<PAGE>
1
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 October 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 (I.R.S. Employer Identification Number)
of Incorporation ororganization)
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 October 2, 1999, 67,395,069 shares of the Registrant's common stock were
outstanding.
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2
E-TEK Dynamics, Inc.
FORM 10-Q
October 2, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations
for the Quarter Ended October 2, 1999
and October 2, 1998 3
Consolidated Balance Sheets as of
October 2, 1999 and June 30, 1999 4
Consolidated Statements of Cash Flows
for the Quarter Ended October 2, 1999
and October 2, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
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3
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
-----------------------------
Oct. 2, Oct. 2,
1999 1998
<S> <C> <C>
Net revenues $ 60,342 $ 32,942
Cost of goods sold 30,181 15,989
-------------- -------------
Gross profit 30,161 16,953
-------------- -------------
Operating expenses:
Research and development 4,913 3,076
Selling, general and administrative 7,622 5,395
Purchased in-process research and
development 1,630 -
Amortization of intangibles 6,265 -
-------------- -------------
Total operating expenses 20,430 8,471
-------------- -------------
Operating income 9,731 8,482
Interest income 1,539 588
Interest expense (492) (285)
-------------- -------------
Income before income taxes 10,778 8,785
Provision for income taxes 4,096 3,514
-------------- -------------
Net income 6,682 5,271
Convertible Preferred Stock accretion - 2,400
-------------- -------------
Net income available to
Common Stockholders $ 6,682 $ 2,871
============== =============
Net Income per share:
Basic $ 0.11 $ 0.13
Diluted $ 0.10 $ 0.09
============== =============
Shares used in net income per share Calculations:
Basic 61,938 22,037
Diluted 67,322 58,573
</TABLE>
See Notes to Consolidated Financial Statements.
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4
E-TEK Dynamics, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 2, June 30,
1999 1999
----------------- -------------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 178,718 $ 55,090
Accounts receivable 35,996 29,831
Inventories 35,156 20,367
Deferred income taxes 13,673 13,542
Other current assets 5,391 3,542
----------------- -------------------
Total current assets 268,934 122,372
Property and equipment, net 73,971 61,874
Long-term investments 12,666 11,665
Goodwill & other intangibles, net 90,543 34,585
----------------- -------------------
Total assets $ 446,114 $ 230,496
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,261 $ 17,762
Accrued liabilities 33,750 26,352
Income taxes payable 6,442 4,337
Current portion of capital
lease obligations 1,301 1,277
Current portion of long-term debt 6,984 6,101
----------------- -------------------
Total current liabilities 69,738 55,829
Capital lease obligations,
net of current portion 1,958 2,281
Long-term debt, net of current portion 17,644 19,232
Deferred income taxes 18,802 3,481
----------------- -------------------
Total liabilities 108,142 80,823
----------------- -------------------
Stockholders' equity:
Common stock, $0.001 par value, 300,000 shares
Authorized, 67,395 and 62,054 shares issued
and outstanding, respectively 67 63
Additional paid-in capital 395,786 216,124
Notes receivable from stockholders (10,155) (11,454)
Deferred compensation (3,197) (3,805)
Distribution in excess of net book value (83,901) (83,901)
Retained earnings 39,328 32,646
Cumulative translation adjustment 44 -
----------------- -------------------
Total stockholders' equity 337,972 149,673
================= ===================
Total liabilities and
stockholders' equity $ 446,114 $ 230,496
================= ===================
</TABLE>
See Notes to Consolidated Financial Statements.
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5
E-TEK Dynamics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Quarter Ended
Oct. 2, Oct. 2,
1999 1998
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,682 $ 5,271
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 9,982 2,409
Stock compensation expense 215 376
Imputed interest income (79) (241)
Purchased in-process research and
development 1,630 -
Changes in assets and liabilities:
Accounts receivable (2,707) (293)
Inventories (10,703) (2,374)
Deferred income taxes - -
Other current assets (1,210) 128
Accounts payable 671 (2,904)
Accrued liabilities 3,283 3,666
Income taxes payable 2,104 3,489
------------------ -------------------
Net cash provided by
operating activities 9,868 9,527
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Cash flows from investing activities:
Additions to property and equipment (10,314) (4,110)
Payment from (advance to) joint venture (1,001) 7,000
Acquisition of Fibx, net of cash received (12,550) -
Acquisition of Kaifa, net of cash received (10,551) -
---------- --------
Net cash provided by (used in)
investing activities (34,416) 2,890
------------------ -------------------
Cash flows from financing activities:
Proceeds from issuance of
Common Stock, net 2,892 49
Proceeds from secondary offering, net 146,990 -
Principal payments on capital lease
obligations (299) (286)
Principal repayments on notes receivable
from stockholders 1,750 -
Borrowings on short-term debt 269 -
Payment on short-term debt (898) -
Borrowings on long-term debt - 5,440
Payments on long-term debt (2,571) (2,954)
Other, net 43 -
------------------ -------------------
Net cash provided by
financing activities 148,176 2,249
------------------ -------------------
Net increase in cash and cash
equivalents 123,628 14,666
Cash and cash equivalents at
beginning of period 55,090 21,918
================== ===================
Cash and cash equivalents
at end of period $ 178,718 $ 36,584
================== ===================
Supplemental disclosure of cash flow information:
Interest paid $ 527 $ 286
Income taxes paid $ 1,991 $ 25
</TABLE>
See Notes to Consolidated Financial Statements.
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6
E-TEK Dynamics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial data as of October 2, 1999 and June 30,
1999, and for the quarters ended October 2, 1999 and October 2, 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 August 11, 1999.
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 October 2, 1999 and for the quarters
ended October 2, 1999 and October 2, 1998, have been made. The results of
operations for the quarter ended October 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>
Oct. 2, June 30,
1999 1999
------------------ ------------------
<S> <C> <C>
Raw materials............. ..... $18,026 $10,613
Work in process................. 15,105 7,577
Finished goods.................. 2,025 2,177
================== ==================
$35,156 $20,367
================== ==================
</TABLE>
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7
3. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
Oct. 2, Oct. 2,
1999 1998
<S> <C> <C>
Numerator:
Net income................... $ 6,682 $ 5,271
Convertible Preferred Stock accretion.... - 2,400
--------------- --------------
Net income available to Common
Stockholders (Basic)............................ 6,682 2,871
Convertible Preferred Stock accretion............. - 2,400
============== ==============
Net income available to Common Stockholders
and assumed Conversions (Diluted)............ $ 6,682 $ 5,271
=============== ==============
Denominator:
Denominator for basic earnings per
Share-weighted average common shares.......... 61,938 22,037
Effect of dilutive securities
Common Stock options.......................... 1,151 2,572
Unvested Common Stock subject
to repurchase................................. 2,812 5,385
Convertible Preferred Stock................... - 30,000
--------------- --------------
Denominator for dilutive earnings per
Share-adjusted weighted average common
Shares and assumed conversions................. 67,322 58,573
Basic earnings per share..................... $0.11 $0.13
--------------- --------------
Diluted earnings per share................... $0.10 $0.09
--------------- --------------
</TABLE>
Comprehensive income
Comprehensive income for the quarter ended October 2, 1999 was $6,726,000.
5. Recent Financial Pronouncements
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. The adoption of SFAS 133 has been deferred to all fiscal
quarters of fiscal years beginning after June 15, 2000, by SFAS 137. We do not
expect the adoption of SFAS 133 to have a material impact on our 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 our Registration Statement on Form S-1
(File No. 333-83857) and Annual Report on Form 10-K which describe factors that
could cause actual events to differ from those contained in the forward looking
statements.
<PAGE>
8
Overview
We design, manufacture and sell high quality fiber optic components, modules and
subsystems for optical networks. Optical networks are being deployed by
telecommunications service providers like AT&T and MCI WorldCom to address the
demand for applications such as Internet access, e-mail, and electronic commerce
that require high capacity, high speed data transmission. Our products are
designed into optical systems built for these service providers' networks by
telecommunications equipment manufacturers. Our products guide, route or amplify
the light signals which transmit data within the network.
Revenues from product sales are generally recognized at the time the product is
shipped, with provisions established for estimated product returns and
allowances. A relatively small number of customers has accounted for a
significant portion of our revenues to date, and we expect that this trend will
continue for the foreseeable future. This has historically resulted in uneven
orders and fluctuating demand for our products.
The fiber optic component industry is characterized by rapidly declining average
selling prices, increasing unit volumes and declining gross margins. These price
declines have had an adverse affect on our gross margins.
In June 1999, we acquired ElectroPhotonics Solutions Corporation, a Canadian
company, for a total acquisition cost of $41.5 million, primarily comprised of
400,062 shares of our common stock with a market value of $13.7 million and cash
of $26.7 million. We accounted for the transaction as a purchase. We allocated
$4.2 million of the purchase price to in-process research and development, which
was expensed at the time of the acquisition, and $34.9 million of goodwill and
other intangibles, which will generally be amortized over three years.
In July 1999, we increased our ownership in FibX, our joint venture in Taiwan,
from 45.3% to 95.9% for $12.0 million in cash, and in August 1999, to 100% for
$1.0 million in cash. As a result of these transactions, we recorded $14.5
million of intangibles, partially offset by a related deferred tax liability of
$5.5 million. The intangibles will be amortized over three years.
In August 1999, we completed our acquisition of SMC Kaifa (Holdings) Ltd., a
British Virgin Islands company with operations in the U.S and China, by issuing
697,000 shares of our common stock with a market value of $29.8 million and cash
of $12.0 million. As a result of the acquisition, we recorded goodwill and other
intangibles of $47.4 million, partially offset by a related deferred tax
liability of $9.7 million. The goodwill and other intangibles will generally be
amortized over three years.
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9
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
Oct. 2, Oct. 2,
1999 1998
---- ----
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of goods sold.......................... 50.0 48.5
----------------- ----------------
Gross profit............................ 50.0 51.5
----------------- ----------------
Operating expenses:
Research and development.................. 8.1 9.3
Selling, general and administrative....... 12.6 16.4
Purchased in-process research
and development.......................... 2.7 -
Amortization of goodwill and intangibles... 10.5 -
----------------- ----------------
Total operating expenses............ 33.9 25.7
----------------- ----------------
Operating income..................... 16.1 25.8
Interest income............................... 2.6 1.8
Interest expense............................. (0.8) (0.9)
----------------- ----------------
Income before income taxes................. 17.9 26.7
Provision for income taxes.................. 6.8 10.7
----------------- ----------------
Net income.................................. 11.1% 16.0%
----------------- ----------------
</TABLE>
Quarter Ended October 2, 1999 and October 2, 1998
Net Revenues
Net revenues increased 83.2% to $60.3 million in the first quarter of fiscal
2000 from $32.9 million in the first quarter of fiscal 1999. The revenue
increase was primarily due to increased shipments of our Wavelength Division
Multiplexer components, modules and subsystems ("WDMs"), couplers and
micro-optic integrated components ("MOICs"). WDMs accounted for the majority of
our total revenues and this is expected to continue for the remainder of fiscal
2000. Customers are also demanding a wider variety of wavelengths with more
difficult specifications, which may cause us to not be able to obtain the
filters we need and may reduce our ability to ship products and generate
revenues.
Gross Profit
Gross profit increased 77.9% to $30.2 million for the first quarter of fiscal
2000 from $17.0 million in the first quarter of fiscal 1999. 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 51.5% to 50.0% between these periods due to declining average
selling prices ("ASPs") and increased costs associated with both the expansion
of our manufacturing capacity to address unit volume growth and the integration
of our recent ElectroPhotonics, FibX and Kaifa acquisitions. We expect these
issues to continue to have an adverse affect on our margins until we can absorb
the additional manufacturing capacity through increased revenues. Also, as we
hire more people to meet increased unit volumes, the risk of yield and quality
issues increases, which may have an adverse impact on our margins. We also
expect the decline in ASPs to continue in the future.
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10
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 $4.9 million for the first quarter of fiscal 2000 representing
8.1% of net revenues. This represents a 59.7% increase over the first quarter of
fiscal 1999 research and development expenses of $3.1 million or 9.3% of
revenues. The increase was primarily due to the increase in research and
development personnel and material costs. We expect that research and
development expenses will continue to increase in absolute dollars for the
remainder of fiscal 2000.
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 $7.6 million for the first
quarter of fiscal 2000, representing 12.6% of net revenues. This represents a
41.3% increase over selling, general and administrative expenses for the first
quarter of fiscal 1999 of $5.4 million or 16.4% 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 2000.
Interest Income and Interest Expense
Our interest income was approximately $1.5 million for the first quarter of
fiscal 2000. We earned interest income on our cash investments. Interest
expense, incurred on borrowings secured by our property and equipment, and on
capital leases, was $0.5 million for the first quarter of fiscal 2000.
Provision for Income Taxes
Our combined federal and state income tax provision was 38% for the first
quarter of fiscal 2000, slightly lower than the rate for fiscal 1999. The higher
rate for fiscal 1999 is due to a permanent tax difference resulting from our
purchase of ElectroPhotonics.Our future tax rate may be impacted by acquisition
related activities.
Liquidity and Capital Resources
Since inception, we have financed operations and met our capital expenditure
requirements primarily through cash flows from our operations and borrowings.
Our operating activities provided cash of $9.9 million for the quarter ended
October 2, 1999 as compared to $9.5 million for the quarter ended October 2,
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 October 2, 1999 we had cash and cash equivalents of
$178.7 million and working capital of $199.2 million.
Net cash used in investing activities was $34.4 million for the quarter ended
October 2, 1999 as compared to $2.9 million provided by investing activities for
the quarter ended October 2, 1998. The net cash used in the quarter ended
October 2, 1999 related to the Kaifa and FibX acquisitions and capital
expenditures.
Net cash provided by financing activities was $148.2 million for the quarter
ended October 2, 1999, as compared to $2.3 million for the quarter ended October
2, 1998. Net cash provided by financing activities for the quarter ended October
2, 1999 resulted primarily from net proceeds of approximately $147.0 million
from our follow-on public offering.
Our cash is invested in short term taxable funds with a maximum duration of 120
days, and our debt instruments are all fixed rate instruments. Currently, the
majority of our international sales are U.S. dollar denominated. We have not
entered into any currency hedging activities.
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11
Year 2000 Compliance
Many computer programs use two digits rather than four to define the applicable
year. Computer programs or hardware that have date sensitive software or chips
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in systems failures or miscalculations causing disruptions of
operations for any company using computer programs or hardware.
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 representations of our
software vendors and our internal review of our information technology and
non-information technology systems, software and devices, we believe our
systems, software and devices are year 2000 compliant. However, the
noncompliance of our systems, software and devices could severely disrupt our
operations and have a material adverse effect on our business, financial
condition and results of operations. Based on our assessment to date, we do not
anticipate that costs associated with remediating any of our internal systems
will be material.
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 is
under our control. Consequently, we could be affected by disruptions in the
operations of the enterprises with which we interact. 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. Some 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
that time. As a result, our sales of 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 have not adopted a formal year 2000 contingency plan because, based on the
information available to us, we believe that we do not have material exposure to
significant business interruptions as a result of year 2000 compliance issues.
The foregoing is a Year 2000 Readiness Disclosure as defined by the Year 2000
Information and Readiness Disclosure Act of 1998.
Risk Factors
You should carefully consider these risk factors, in addition to the other
information in this Report, as well as the risk factors set forth in other
documents filed with the SEC, including the Annual Report on Form 10-K for the
fiscal year ended June 30, 1999, and the Registration Statement on Form S-1
dated August 11, 1999. Any of these factors could have a material adverse impact
on our business, financial condition and results of operations.
If a major customer delays, reduces or defers purchases, our revenues will
decline.
We have depended on a small number of large customers for a substantial portion
of our sales, and we expect this to continue for the foreseeable future. In the
first quarter of fiscal 2000, our three largest customers and their related
entities accounted for 59.8% of our revenues. Industry consolidation may reduce
the number of potential customers and increase our dependence on a small number
of customers.
Further, we do not have long-term contracts with many customers, and our
existing contracts do not obligate our customers to buy material amounts of our
products. Therefore, sales in a particular period are difficult to predict and
we may experience unforeseen decreases in purchases, cancellations of purchase
orders or deferrals of purchases.
If sales of our wavelength division multiplexing products decline, our revenue
will be materially reduced.
<PAGE>
12
Sales of wavelength division multiplexing components, modules and subsystems
accounted for 58.8% of our revenues in the first quarter of fiscal year 2000. We
expect sales of WDMs to account for more than 50% of our total revenues in
fiscal 2000. If sales of this product line decline, our overall revenues will be
lower, which could result in operating losses. We may not be successful in
taking steps to mitigate the risks associated with reduced demand for our
existing products.
If we cannot obtain an adequate supply of thin film filters or other raw
materials or equipment, our product revenues may decline.
Thin film filters are a key raw material for WDMs and are difficult to produce.
We have previously experienced and continue to experience shortages of these
filters, which has limited our ability to ship product and generate revenues.
Also, we depend on a limited number of suppliers for other key materials and
equipment, some of which are sole sources. Delivery delays, quality problems and
price increases could hurt our ability to supply our customers with products in
a timely manner, which can cause our shipments and revenues to decline.
The increase in the number of wavelengths and narrower spacing requirements
increases product complexity, which may adversely affect our yields and
revenues.
The increased need for bandwidth is being satisfied with more wavelengths with
narrow spacing between each wavelength. Both of these trends (more wavelengths
and tighter spacing) increase the complexity and variety of filters needed and
the risk of lower yields. In addition, the trend towards increased integration
from devices to modules, and to subsystems means that any missing wavelengths
can delay shipment of the whole module or subsystem, which would have an adverse
impact on our revenues.
We may not be able to reduce our manufacturing costs sufficiently or plan our
manufacturing expansion accurately.
We expect the price of our existing products to decline due to various factors,
such as increased competition, including from companies with lower labor and
production costs; a limited number of potential customers with significant
bargaining leverage; introduction of new products by competitors; and greater
economies of scale for higher volume manufacturers. To maintain our existing
revenues, we must increase our unit volumes and our manufacturing capacity.
Adding capacity increases our fixed costs and the level of unit shipments we
must achieve to maintain gross margins. As a result, if we are unable to
continuously reduce our manufacturing costs, our net revenues and gross margins
may decline and we could incur losses.
We are in the process of increasing our manufacturing capacity at our existing
facilities as well as pursuing the expansion of overseas manufacturing in Taiwan
and China. Developing overseas manufacturing capabilities involves significant
risks which could materially adversely affect our gross margins and revenues,
including:
- our inability to qualify a new manufacturing line for
all of our customers;
- unanticipated cost increases;
- unavailability or late delivery of equipment;
- unforeseen environmental or engineering problems;
- personnel recruitment delays; and
- political instability.
Expanding our manufacturing capacity requires substantial time to build out and
equip facilities and train personnel. If we receive orders substantially in
excess of our planned capacity, we might not be able to fulfill them quickly
enough to meet customer requirements. Our inability to deliver products timely
could enable competitors to win business from our customers.
We may not be able to effectively increase production and maintain acceptable
manufacturing yields, resulting in delay of product shipments and impairment of
our gross margins.
Manufacturing our products is highly complex and labor intensive. As we rapidly
increase production and hire more people, our manufacturing yield, which is the
percentage of our products which meet customer specifications, could decline,
resulting in product shipment delays, possible lost revenue opportunities,
higher customer returns, and impaired gross margins. Some of our manufacturing
lines have experienced lower than expected yields, which could continue in the
future. Rapid increases in production levels to meet unanticipated demand may
also result in higher overtime costs and other expenses.
<PAGE>
13
Our stock price could fluctuate significantly due to the unpredictability of our
quarterly results.
Our revenues and operating results have fluctuated significantly from quarter-
to-quarter in the past and may fluctuate significantly in the future as a result
of several factors, some of which are outside of our control. These factors
include:
- the size and timing of customer orders;
- our ability to manufacture and ship our products on a timely basis;
- our ability to obtain sufficient supplies to meet our product
manufacturing needs;
- our ability to meet customer product specifications and
qualifications;
- long and unpredictable sales cycles of up to a year or more;
- our ability to sustain high levels of quality across all
product lines;
- changes in our product mix;
- customer cancellations or delivery deferrals;
- seasonality of customer demand; and
- difficulties in collecting accounts receivable.
Due to these factors, results are difficult to predict and you should not rely
on quarter-to-quarter comparisons of our results of operations as an indication
of our future performance. It is possible that, in future periods, our results
of operations may be below the expectations of public market analysts and
investors.
If we do not achieve our planned revenues, we could incur operating losses
because our expenses are fixed in the short term.
We make manufacturing and related capital expenditures in anticipation of a
level of customer orders that may vary over multiple quarters. Our expenditures
are largely based on anticipated future sales and a significant portion of our
expenses is fixed in the short term. If anticipated levels of customer orders
are not received, we may not be able to reduce our expenses quickly enough to
prevent a decline in our gross margins and operating income.
The fiber-optic component market is highly competitive, and we could lose sales
to our competitors.
Many of our competitors have greater financial and other resources than us and
they may be able to more quickly:
- respond to new technologies or technical standards;
- react to changing customer requirements and expectations;
- manufacture, market and sell current products;
- develop new products or technologies; and
- deliver competitive products at lower prices.
In addition, our competitors may acquire our suppliers or potential suppliers.
For example, JDS Uniphase Corp has announced the acquisition of EPITAXX, Inc.
and Optical Coating Laboratory, Inc., both of which supply raw materials to us
or our competitors. As a result of these factors, our customers could decide to
purchase products from our competitors and reduce their purchases from us. Our
competitors' introduction of new products incorporating new technologies or the
emergence of new industry standards could make our existing products
noncompetitive. In addition, some of our customers have fiber optic component
manufacturing capabilities, and could decide to manufacture and sell products
that they currently purchase from us.
If our new product introductions are delayed, or if our new products have
defects, our revenues would be harmed and our costs could increase.
If we do not introduce new products in a timely manner, we will not obtain
incremental revenues from these products or be able to replace more mature
products with declining revenues or gross margins. Customers could decide to
purchase components from our competitors, resulting in lost revenue over a
longer term. We could also incur unanticipated costs if new product
introductions are delayed or we need to fix defective new products.
<PAGE>
14
Acquisitions and investments may adversely affect our business.
Our strategy involves the acquisition and integration of additional companies'
products, technologies and personnel. We have limited experience in acquiring
outside businesses. Acquisition of businesses requires substantial time and
attention of management personnel and may also require additional equity or debt
financings. Integration of newly established or acquired businesses can be
disruptive. There is no assurance that we will identify appropriate targets,
will acquire such businesses on favorable terms, or will be able to integrate
such organizations into our business successfully.
Financial consequences of our acquisitions and investments may include
potentially dilutive issuances of equity securities; large one-time write-offs;
reduced cash balances and related interest income; higher fixed expenses which
require a higher level of revenues to maintain gross margins; the incurrence of
debt and contingent liabilities; and amortization expenses related to goodwill
and other intangible assets.
If a key sales representative or distributor stopped selling or reduced sales of
our products, our revenues would suffer.
We sell substantially all of our products through a network of independent sales
representatives and distributors, the majority of whom have exclusive rights to
sell our products in certain territories. Our sales representatives and
distributors could decide to reduce or stop selling our products.
We may not be able to recruit and retain the personnel we need to succeed.
If we cannot hire and retain technical personnel with advanced skills and
experience in the specialized field of fiber optics, our product development
programs may be delayed and our customer support efforts may be less effective.
If we are unable to hire the necessary managerial, sales and marketing
personnel, we may not be able to grow our revenues.
Our international sales could be delayed or could have additional costs which
would lower their contribution to our gross profit.
We generate a significant portion of our revenues from sales to companies
located outside the United States, principally in Europe. As a result, a
significant portion of our sales faces risks inherent in international
operations, including:
- government controls, which can delay sales or increase our costs;
- export licensing requirements and restrictions, which can delay or
prevent sales;
- tariffs and other trade barriers, which can increase our costs and
make our products uncompetitive; and
- greater difficulty in accounts receivable collection and
longer collection periods, which can increase our need for working
capital.
Currently, the majority of our international sales are U.S. dollar denominated.
As a result, our customers' orders could fluctuate significantly based upon
changes in our customers' currency exchange rates in relation to the U.S.
dollar. A large increase in the value of the U.S. dollar could make our products
more expensive to our foreign customers, resulting in cancelled or delayed
orders and decreased revenues.
Our international operations expose us to additional costs, some of which we
cannot predict.
Our recent expansion of our operations into other countries, such as Canada,
Taiwan and China, has increased the legal, tax and other business complexities
that we must comply with. If we cannot comply with local regulations, we could
incur unexpected costs and potential litigation. Our international operations
could cause our average tax rate to increase. We could also incur expenses due
to the exchange rate risk because many expenses relating to our international
operations are denominated in foreign currencies, while our revenues are in U.S.
dollars.
<PAGE>
15
If we cannot protect or enforce our intellectual property rights, our
competitive position may be impaired.
Third parties may attempt to use our confidential information and proprietary
technologies without authorization. Policing unauthorized use is expensive and
difficult. We cannot be sure that will be able to prevent misappropriation or
infringement of our intellectual property.
Intellectual property claims against us could cause our business to suffer.
In the past, we have received notifications alleging that we are infringing the
intellectual property rights of third parties, and we may in the future face
claims that our products infringe the rights of another. Whether or not these
claims are successful, we would likely incur significant costs and diversion of
our resources defending these claims.
We could incur costs and experience disruptions complying with environmental
regulations.
We handle small amounts of hazardous materials as part of our manufacturing
activities. We may be required to incur environmental remediation costs to
comply with current or future environmental laws.
Our operations could be disrupted by natural disasters.
Earthquakes, fire, floods, loss of power or water supply, telecommunications
failures and similar events could significantly disrupt our operations.
Our business could be disrupted by year 2000 compliance issues.
We believe our own software is year 2000 compliant, but if we are wrong, we
could face unexpected expenses to fix the problems or significant disruptions of
our business. We do not have any contingency plans for our operations if year
2000 issues are not resolved in time or go undetected.
We also rely on external systems and software of third parties that may not be
year 2000 compliant. We do not know if those external systems are year 2000
compliant. If our customers or suppliers encounter year 2000 problems, our
business could be disrupted as well.
<PAGE>
16
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 2. Changes in Securities and Use of Proceeds
As noted under Part I., Item 2, in August 1999, we issued 697,000 shares of our
common stock pursuant to the purchase of SMC Kaifa (Holdings) Ltd. The issuance
of the common stock was exempt from registration pursuant to Regulation D under
the Securities Act of 1933, as amended. The stock was issued to SMC Optics
Communications Corporation and Cylinder Company Limited.
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
The Company filed a report on Form 8-K on September
1,1999 reporting the purchase of SMC Kaifa (Holdings) Ltd.
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: November 12, 1999 By /s/ Sanjay Subhedar
--------------------------------------
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
17
<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 October 2, 1999, and is qualified in our entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> OCT-02-1999
<CASH> 178,718
<SECURITIES> 0
<RECEIVABLES> 48,762
<ALLOWANCES> (12,766)
<INVENTORY> 35,156
<CURRENT-ASSETS> 268,934
<PP&E> 100,096
<DEPRECIATION> (26,125)
<TOTAL-ASSETS> 446,114
<CURRENT-LIABILITIES> 69,738
<BONDS> 17,644
0
0
<COMMON> 67
<OTHER-SE> 337,972
<TOTAL-LIABILITY-AND-EQUITY> 446,114
<SALES> 60,342
<TOTAL-REVENUES> 60,342
<CGS> 30,181
<TOTAL-COSTS> 30,181
<OTHER-EXPENSES> 20,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,047)
<INCOME-PRETAX> 10,778
<INCOME-TAX> 4,096
<INCOME-CONTINUING> 6,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,682
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
