ended April 2, 1999 are not
necessarily indicative of the operating results for the full year.
2. Inventories
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
April 2, June 30,
1999 1998
------------ -------------
<S> <C> <C>
Raw materials..................................... $ 10,884 $3,473
Work in process................................... 5,402 2,216
Finished goods.................................... 1,222 1,220
------------ -------------
$ 17,508 $6,909
============ =============
</TABLE>
6
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3. 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 Nine Months Ended
------------- ---------------------
Apr. 2, Mar. 31, Apr. 2, Mar. 31,
------- --------- --------- ----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income............................. $ 8,668 $ 3,421 $ 20,739 $13,191
Convertible Preferred Stock accretion. - 2,393 3,882 6,628
---------- -------- --------- ----------
Net income available to Common
Stockholders (Basic)................. 8,668 1,028 16,857 6,563
Convertible Preferred Stock accretion. - 2,393 3,882 6,628
---------- -------- --------- ----------
Net income available to Common
Stockholders and assumed
Conversions (Diluted)................ $ 8,668 $ 3,421 $ 20,739 $13,191
========== ======== ========= ==========
Denominator:
Denominator for basic earnings per
share-weighted average common shares. 57,720 21,258 38,244 23,512
Effect of dilutive securities
Common Stock options................. 2,280 264 1,772 132
Unvested Common Stock subject
to repurchase........................ 3,719 5,700 4,549 3,482
Convertible Preferred Stock............ - 30,000 16,345 27,591
---------- -------- --------- ----------
Denominator for dilutive earnings per
share-adjusted weighted average common
shares and assumed conversions....... 63,719 57,222 60,910 54,717
Basic earnings per share................. $0.15 $0.05 $0.44 $0.28
---------- -------- --------- ----------
Diluted earnings per share............... $0.14 $0.06 $0.34 $0.24
---------- -------- --------- ----------
</TABLE>
4. 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. 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.
We have adopted SFAS 130 "Reporting Comprehensive Income," for the interim
period of fiscal 1999. The adoption of SFAS 130 did not have a material impact
on our presentation of our consolidated financial statements. We will adopt SFAS
131 for the fiscal year ending June 30, 1999 and we are currently studying its
provisions.
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. We do not expect the adoption of SFAS 133 to have
a material impact on our results of operations.
7
<PAGE>
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 our 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
We generate 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 our revenue to date.
This has historically resulted in uneven orders and fluctuating demand for our
products.
The fiber optic components industry is characterized by rapidly 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. These price declines
affected our margins and operating performance. However, these declines have
been accompanied by increased unit demand. 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 and modules.
We are engaged in continuing efforts to expand our manufacturing capabilities to
address anticipated unit volume growth. We have increased the size of our San
Jose facility from approximately 90,000 square feet to approximately 160,000
square feet. We have also leased an additional 80,000 square feet, with
occupancy scheduled for May 1999. We increased our number of employees from 906
at the end of the second quarter of fiscal year 1999 to 1131 at the end of the
third quarter fiscal year 1999. In addition to building capacity, we have been
and will continue to invest considerable effort in improving the performance of
our components and decreasing their costs.
Our fiscal quarter ends on the Friday that is closest to the end of the calendar
quarter (April 2 for the third quarter in fiscal year 1999). Our 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 our Consolidated
Statement of Operations:
<TABLE>
<CAPTION>
Quarter ended Nine Months ended
Apr. 2, Mar. 31, Apr. 2, Mar. 31,
------- -------- ------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................ 49.5 47.1 49.0 44.8
---------- ---------- ----------- -------------
Gross profit.......................... 50.5 52.9 51.0 55.2
---------- ---------- ----------- -------------
Operating expenses:
Research and development.............. 8.6 8.1 8.7 7.0
Selling, general and administrative... 14.3 21.8 15.0 20.3
---------- ---------- ------------ ------------
Total operating expenses........... 22.9 29.9 23.7 27.3
---------- ---------- ------------ ------------
Operating income.......................... 27.6 23.0 27.3 27.9
Interest income........................... 2.4 2.2 2.1 1.7
Interest expense.......................... (0.8) (0.5) (0.9) (0.6)
---------- ---------- ------------ ------------
Income before income taxes................ 29.2 24.7 28.5 29.0
Provision for income taxes................ 11.7 10.3 11.4 11.7
---------- ---------- ------------ ------------
Net income................................ 17.5% 14.4% 17.1% 17.3%
---------- ---------- ------------ ------------
</TABLE>
Quarters Ended April 2, 1999 and March 31, 1998
Net Revenues
Net revenues increased 108.5% to $49.5 million in the third quarter of fiscal
1999 from $23.7 million in the third quarter of fiscal 1998. The revenue
increase was primarily due to increased shipments of our Wavelength Division
Multiplexer components and modules ("WDMs"), Couplers, Isolators, and
Micro-Optic Integrated Components ("MOICs"). Isolator revenues are expected to
decline in the future due to lower purchases by a major customer as well as a
product shift to integrated components that incorporate Isolator functionality.
A relatively small number of customers have accounted for a significant portion
of our total revenue to date, and we expect that this trend will continue for
the foreseeable future.
Gross Profit
Gross profit increased 99.1% to $25.0 million for the third quarter of fiscal
1999 from $12.6 million in the third quarter of fiscal 1998. Cost of goods sold
consists of raw material costs, direct labor costs, warranty costs, royalties
and overhead related to our manufacturing operations. Gross profit margins
declined from 52.9% to 50.5% between these periods primarily due to declining
ASPs and increased costs associated with the expansion of our manufacturing
capacity to address unit volume growth. Our gross margins in the future will 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. As a result, these factors may cause our gross margins to increase
or decrease in future periods.
9
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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 $4.2 million for the third quarter of fiscal 1999 representing
8.6% of net revenues. This represents a 120.4% increase over the third quarter
of fiscal 1998 research and development expenses of $1.9 million or 8.1% of
revenues. The increase was primarily due to the increase in research and
development personnel and related expenses. We expect that research and
development expenses will continue to increase for the remainder of 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 $7.1 million for the third
quarter of fiscal 1999, representing 14.3% of net revenues. This represents a
36.7% increase over selling, general and administrative expenses for the third
quarter of fiscal 1998 of $5.2 million or 21.8% 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. We anticipate that our selling, general and
administrative expenses will increase in absolute dollars for the remainder of
fiscal 1999.
Interest Income and Interest Expense
Our interest income was approximately $1.2 million for the third quarter of
fiscal 1999. We earned interest income on our 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 our
property and equipment, and on capital leases, was $0.4 million for the third
quarter of fiscal 1999.
Provision for Income Taxes
Our combined federal and state income tax provision was 40% for the third
quarter of fiscal 1999, consistent with fiscal 1998 and the first two quarters
of fiscal 1999.
Nine Months Ended April 2, 1999 and March 31, 1998
Net Revenues
Net revenues increased 58.6% from $76.4 million for the nine months ended March
31, 1998 to $121.1 million for the nine months ended April 2, 1999. The increase
in net revenues reflected higher shipments of our WDMs, Couplers, Isolators and
MOICs. Isolator revenues are expected to decline in the future due to lower
purchases by a major customer as well as a product shift to integrated
components that incorporate Isolator functionality. A relatively small number of
customers have accounted for a significant portion of our total revenue to date,
and we expect that this trend will continue for the foreseeable future.
10
<PAGE>
Gross Profit
Gross profit increased 46.7% to $61.8 million for the nine months ended April 2,
1999 from $42.1 million for the nine months ended March 31, 1998. Gross profit
margins declined from 55.2% to 51.0% during these periods, primarily due to
declining ASPs and increased costs associated with the expansion of our
manufacturing capacity.
Research and Development Expenses
Research and development expenses increased 98.5% from $5.3 million for the nine
months ended March 31, 1998, which represented 7.0% of revenues, to $10.6
million for the nine months ended April 2, 1999, which represented 8.7% 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 17.6% from $15.5 million
for the nine months ended March 31, 1998 which represented 20.3% of revenues to
$18.2 million for the nine months ended April 2, 1999, which represented 15.0%
of revenue. The increase was primarily due to the hiring of additional selling,
general and administrative personnel to support our growth and due to increases
in other expenses.
Interest Income and Interest Expense
Interest income increased from $1.3 million in the nine months ended March 31,
1998 to $2.6 million in the nine months ended April 2, 1999, primarily due to
higher cash balances as a result of our initial public offering on December 1,
1998. Interest expense increased from $0.5 million in the nine months ended
March 31, 1998 to $1.0 million in the nine months ended April 2, 1999,
reflecting a higher level of borrowings.
Liquidity and Capital Resources
Since inception, we have financed operations and met our capital expenditure
requirements primarily through cash flows from operations and borrowings. Our
operating activities provided cash of $26.8 million for the nine months ended
April 2, 1999 as compared to $22.1 million for the nine months ended March 31,
1998. Cash provided by operating activities is primarily the result of net
income, depreciation and amortization expenses, and increases in accrued
liabilities and accounts payable, offset in part by increases in accounts
receivable and inventory. At April 2, 1999 we had cash and cash equivalents of
$83.7 million and working capital of $85.6 million.
Net cash used in investing activities was $25.3 million for the nine months
ended April 2, 1999 as compared to $4.9 million for the nine months ended March
31, 1998, and consisted primarily of capital expenditures.
We have an equity basis investment in a German company, ADVA AG Optical
Networking ("ADVA"). On March 30, ADVA completed its initial public offering and
began trading on the Neuer Markt, of the Frankfurt Stock Exchange, and we have
increased the carrying value of our investment to reflect the increase in ADVA's
net book value. We recorded such increase as an addition to additional
paid-in-capital, net of the deferred tax liability.
Net cash provided by financing activities was $60.4 million for the nine months
ended April 2, 1999 as compared to $1.4 million used in financing activities for
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the nine months ended March 31, 1998. Net cash provided by financing activities
resulted primarily from net proceeds of approximately $43.5 million from our
initial public offering in the nine months ended April 2, 1999. In addition, we
borrowed $20.2 million during this period.
Our $15 million revolving credit agreement expired on March 31, 1999. We are
currently evaluating our revolving credit alternatives.
Qualitative and Quantitative Disclosure about Market Risk
The following discusses our 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. As of April 2, 1999, we had cash and cash equivalents
of $83.7 million invested in 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 we 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 April 2, 1999
would not have a material impact on our cash or cash equivalents.
Outstanding Debt and Capital Lease Obligations. As of April 2, 1999 we had
outstanding long-term debt and capital lease obligations of approximately $30.5
million at fixed interest rates ranging from 6.4% to 8.6%. Because the interest
rates on these instruments are fixed, a hypothetical decrease in market interest
rates of 10 percent from levels at April 2, 1999 would not have a material
impact on our outstanding debt and capital lease obligations.
Foreign Currency Exchange Rate Risk
Currently, all of our international sales are U.S. dollar denominated. We have
not entered into any currency hedging activities.
Year 2000 Compliance
We rely on our systems, applications and control devices in operating and
monitoring all major aspects of our business. We installed new Enterprise
Resource Planning software during fiscal 1998 at a cost of approximately $1.0
million which we believe is Year 2000 compliant. With respect to our own
systems, we rely on the representations of our primary software vendors that
their products are Year 2000 compliant. Based in part on these representations,
we believe our other systems, software and devices are also Year 2000 compliant.
We have reviewed the effect of Year 2000 issues on our other systems, including
both our information technology and non-information technology systems, software
and devices, and believe that they are year 2000 compliant. However, the
noncompliance of our systems, software and devices could severely disrupt our
operations and have a material adverse affect on our business, financial
condition and results of operations.
We also rely, directly and indirectly, on external systems of our customers,
suppliers, creditors, financial organizations, utilities providers and
governmental entities, both domestic and international. None of these systems
are under the control of us. Consequently, we could be affected through
disruptions in the operations of the enterprises with which we interact.
Furthermore, the purchasing
12
<PAGE>
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 our customers, including each of our
three largest customers, have requested information from us concerning our
exposure to Year 2000 problems, the steps we have taken to resolve any Year 2000
problems and what level of management attention is being focused on the issue.
Similarly, we have sent inquiries to certain of our suppliers requesting
substantially the same information from them. We have received representations
from certain of our suppliers, including each of our sole source suppliers, as
to the Year 2000 compliance of their systems and products. We have not assessed
the Year 2000 compliance of our customers. If our 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, our sales of fiber optic components to these customers
could be materially and adversely affected. In addition, if our suppliers,
particularly our sole-source suppliers, are unable to manufacture or deliver
supplies to us as a result of Year 2000 problems, our ability to manufacture and
sell our products would be materially and adversely affected. We do not
currently have in place any contingency plans for our 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 our
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. Our 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.
We Depend on a Limited Number of Major Customers
The telecommunications equipment industry is dominated by a small number of
large companies and is currently consolidating. Consolidation reduces the number
of potential customers in the industry. The loss of one or more of our largest
customers, any reduction or delay in sales to these customers, our inability to
successfully develop relationships with additional customers, or any further
price reductions could have a material adverse effect on our business, financial
condition and results of operations.
In addition, our customers also compete for particular projects in which our
products will be deployed. The failure of our customer to be selected or the
delay by their customers' project deployment could have a material adverse
effect on our business, financial condition and results of operations.
Our Quarterly and Annual Results May Fluctuate
Our net revenues and operating results have in the past fluctuated and may in
the future fluctuate 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 our products, the
ability to manufacture products on a timely basis, pricing pressure, customer
product specifications and qualifications, and changes in the product mix, among
other
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<PAGE>
factors. Our net revenues in any quarter are also dependent on the receipt
of orders to be booked and shipped within the quarter, as well as the existing
backlog. As a result, quarter-to-quarter sequential revenue and operating
results are likely to fluctuate and therefore may not be reliable indicators of
annual performance. Changes in the incoming customer order rate, refusal of
customers to accept shipped products, returns of products or difficulties in
collecting accounts receivable could result in significant material fluctuations
in net revenues and/or charges against income, which could have a material
adverse effect on our business, financial condition and results of operations.
We Depend on a Limited Number of Product Lines
A small number of products have historically accounted for a majority of our net
revenues. We may not be successful in developing any other products or taking
other steps to mitigate the risks associated with reduced demand for our
existing products. Isolator revenues are expected to decline in the future due
to lower purchases by a major customer as well as a product shift to integrated
components that incorporate Isolator functionality. Reduced demand for our
existing products could have a material adverse effect on our business,
financial condition and results of operations.
We Depend on the Success of the Telecommunications Industry
Our future success depends on the continued growth and success of the
telecommunications industry. This industry is changing rapidly as
telecommunication markets around the world deregulate and open to global
competition. Globalization, deregulation and other trends causing an increase in
the need for bandwidth that are currently driving growth in the
telecommunications industry may not continue in a manner that is favorable to
us.
Our Sales Process is Long and Unpredictable
The period of time between our 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 us to perform, extensive product evaluation and testing of
new components before purchasing them. Reduction or termination of customer
purchases, particularly if unanticipated by us, could have a material adverse
effect on our business, financial condition and results of operations.
There has been a Decline in Prices of our Products
The fiber optic component industry is very competitive and is characterized by
declining prices resulting from factors such as increased competition and
greater unit volumes as telecommunication service providers continue to deploy
fiber optic networks. If we are unable to continue to develop and introduce on a
timely basis new products that incorporate features that can be sold at higher
prices, as well as reduce our manufacturing costs, there is a risk that our net
revenues and/or gross margins could decline, which could have a material adverse
effect on our business, financial condition and results of operations.
We Face Intense Competition
The market for fiber optic components is intensely competitive. Many of our
current and potential competitors and customers have significantly greater
financial, technical, marketing, purchasing and other resources than we have,
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
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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 us. For
example, two of our competitors, JDS Fitel, Inc. and Uniphase Corp., have
recently announced their plan to merge. The merged company intends to offer more
integrated products that could make our products less competitive. Many of our
competitors manufacture their products in countries offering significantly lower
labor costs than in the United States. In addition, some of our 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 us. We also compete in new design evaluations of
our products and our competitors' products with new and existing customers. We
may not be able to compete successfully with our existing or new competitors,
which could have a material adverse effect on our business, financial condition
and results of operations.
Our Growth is Dependent on our Ability to Expand Our Manufacturing and
Corporate Facilities
We currently manufacture the majority of our products at our facilities in San
Jose, California. We are in the process of increasing our manufacturing capacity
at these facilities as well as adding overseas manufacturing capacity through a
joint venture in Taiwan. The development of overseas manufacturing capabilities
and the expansion of corporate facilities involve significant risks, including
unanticipated cost increases, unavailability or late delivery of equipment,
unforeseen environmental or engineering problems, personnel recruitment delays,
political instability, and weather interference. Any one of these risks could
have a material adverse effect on the start up or operation of new facilities.
Our 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, we will not be able to reduce our expenses quickly
enough to prevent a decline in our gross margins and operating income. Such
decline could have a material adverse effect on our business, financial
condition and results of operations. Conversely, in the event our plans to
expand our manufacturing capacity are not implemented on a timely basis, we
could face production capacity constraints, which could have a material adverse
effect on our business, financial condition and results of operations.
We Depend on a Limited Number of Suppliers
We are dependent on a limited number of suppliers of materials for our products
as well as equipment used to manufacture our products. Some of our 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 our business,
financial condition and results of operations.
We Depend on Sales Representatives, Distributors and Key Employees
We sell substantially all of our products through a network of sales
representatives and distributors, the majority of whom have exclusive rights to
sell our products in certain territories. There is a risk that our sales
representatives and distributors may discontinue sales of our products in order
to switch to representing one or more of our competitors. The loss of, or
reduction in sales made by, any of our key sales representatives or distributors
could have a
15
<PAGE>
material adverse effect on our business, financial condition or results of
operations. Our success is dependent, in large part, on the long-term
effectiveness of our executive officers, other key employees and their continued
service. Our success will also depend in large part upon our 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 our
business, financial condition and results of operations.
We Face Technological Change and the Uncertainty of Introducing New Products
We expect that new technologies will emerge as competition in the fiber optic
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 make our existing products
noncompetitive, obsolete or unmarketable. Products as complex as those offered
by us may contain defects when first introduced or as new versions are released
and new products often take longer to develop than originally anticipated. We
may not be able to identify, develop, manufacture, market or support new or
enhanced products successfully or on a timely basis, our new products may not
gain market acceptance and we may not be able to respond effectively to product
announcements by competitors, technological changes or emerging industry
standards, which could have a material adverse effect on our business, financial
condition and results of operations.
We Face Risks from International Operations
We generate a significant portion of our net revenues from sales to companies
located outside the United States, principally in Europe. As a result, a
significant portion of our sales and operations may be subject to 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 our international sales are U.S. dollar
denominated. As a result, our customer's orders could fluctuate significantly
based upon changes in our customer's currency exchange rates in relation to the
U.S. dollar, which could have a material adverse effect on our business,
financial condition and results of operations.
If We Cannot Protect or Enforce Our Intellectual Property Rights, our
Competitive Position may be Impaired
Our success will depend, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies and processes. Such measures may not provide meaningful
protection for our proprietary technologies and processes. Despite reasonable
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products or technology without authorization, develop similar
technology independently or design around our patents. The steps taken by us to
prevent misappropriation or infringement of the intellectual property of ours or
of our customers may not be successful. The telecommunications equipment
industry is characterized by vigorous protection and pursuit of intellectual
property rights, and we have also entered into certain indemnification
obligations in favor of our customers and strategic partners that could be
triggered upon an allegation or finding of our infringement of other parties'
proprietary rights. We have in the past received notifications alleging that we
are infringing the intellectual property rights of third parties. Irrespective
of the validity or successful assertion of such claims, we would
16
<PAGE>
likely incur significant costs and diversion of our resources with respect to
the defense of such claims, which could also have a material adverse effect on
our business, financial condition and results of operations.
Our Results May be Affected by Potential Acquisitions and Strategic Investments
We are reviewing acquisition and strategic investment prospects that would
complement our existing product offerings, augment our market coverage, secure
supplies of critical materials or enhance our technological capabilities. Future
acquisitions or investments by us, including an increase in ownership interests
in joint ventures, could result in potentially dilutive issuances of equity
securities, large one-time write-offs, reduced cash balances and related
interest income, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets.
Furthermore, acquisitions involve 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 our
existing businesses, products or technologies, risks of entering geographic and
business markets in which we have no or limited prior experience and the
potential loss of key employees of acquired organizations. A failure by us to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, could also have a material adverse affect on
our business, financial condition and results of operations.
We Face Environmental and Disaster Risks
We handle small amounts of hazardous materials as part of our manufacturing
activities. Although we believe that we have complied with all applicable
environmental regulations in connection with our operations, we may 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 our business, financial condition and results of operations.
Our 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 our operations,
which could have a material adverse effect on our business, financial condition
and results of operations.
17
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
We are involved in disputes and litigation in the normal course of our business.
We do not believe that the outcome of any of these disputes or litigation will
have a material adverse effect on our business, financial condition or results
of operations.
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
18
<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: May 7, 1999 By /s/ Sanjay Subhedar
---------------------------------------
Senior Vice President Operations
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
27.1 Financial Data Schedule
This schedule contains Summary Financial Information extracted from the Balance
Sheet, Statement of Operations and Statement of Cash Flows included in our Form
10-Q for the period ending April 2, 1999, and is qualified in our entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> APR-02-1999
<CASH> 83,743
<SECURITIES> 0
<RECEIVABLES> 35,308
<ALLOWANCES> (9,206)
<INVENTORY> 17,508
<CURRENT-ASSETS> 136,882
<PP&E> 70,660
<DEPRECIATION> (17,797)
<TOTAL-ASSETS> 200,410
<CURRENT-LIABILITIES> 51,302
<BONDS> 20,796
0
0
<COMMON> 61
<OTHER-SE> 122,222
<TOTAL-LIABILITY-AND-EQUITY> 200,410
<SALES> 121,122
<TOTAL-REVENUES> 121,122
<CGS> 59,338
<TOTAL-COSTS> 59,338
<OTHER-EXPENSES> 28,772
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,553)
<INCOME-PRETAX> 34,565
<INCOME-TAX> 13,826
<INCOME-CONTINUING> 20,739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,739
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.34
</TABLE>
