<PAGE>
As filed with the Securities and Exchange Commission on August 11, 1999
Registration No. 333-83857
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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E-TEK DYNAMICS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 3674 592337308
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1865 Lundy Avenue
San Jose, California 95131
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Michael J. Fitzpatrick
Chairman, President and Chief Executive Officer
E-TEK Dynamics, Inc.
1865 Lundy Avenue
San Jose, CA 95131
(408) 546-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Larry W. Sonsini William N. Gerson John L. Savva
Neil J. Wolff Matthew J. Lucero Sullivan & Cromwell
Aaron J. Alter E-TEK Dynamics, Inc. 1888 Century Park East
Wilson Sonsini Goodrich & 1865 Lundy Avenue Suite 2100
Rosati San Jose, California Los Angeles, California 90067
Professional Corporation 95131 (310) 712-6600
650 Page Mill Road (408) 546-5000
Palo Alto, California 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated August 11, 1999.
6,000,000 Shares
[LOGO OF E-TEK DYNAMICS APPEARS HERE]
Common Stock
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E-TEK Dynamics, Inc. is offering 4,000,000 of the shares to be sold in the
offering. The selling stockholders identified in this prospectus are offering
an additional 2,000,000 shares. E-TEK will not receive any of the proceeds from
the sale of the shares being sold by the selling stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"ETEK". The last reported sale price of the common stock on July 29, 1999 was
$43.06 per share.
See "Risk Factors" beginning on page 6 to read about the risk factors you
should consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public......................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to E-TEK............................. $ $
Proceeds, before expenses, to the selling stockholders.......... $ $
</TABLE>
To the extent that the underwriters sell more than 6,000,000 shares of common
stock, the underwriters have the option to purchase up to an additional 900,000
shares from certain of the selling stockholders at the initial price to public
less the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on August , 1999.
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Schroder & Co. Inc.
SoundView Technology Group
U.S. Bancorp Piper Jaffray
-----------
Prospectus dated August , 1999.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our common stock being sold in this
offering, including "Risk Factors" and our audited consolidated financial
statements and their related notes, appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors"
and elsewhere in this prospectus. Unless otherwise indicated, the information
in this prospectus assumes no exercise of the underwriters' option to purchase
additional shares in the offering.
E-TEK Dynamics
We design, manufacture and sell high quality fiber optic components and
modules 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 and include:
. narrowband wavelength division multiplexers, commonly referred to as
WDMs, which allow multiple communication signals to be carried on one
fiber optic connection;
. wideband wavelength division multiplexers, which are used in optical
amplifiers to differentiate signals or enhance performance;
. isolators, which act as one-way valves for optical signals, preventing
the light from traveling in the wrong direction;
. couplers, which are used to combine or split optical signals; and
. micro-optic integrated components, which combine two or more of the above
optical component functions into a single package.
Our products are deployed in land-based and undersea long distance networks,
as well as in cable and metropolitan area networks. Our customers include many
of the leading telecommunications equipment manufacturers, including Alcatel,
CIENA, Corning, Fujitsu, Lucent, Nortel and Pirelli.
Many service providers have increased the capacity of their networks by
installing fiber optic cable for long distance routes and, more recently, for
metropolitan area networks. However, the increase in demand for high capacity,
high speed data transmission has created capacity constraints on these
networks. As service providers seek to address capacity constraints by
installing new fiber or expanding the transmission capacity of existing fiber,
we expect the demand for fiber optic components and modules to increase.
We are focused on building on our position as a leading supplier of fiber
optic components and modules in order to capture additional growth
opportunities in the marketplace. The key elements of our strategic plan
include:
. Maintaining our technology leadership through investments in internal
research and development;
. Broadening our product base to include new products and more integrated
modules;
3
<PAGE>
. Diversifying our customer base to be a key supplier to more leading
telecommunications equipment manufacturers;
. Increasing our presence in new markets such as cable and metropolitan
area networks;
. Enhancing and expanding our manufacturing capacity to be the low cost,
high volume provider of high quality components;
. Expanding our sales and marketing efforts; and
. Continuing to expand through complementary acquisitions.
We were incorporated in Florida in May 1983, reincorporated in California in
September 1987 and reincorporated in Delaware in November 1998. Our principal
executive offices are located at 1865 Lundy Avenue, San Jose, California 95131,
and our telephone number is (408) 546-5000.
----------------
E-TEK, E-TEK Dynamics, the E-TEK Dynamics logo, Enabling Next-Generation
Optical Networks, FibX, E-TEK ElectroPhotonics Solutions and Unifuse are our
trademarks. All other brand names or trademarks appearing in this prospectus
are the property of their respective owners.
Recent Events
On June 22, 1999, we completed the acquisition of ElectroPhotonics
Corporation for a total purchase price of $41 million primarily comprised of
stock and cash. ElectroPhotonics is a developer of components and modules for
optical networks, including WDM components. ElectroPhotonics has developed two
products for next-generation optical networks:
. dispersion equalization modules, which are devices that ensure an optical
signal arrives cleanly at the end of an optical fiber; and
. optical performance monitors, which are devices that watch the optical
signals passing through an optical fiber.
ElectroPhotonics has become one of our business units. This business unit
specializes in fiber Bragg grating technology, which complements our existing
technology expertise. Fiber Bragg gratings separate and filter multiple
wavelengths of light within the same fiber.
On July 6, 1999, we purchased for $12 million in cash an additional equity
interest in FibX Corporation. FibX is the Taiwanese manufacturing joint venture
we formed with Walsin Lihwa Corporation in March 1998. FibX operates a fiber
optic component manufacturing facility in Taiwan and employs approximately 175
people. We purchased the equity interest in FibX to secure low cost
manufacturing in Taiwan. We now hold approximately 96% of FibX.
On July 27, 1999, we signed a definitive agreement to acquire SMC Kaifa
(Holdings) Ltd., an independent developer of fiber optic components, including
WDM components and modules, circulators and isolators. The total purchase
price, in stock and cash, is approximately $40 million. Kaifa has engineering
and manufacturing operations in Sunnyvale, California and an interest in a
Sino-foreign cooperative joint venture engaged in the manufacture of fiber
optic components with operations in China. The closing of the transaction is
subject to several conditions, including required governmental approvals. We
cannot be certain that the acquisition will be completed.
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The Offering
<TABLE>
<S> <C>
Shares offered by E-TEK........................ 4,000,000 shares
Shares offered by the selling stockholders..... 2,000,000 shares
Shares to be outstanding after the offering.... 66,054,438 shares
Use of proceeds................................ For general corporate purposes,
including working capital and
potential acquisitions.
Nasdaq National Market symbol.................. "ETEK"
</TABLE>
The total number of shares of common stock to be outstanding after the
offering excludes 11,345,924 shares of common stock reserved for issuance under
our stock option and stock purchase plans. Under these plans, options to
purchase 5,738,778 shares at a weighted average exercise price of $11.75 were
outstanding as of June 30, 1999.
Summary Financial Information
(in thousands, except per share data)
The "as adjusted" balance sheet data below is adjusted to reflect the sale of
our common stock at an assumed initial price to public of $43.06 per share,
after deducting an assumed underwriting discount and offering expenses that we
will pay.
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
-----------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net revenues........................ $31,661 $40,382 $73,076 $106,924 $172,664
Gross profit........................ 21,209 25,670 42,477 57,861 87,541
Operating expenses:
Research and development........... 2,270 2,444 3,953 7,702 14,687
Selling, general and
administrative.................... 6,697 8,773 15,290 21,097 24,516
Purchased in-process research &
development....................... -- -- -- -- 4,207
Amortization of intangibles........ -- -- -- -- 300
Operating income.................... 12,242 14,453 23,234 29,062 43,831
Net income.......................... 7,706 9,271 15,148 17,924 27,625
Net income available to common
stockholders....................... $ 7,706 $ 9,271 $15,148 $ 8,903 $ 23,743
Net income per share:
Basic.............................. $ 0.15 $ 0.19 $ 0.30 $ 0.39 $ 0.55
Diluted............................ $ 0.15 $ 0.19 $ 0.30 $ 0.32 $ 0.45
Shares used in net income per share
calculations:
Basic.............................. 50,000 50,000 50,000 22,970 43,152
Diluted............................ 50,000 50,000 50,000 55,561 61,746
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
--------------------
Actual As Adjusted
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<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................. $ 55,090 $219,700
Working capital............................................ 66,543 231,153
Total assets............................................... 230,496 395,106
Long-term obligations, net of current portion.............. 21,513 21,513
Stockholders' equity....................................... 149,673 314,283
</TABLE>
5
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below before making an investment decision.
If one of our small number of major customers delays or reduces purchases, our
revenues will decline.
Historically, a small number of customers have accounted for a significant
portion of our revenues. In fiscal year 1999, our three largest customers and
their related entities accounted for 64.0% of our revenues. If any one of
those customers reduces or delays its purchases, our revenues will decline. We
expect that we will continue to depend on sales to a small number of large
customers for the foreseeable future. Our customers also have and will
continue to have the negotiating leverage to obtain price reductions.
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, and may increase our dependence
on a small number of customers.
If our customers are not selected for new telecommunications equipment
deployments, our shipments and revenues will be reduced.
Sales of our components depend on sales of fiber optic telecommunications
equipment, which are shipped in quantity when telecommunications service
providers add capacity. Equipment manufacturers compete for sales in each
capacity deployment. If equipment manufacturers that use our products in their
products do not win a contract, their demand for our products will decline,
reducing our future revenues. Similarly, a delay in selecting equipment
manufacturers for a deployment could delay our shipments and revenues.
We depend on sales of wavelength division multiplexing products, so a decline
in sales of these products would materially reduce our revenues.
A small number of products have historically accounted for a majority of our
net revenues. In particular, sales of wavelength division multiplexing
components and modules accounted for 38.3% of our revenues in fiscal year
1999. We expect sales of WDMs to be a majority of our fiscal 2000 revenues. 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, our wavelength
division multiplexing product revenues may decline.
Thin film filters are a key raw material for wavelength division
multiplexers. Revenues from wavelength division multiplexer sales represented
38.3% of our total fiscal 1999 revenues and 41.7% of our total revenues in the
fourth quarter of fiscal 1999 and are expected to increase to more than 50% of
our total revenues in fiscal 2000. In the fourth quarter of fiscal 1999 we
experienced a shortage of thin film filters, which limited our ability to ship
product and generate revenues. Filter production is a complex and sensitive
process which is difficult to replicate, and we may face shortages of these
filters in the future.
We expect the price of our existing products to decline, and if we do not
reduce our manufacturing costs, our gross margins will decline and we could
incur losses.
The fiber optic component industry is very competitive and is characterized
by declining prices. We believe that since average selling prices are
declining rapidly, we must increase our manufacturing
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capacity and greatly increase unit volume sold in order to maintain our
existing revenues. If we add capacity, we increase our fixed costs, and also
further increase the level of unit sales we must achieve to maintain operating
margins. As a result, if we are unable to continuously reduce our
manufacturing costs, our net revenues and gross margins would decline. These
industry-wide price declines result from factors such as:
. increased competition for business;
. a limited number of potential customers;
. competition from companies with lower labor and production costs;
. introduction of new products by competitors; and
. greater economies of scale for higher volume manufacturers.
Our customers are not obligated to buy material amounts of our products and
may cancel or defer purchases on short notice.
Our customers typically purchase our products under individual purchase
orders and may cancel or defer purchases on short notice without significant
penalty. While we have recently announced long-term contracts with some of our
customers, these contracts do not obligate the customers to buy material
amounts of our products. Accordingly, sales in a particular period are
difficult to predict. Decreases in purchases, cancellations of purchase orders
or deferrals of purchases may have a material adverse effect on us,
particularly if we do not anticipate them.
We depend on a limited number of suppliers, and we may not be able to ship
products on time if we are unable to obtain an adequate supply of raw
materials and equipment on a timely basis.
We depend on a limited number of suppliers of raw materials and equipment
used to manufacture our products. Some of our suppliers are sole sources. We
typically do not have long-term agreements with our suppliers, and, therefore,
our suppliers generally may stop supplying materials and equipment to us at
any time. The reliance on a sole or limited number of suppliers could result
in delivery problems and reduced control over product pricing and quality.
Our quarterly operating results are subject to significant fluctuations, and
you should not rely on them as an indication of our future performance.
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;
. our ability to sustain high levels of quality across all product lines;
. changes in our product mix;
. customers' ability to cancel and reschedule orders;
. seasonality of customer demand; and
. difficulties in collecting accounts receivable.
Because of these factors, 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
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of operations may be below the expectations of public market analysts and
investors. This could adversely affect the trading price of our common stock.
Our operating results may fluctuate because our product sales cycle is long
and unpredictable.
To date, our customers have taken a long time to reach a decision to
purchase our products. This long sales cycle may cause our revenues and
operating results to vary unpredictably from period to period. 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.
The markets in which we operate are highly competitive, which could result in
lost sales and lower revenues.
The market for fiber optic components is intensely competitive, which could
result in existing customers rapidly shifting their orders to competitors.
Because many of our competitors have significantly greater financial and other
resources than we have, they may be able to more quickly:
. respond to new technologies or technical standards;
. react to changing customer requirements and expectations;
. devote greater resources to the development, production, promotion and
sale of products; and
. deliver competitive products at lower prices.
In addition, some of our customers have fiber optic component manufacturing
capabilities, which may represent further competition and lost sales
opportunities if those customers choose to manufacture and sell products that
they currently purchase from us.
As our competitors consolidate, they may offer products or pricing which we
cannot meet, which could cause our revenues to decline.
Consolidation in the fiber optic component industry could intensify the
competitive pressures that we face. For example, two of our competitors, JDS
Fitel and Uniphase have merged. The merged company has announced its intention
to offer more integrated products that could make our products less
competitive.
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.
If we do not plan our manufacturing expansion accurately, we could lose sales
and customer relationships.
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.
Since customers often design a component into their equipment, this could
result in a permanent loss of a customer for one or more of our components.
8
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If we cannot expand our manufacturing facilities or qualify new production
lines with customers, our revenues could decline.
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. The development of overseas manufacturing
capabilities involves significant risks, including:
. unanticipated cost increases;
. unavailability or late delivery of equipment;
. unforeseen environmental or engineering problems;
. personnel recruitment delays; and
. political instability.
Any one of these risks could have a material adverse effect on the start up
or operation of new facilities. Once developed, many customers require
qualification of the manufacturing line before they will purchase any products
from that line. Delays in the qualification process or a customer's inability
to qualify a new manufacturing line could have a negative impact on our
revenues.
If we fail to maintain acceptable manufacturing yields, we may need to delay
product shipments and our gross margins could be impaired.
The manufacture of our products involves highly complex and labor intensive
processes, requiring production in controlled and clean environments. If we do
not meet these requirements, our manufacturing yields, which is the percentage
of our products which meet customer specifications, could decline, resulting
in product shipment delays, possible lost revenue opportunities, and impaired
gross margins. In response to changes in product specifications and customer
needs, our manufacturing process may experience changes that could
significantly reduce manufacturing yields. Our production yields could also be
lower if we receive or inadvertently use defective or contaminated materials
from our suppliers. Some of our manufacturing lines have experienced and may
continue to experience lower than expected production yields. We cannot be
sure that our manufacturing facilities will achieve or maintain acceptable
yields in the future.
Our revenues would suffer if a key sales representative or distributor were to
stop selling or reduce sales of our products.
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. There is a risk that our
independent sales representatives and distributors may discontinue sales of
our products in order to switch to representing one or more of our
competitors, which would result in reduced revenue for us. In addition, some
of our customers have requested to purchase our products directly from us,
which may give some of our affected independent sales representatives and
distributors less incentive to sell our products.
New technologies or industry standards could make our products noncompetitive,
decreasing our sales.
New technologies are emerging due to increased competition and customer
demand. The introduction of new products incorporating new technologies or the
emergence of new industry standards could make our existing products
noncompetitive. For example, new technologies are being developed in the
design of wavelength division multiplexers that compete with the thin film
filters that we employ. Our future results will depend on our ability to
successfully develop and introduce a variety of new products and product
enhancements.
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If our new product introductions are delayed, or if our new products have
defects, our revenues would be harmed and our costs could increase.
Our products are complex and new products may take longer to develop than
originally anticipated. These products may contain defects when first
introduced or as new versions are released. 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 that have designed our new components
into their products could instead purchase components from our competitors,
resulting in lost revenue over a longer term. We could also incur
unanticipated costs in attempting to complete delayed new products or to fix
defective products.
Acquisitions and investments may adversely affect our business.
We regularly review acquisition and investment prospects that would
complement our existing product offerings, augment our market coverage, secure
supplies of critical materials or enhance our technological capabilities.
Acquisitions or investments could result in a number of financial
consequences, including:
. 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.
Furthermore, acquisitions involve numerous operational risks, including:
. difficulties in the integration of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns;
. 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
. potential loss of key employees of acquired organizations.
We may not be able to recruit and retain the personnel we need to succeed.
We heavily depend upon our ability to attract and retain highly-skilled
technical personnel, who have advanced skills and experience in the
specialized field of fiber optics. If we cannot hire or retain these technical
personnel, our product development programs may be delayed and our customer
support efforts may be less effective. In addition, most of our operations are
located in Silicon Valley, where it has become increasingly difficult to find
qualified personnel in all areas of our business. 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 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;
10
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. 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, almost all 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 both the administrative complications we must
manage and our exposure to currency fluctuations. 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.
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. Despite our efforts to protect our
proprietary technology and processes, unauthorized parties may attempt to copy
or otherwise obtain and use our products or technology without authorization,
develop similar technology independently or design around our patents.
Policing unauthorized use of our products is expensive and difficult, and we
cannot be sure that the steps we have taken will prevent misappropriation or
infringement of our intellectual property.
Intellectual property claims against us could cause our business to suffer.
The telecommunications equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights. We have entered into
indemnification obligations in favor of our customers and partners that could
be triggered upon an allegation or finding that we infringe other parties'
proprietary rights. In the past, we have received notifications alleging that
we are infringing the intellectual property rights of third parties. Whether
or not these claims are successful, we would likely incur significant costs
and diversion of our resources defending these claims, which could have a
material adverse effect on our business, financial condition and results of
operations.
We could incur costs and experience disruptions complying with environmental
regulations.
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 incur environmental remediation costs to comply with current or
future environmental laws.
Our operations could be disrupted by natural disasters.
Our facilities are susceptible to damage from earthquakes as well as from
fire, floods, loss of power or water supply, telecommunications failures and
similar events. Any of these events could significantly disrupt our
operations.
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Our business could be disrupted by year 2000 compliance issues.
Many current installed computer systems and software products are coded to
accept only two-digit entries in the date code field and need to be upgraded
or replaced in order to correctly process dates beginning in 2000 and achieve
year 2000 compliance. Although we believe our own software is year 2000
compliant, we may be wrong. If we are wrong, we could face unexpected expenses
to fix the problems or significant disruptions of our business, which could
have a material adverse affect on our business, financial condition and
results of operations.
We also rely on external systems and software of third parties that may not
be year 2000 compliant. None of these systems are under our control.
Consequently, our business could be adversely affected by disruptions in the
operations of enterprises with which we interact. If our suppliers,
particularly our sole source suppliers, encounter year 2000 problems and are
unable to manufacture or deliver supplies to us, our ability to manufacture
and sell our products could be materially and adversely affected. Furthermore,
we have not assessed the year 2000 compliance of our customers. If our
customers encounter year 2000 problems, these customers may be forced to
devote significant resources to fixing these problems and as a result, reduce
purchases of our products. 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 affect on our business, financial condition and
results of operations.
Our stock price could fluctuate significantly.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
. operating results below market expectations;
. announcements of technological innovations or new products by us or our
competitors;
. loss of a major customer;
. changes in, or our failure to meet, financial estimates by securities
analysts;
. industry developments;
. economic and other external factors; and
. period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock. Past
stock price performance is not an indication of future performance.
Future sales of shares could adversely affect our stock price.
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock and could impair
our ability to raise capital through the sale of additional equity securities.
For a description of the shares of our common stock that are available for
future sale, see "Shares Eligible for Future Sale".
Our principal stockholders own a significant percentage of our common stock
and will be able to control the outcome of matters requiring stockholder
approval.
Our founders, officers, directors and their affiliates will, in the
aggregate, beneficially own approximately 64.6% of our outstanding shares
after this offering. Our founders, Theresa Pan and
12
<PAGE>
Jing Jong Pan, will collectively own 25.8% of our outstanding shares after
this offering, and entities related to Summit Partners will own 31.2% of our
shares after this offering. As a result, these groups acting together will be
able to control, or acting independently will be able to substantially
influence, the outcome of all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This ability may have the effect of delaying or preventing a
change in control of E-TEK, or causing a change in control of E-TEK that may
not be favored by our other stockholders. See "Principal and Selling
Stockholders".
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could discourage a takeover.
Certain provisions of our certificate of incorporation and bylaws could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, us. For example, our
certificate of incorporation and bylaws allow us to issue preferred stock with
rights senior to those of the common stock without any further vote or action
by the stockholders, provide for a classified board of directors, eliminate
the right of stockholders to call a special meeting of stockholders and
eliminate the right of stockholders to act by written consent. See
"Description of Capital Stock".
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, all of which are
subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed future business success or
financial results. Such forward-looking statements include, but are not
limited to, statements as to our expectations regarding:
. our future revenue opportunities;
. the future growth of our customer base;
. our future expense levels (including research and development, selling,
general and administrative expenses and amortization of goodwill and
other intangibles);
. our future capital needs;
. the effect of the year 2000 situation;
. our dependence on sales to a small number of large customers;
. the emergence of new technologies;
. our expansion of our direct sales force and network of independent sales
representatives;
. our investment in new product development and enhancements;
. our expansion of our product lines;
. our intention to strengthen customer relationships;
. our expansion into new markets, such as cable and metropolitan area
networks;
. our acquisitions of complementary products, technologies and businesses;
. the increases in our level of manufacturing automation and expansion
into additional facilities;
. the expansion of our manufacturing capacity;
. our use of net proceeds;
. our intentions regarding retained earnings and dividends; and
. future financial pronouncements.
When we use words such as "believe," "expect," "anticipate" or similar words,
we are making forward-looking statements.
You should note that an investment in our common stock involves risks and
uncertainties that could affect our future business success or financial
results. 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 "Risk Factors" and elsewhere in this prospectus.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described
in the risk factors and elsewhere in this prospectus could materially and
adversely affect our business, financial condition and operating results. We
undertake no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 4,000,000 shares of
common stock we are selling in the offering will be approximately $164.6
million, based on an assumed initial price to public of $43.06 per share and
after deducting an assumed underwriting discount and estimated offering
expenses. We will not receive any proceeds from the sale of shares being sold
by the selling stockholders.
We intend to use the net proceeds for working capital and general corporate
purposes, including to fund potential acquisitions. In the ordinary course of
business, we evaluate potential acquisitions of, or investments in,
complementary businesses or products. Other than the acquisition of Kaifa, we
currently have no understandings, commitments or agreements with respect to
any material acquisition of, or investment in, other businesses, products or
technologies. Until we use the net proceeds for any purpose, we will invest
the funds in short-term, interest-bearing, investment grade obligations.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "ETEK" since December 2, 1998, the date of our initial public offering.
The following table shows the high and low closing sale prices for the common
stock as reported on the Nasdaq National Market for the periods indicated
below:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal year ended June 30, 1999
Second Quarter (from December 2, 1998)........................ $27.13 $20.06
Third Quarter................................................. $36.38 $23.31
Fourth Quarter................................................ $50.50 $30.50
Fiscal year ending June 30, 2000
First Quarter (through July 29, 1999)......................... $47.84 $40.75
</TABLE>
The last reported sale price for our common stock on the Nasdaq National
Market was $43.06 per share on July 29, 1999. As of July 22, 1999, there were
approximately 297 holders of record of our common stock.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock. We
currently intend to retain earnings to finance the growth and development of
the business and, therefore, we do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth:
. our actual capitalization as of June 30, 1999, and
. our capitalization as adjusted to give effect to the sale of 4,000,000
shares of our common stock at an assumed initial price to public of
$43.06 per share after deducting an assumed underwriting discount and
estimated offering expenses that we will pay.
You should read this table in conjunction with our audited consolidated
financial statements and the related notes included elsewhere in this
prospectus.
The outstanding share information in the table below excludes 11,345,924
shares of common stock reserved for issuance under our stock option and
purchase plans. Under the plans, options to purchase 5,738,778 shares at a
weighted average exercise price of $11.75 were outstanding as of June 30,
1999.
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Capital lease obligations, net of current portion........ $ 2,281 $ 2,281
-------- --------
Long-term debt, net of current portion................... 19,232 19,232
-------- --------
Stockholders' equity:
Common stock, $.001 par value, 300,000,000 shares
authorized; 62,054,438 shares issued and outstanding
(actual); 66,054,438 shares issued and outstanding (as
adjusted).............................................. 63 67
Additional paid-in capital.............................. 216,124 380,730
Notes receivable from stockholders...................... (11,454) (11,454)
Deferred compensation................................... (3,805) (3,805)
Distribution in excess of net book value................ (83,901) (83,901)
Retained earnings....................................... 32,646 32,646
-------- --------
Total stockholders' equity............................ 149,673 314,283
-------- --------
Total capitalization................................ $171,186 $335,796
======== ========
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited consolidated financial statements and the related
notes included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended June 30, 1997, 1998 and 1999, and
the consolidated balance sheet data at June 30, 1998 and 1999 are derived from
audited consolidated financial statements included in this prospectus. The
consolidated statement of operations data for the fiscal years ended June 30,
1995 and 1996 and the consolidated balance sheet data at June 30, 1995, 1996
and 1997 are derived from audited consolidated financial statements not
included in this prospectus. A description of the mandatorily redeemable
convertible preferred stock (all of which converted into our common stock in
our initial public offering in December 1998) and related accretion for fiscal
1998 and 1999 is included in Note 8 of the notes to the audited consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues.................... $31,661 $40,382 $73,076 $106,924 $172,664
Cost of goods sold.............. 10,452 14,712 30,599 49,063 85,123
------- ------- ------- -------- --------
Gross profit................... 21,209 25,670 42,477 57,861 87,541
------- ------- ------- -------- --------
Operating expenses:
Research and development....... 2,270 2,444 3,953 7,702 14,687
Selling, general and
administrative................ 6,697 8,773 15,290 21,097 24,516
Purchased in-process research
and development............... -- -- -- -- 4,207
Amortization of intangibles.... -- -- -- -- 300
------- ------- ------- -------- --------
Total operating expenses...... 8,967 11,217 19,243 28,799 43,710
------- ------- ------- -------- --------
Operating income................ 12,242 14,453 23,234 29,062 43,831
Interest income................. 84 408 962 1,992 3,784
Interest expense................ (54) (66) (571) (988) (1,573)
------- ------- ------- -------- --------
Income before income taxes...... 12,272 14,795 23,625 30,066 46,042
Provision for income taxes...... 4,566 5,524 8,477 12,142 18,417
------- ------- ------- -------- --------
Net income...................... 7,706 9,271 15,148 17,924 27,625
Convertible preferred stock
accretion...................... -- -- -- 9,021 3,882
------- ------- ------- -------- --------
Net income available to common
stockholders................... $ 7,706 $ 9,271 $15,148 $ 8,903 $ 23,743
======= ======= ======= ======== ========
Net income per share:
Basic.......................... $ 0.15 $ 0.19 $ 0.30 $ 0.39 $ 0.55
Diluted........................ $ 0.15 $ 0.19 $ 0.30 $ 0.32 $ 0.45
Shares used in net income per
share calculations:
Basic.......................... 50,000 50,000 50,000 22,970 43,152
Diluted........................ 50,000 50,000 50,000 55,561 61,746
<CAPTION>
June 30,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....... $ 3,992 $ 8,026 $ 8,259 $ 21,918 $ 55,090
Working capital................. 9,464 18,342 27,706 33,582 66,543
Total assets.................... 16,665 26,709 61,760 90,378 230,496
Long-term obligations, net of
current portion................ -- -- 9,577 13,808 21,513
Mandatorily redeemable
convertible preferred stock.... -- -- -- 125,144 --
Stockholders' equity (deficit).. 11,680 20,951 36,099 (74,498) 149,673
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, manufacture and sell high quality fiber optic components and
modules 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.
We generate revenues primarily from the sale of fiber optic components and
modules. 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 telecommunications equipment
manufacturers have 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. In fiscal 1999 our three largest customers were Alcatel and related
entities, Corning and Pirelli. During that period, sales to Alcatel and
related entities accounted for 35.2% of our revenues, sales to Corning
accounted for 17.3%, and sales to Pirelli accounted for 11.6%.
The fiber optic component industry is characterized by rapidly declining
average selling prices, increasing unit volumes and declining margins. While
these price declines have negatively affected our margins, they have been
accompanied by increased unit sales.
In June 1999, we acquired ElectroPhotonics in Canada 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. We estimate that we
will record $6.0 million of goodwill and other intangibles, which will be
amortized over three years.
On July 27, 1999, we signed a definitive agreement to acquire SMC Kaifa
(Holdings) Ltd., for a total purchase price of 697,000 shares of our common
stock and cash of $12.0 million. We estimate that the purchase will result in
approximately $36.0 million of goodwill and other intangible assets which will
be amortized over three years. The closing of the transaction is subject to
several conditions, including required governmental approvals. We cannot be
certain that the acquisition will be completed.
18
<PAGE>
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentage of net revenues represented by the line items reflected in our
audited consolidated statements of operations:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues................ 100.0% 100.0% 100.0%
Cost of goods sold.......... 41.9 45.9 49.3
-------- -------- --------
Gross profit.............. 58.1 54.1 50.7
-------- -------- --------
Operating expenses:
Research and
development.............. 5.4 7.2 8.5
Selling, general and
administrative........... 20.9 19.7 14.2
Purchased in-process
research and development
......................... -- -- 2.4
Amortization of
intangibles.............. -- -- 0.2
-------- -------- --------
Total operating
expenses............... 26.3 26.9 25.3
-------- -------- --------
Operating income............ 31.8 27.2 25.4
Interest income............. 1.3 1.8 2.2
Interest expense............ (0.8) (0.9) (0.9)
-------- -------- --------
Income before income taxes.. 32.3 28.1 26.7
Provision for income taxes.. 11.6 11.4 10.7
-------- -------- --------
Net income.................. 20.7% 16.7% 16.0%
======== ======== ========
</TABLE>
Comparison of fiscal years ended June 30, 1997, 1998 and 1999
Net Revenues. Net revenues increased 46.2% from $73.1 million in fiscal 1997
to $106.9 million in fiscal 1998. Net revenues increased 61.5% from $106.9
million in fiscal 1998 to $172.7 million in fiscal 1999. The primary reason
for the increase from fiscal 1997 to fiscal 1998 was increased unit shipments
of our isolators, WDMs, couplers, and micro-optic integrated components. The
primary reason for the increase from fiscal 1998 to fiscal 1999 was increased
unit shipments of WDMs, couplers, and micro-optic integrated components.
Fiscal 1998 and fiscal 1999 net revenues also increased due to growth in sales
of products for undersea applications. In the fourth quarter ended June 30,
1999, we experienced a shortage of thin film filters, which limited our
ability to ship products and generate revenues. We may face shortages of these
filters in the future.
Gross Profit. Gross profit increased 36.2% from $42.5 million in fiscal 1997
to $57.9 million in fiscal 1998. Gross profit increased 51.3% from $57.9
million in fiscal 1998 to $87.5 million in 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 58.1% in fiscal 1997 to 54.1% in fiscal 1998 and to 50.7% in
fiscal 1999. The gross profit margin declines over both fiscal years were
primarily due to declining average selling prices and increased costs
associated with the expansion of our manufacturing capacity to address future
unit volume growth. In addition, we expect the purchase of a controlling
interest in FibX will have an adverse impact on our margins until we can
absorb the additional manufacturing capacity through increased revenues.
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 $4.0 million in fiscal 1997,
representing 5.4% of net revenues, and $7.7 million, or 7.2% of net revenues,
in fiscal 1998. Research and development expenses for fiscal 1999, excluding
purchased in-process research and development charges, were $14.7 million, or
8.5% of net revenues, a 90.7% increase over fiscal 1998. The growth in
research and development expenses in both years 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 fiscal
2000 in absolute dollars.
19
<PAGE>
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 $15.3 million in fiscal 1997,
representing 20.9% of net revenues, and $21.1 million, or 19.7% of net
revenues, in fiscal 1998. Selling, general and administrative expenses for
fiscal 1999 were $24.5 million, or 14.2% of net revenues, representing a 16.2%
increase over fiscal 1998. The increase in absolute dollars of expenditures
over both periods reflected the hiring of additional sales, 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 in fiscal 2000.
Purchased In-Process Research and Development and Goodwill Amortization. On
June 22, 1999, we completed the acquisition of ElectroPhotonics. On that date,
we recorded a one-time charge of $4.2 million representing purchased in-
process technology that had not yet reached technological feasibility and had
no alternative future use. We determined this value by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from these products, and discounting
the net cash flows back to their present values. The discount rate includes a
factor that takes into account the uncertainty surrounding the successful
development of the purchased in-process technology. If we do not successfully
develop these products, our revenues and profitability may be adversely
affected in future periods. Additionally, the value of other intangible assets
acquired may become impaired. Capitalized intangible assets resulting from the
acquisition of ElectroPhotonics, including developed and core technologies and
goodwill, amounted to $34.9 million. These assets are being amortized over
their useful lives, generally three years. Such amortization amounted to $0.3
million for fiscal 1999. We estimate that as a result of the ElectroPhotonics
and FibX acquisitions and, if completed, the Kaifa acquisition, amortization
of goodwill and other intangibles will be approximately $26.0 million in each
of the next three fiscal years. We may continue to buy technology in order to
expand our product offering and bring products to the market in a timely
fashion.
Interest Income and Interest Expense. Our interest income was approximately
$1.0 million for fiscal 1997, compared to $2.0 million in fiscal 1998 and $3.8
million for fiscal 1999. We earned interest income on our cash investments. We
also recognized imputed interest income of $0.6 million in fiscal 1998 and
$1.0 million in fiscal 1999 relating to notes receivable from stockholders.
Interest expense, incurred on borrowings secured by our property and
equipment, and on capital leases, was $0.6 million for fiscal 1997, compared
to $1.0 million for fiscal 1998 and $1.6 million for fiscal 1999.
Income Taxes. Our income tax provision was 35.9% in fiscal 1997, 40.4% in
fiscal 1998 and 40.0% in fiscal 1999. The higher rate for fiscal 1998 is due
to a permanent tax difference related to our investment in FibX. The higher
rate for fiscal 1999 is due to a permanent difference related to our purchase
of ElectroPhotonics.
Net Income. Net income for fiscal 1997 was $15.1 million, or $0.30 per
diluted share, compared to net income of $17.9 million, or $0.32 per diluted
share, for fiscal 1998 and net income of $27.6 million, or $0.45 per diluted
share, for fiscal 1999. Excluding the one time charge for purchased in-process
research and development and amortization of goodwill and other intangibles
related to the acquisition of ElectroPhotonics, net income would have been
$30.3 million, or $0.49 per diluted share, for fiscal 1999.
Net income available to common stockholders was $15.1 million in fiscal
1997, $8.9 million in fiscal 1998, and $23.7 million in fiscal 1999. Net
income available to common stockholders in fiscal 1998 and fiscal 1999 reflect
accretion relating to our convertible preferred stock of $9.0 million in
fiscal 1998 and $3.9 million in fiscal 1999. All of our convertible preferred
stock was converted into common stock on December 2, 1998 and, accordingly, we
will not be recording accretion on this convertible preferred stock in future
periods.
20
<PAGE>
Quarterly Results of Operations
The following tables set forth unaudited quarterly results for the eight
fiscal quarters ended June 30, 1999, as well as such data expressed as a
percentage of our net revenues for each quarter. This information has been
presented on the same basis as our audited consolidated financial statements
appearing elsewhere in this prospectus and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary to present fairly the unaudited quarterly results.
This information should be read in conjunction with our audited consolidated
financial statements and the related notes appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period. See "Risk Factors--Our quarterly
operating results are subject to significant fluctuations, and you should not
rely on them as an indication of future performance".
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, June 30, Oct. 2, Jan. 1, April 2, June 30,
1997 1997 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $27,309 $25,311 $23,729 $30,575 $32,942 $38,708 $49,472 $51,542
Cost of goods sold...... 11,893 11,155 11,182 14,833 15,989 18,854 24,495 25,785
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 15,416 14,156 12,547 15,742 16,953 19,854 24,977 25,757
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 1,655 1,746 1,921 2,380 3,076 3,255 4,233 4,123
Selling, general and
administrative........ 5,198 5,112 5,168 5,619 5,395 5,748 7,065 6,309
Purchased in-process
research and
development........... -- -- -- -- -- -- -- 4,207
Amortization of
intangibles........... -- -- -- -- -- -- -- 300
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 6,853 6,858 7,089 7,999 8,471 9,003 11,298 14,939
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 8,563 7,298 5,458 7,743 8,482 10,851 13,679 10,818
------- ------- ------- ------- ------- ------- ------- -------
Interest income......... 353 428 514 697 588 822 1,185 1,189
Interest expense........ (171) (188) (112) (517) (285) (340) (417) (530)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 8,745 7,538 5,860 7,923 8,785 11,333 14,447 11,477
Provision for income
taxes.................. 3,499 3,014 2,439 3,190 3,514 4,533 5,779 4,591
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 5,246 4,524 3,421 4,733 5,271 6,800 8,668 6,886
Convertible preferred
stock accretion........ 1,842 2,393 2,393 2,393 2,400 1,482 -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income available to
common stockholders.... $ 3,404 $ 2,131 $ 1,028 $ 2,340 $ 2,871 $ 5,318 $ 8,668 $ 6,886
======= ======= ======= ======= ======= ======= ======= =======
Net income per share:
Basic.................. $ 0.12 $ 0.10 $ 0.05 $ 0.11 $ 0.13 $ 0.15 $ 0.15 $ 0.12
Diluted................ $ 0.10 $ 0.08 $ 0.06 $ 0.08 $ 0.09 $ 0.11 $ 0.14 $ 0.11
Shares used in net
income per share
calculations:
Basic.................. 28,073 21,205 21,258 21,308 22,037 34,777 57,720 58,307
Diluted................ 51,922 55,007 57,222 58,092 58,573 60,125 63,719 64,051
</TABLE>
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, June 30, Oct. 2, Jan. 1, April 2, June 30,
1997 1997 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 43.5 44.1 47.1 48.5 48.5 48.7 49.5 50.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 56.5 55.9 52.9 51.5 51.5 51.3 50.5 50.0
Operating expenses:
Research and
development........... 6.1 6.9 8.1 7.8 9.3 8.4 8.5 8.0
Selling, general and
administrative........ 19.0 20.2 21.8 18.4 16.4 14.9 14.3 12.2
Purchased in-process
research
and development....... -- -- -- -- -- -- -- 8.2
Amortization of
intangibles........... -- -- -- -- -- -- -- 0.6
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 25.1 27.1 29.9 26.2 25.7 23.3 22.8 29.0
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 31.4 28.8 23.0 25.3 25.8 28.0 27.7 21.0
Interest income......... 1.3 1.7 2.2 2.3 1.8 2.1 2.4 2.3
Interest expense........ (0.6) (0.7) (0.5) (1.7) (0.9) (0.8) (0.9) (1.0)
----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 32.1 29.8 24.7 25.9 26.7 29.3 29.2 22.3
Provision for income
taxes.................. 12.8 11.9 10.3 10.4 10.7 11.7 11.7 8.9
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 19.3% 17.9% 14.4% 15.5% 16.0% 17.6% 17.5% 13.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE>
Liquidity and Capital Resources
Since inception, we have financed operations and met our capital expenditure
requirements primarily through cash flows from operations and borrowings. Cash
flows from operating activities were $13.5 million for fiscal 1997, $27.7
million for fiscal 1998 and $32.2 million for fiscal 1999. Cash flows from
operating activities consisted primarily of net income, depreciation and
amortization expenses, and increases in accrued liabilities and accounts
payable, offset in part by increases in accounts receivable, inventories and
deferred tax assets. In fiscal 1999, cash flows from operating activities also
included purchased in-process research and development. At June 30, 1999, we
had cash and cash equivalents of $55.1 million and working capital of $66.5
million.
Net cash used in investing activities was $21.4 million for fiscal 1997,
compared to $12.4 million for fiscal 1998 and $63.4 million for fiscal 1999.
The cash used in fiscal 1997 and fiscal 1998 was primarily for capital
expenditures. The cash used in fiscal 1999 was primarily for the purchase of
ElectroPhotonics, which was $25.7 million, net of cash received, and capital
expenditures of $41.8 million.
On July 6, 1999, we acquired a controlling interest in FibX for cash of
$12.0 million. On July 27, 1999, we entered into an agreement to acquire SMC
Kaifa (Holdings) Ltd. for a total purchase price of 697,000 shares and cash of
$12.0 million. Although we have no material commitments for capital
expenditures, we expect to make capital expenditures in fiscal 2000 of
approximately $50.0 million.
Net cash provided in financing activities was $8.1 million in fiscal 1997,
as compared to $1.6 million used in financing activities for fiscal 1998. The
fiscal 1997 amount reflects the incurrence of $7.7 million in long-term debt.
The fiscal 1998 amount reflects the net effect of our recapitalization, which
was completed in July 1997. For a description of the recapitalization, see
"Certain Transactions--Recapitalization" and Note 1 to our audited
consolidated financial statements included elsewhere in this prospectus. Net
cash provided by financing activities for fiscal 1999 was $64.4 million and
consisted primarily of net proceeds of $43.4 million from the issuance of
common stock in our initial public offering and borrowings on long-term debt
of $20.2 million.
Based on current plans and business conditions, we believe that our existing
cash and equivalents, cash generated from operations, available equipment
financing sources and proceeds from this offering will be sufficient to
satisfy our anticipated cash requirements for at least the next twelve months.
On January 1, 1999, the participating member countries of the European Union
converted to a common currency, the euro. On that same date they established
fixed conversion rates between their existing sovereign currencies and the
euro. Even though legacy currencies are scheduled to remain legal tender in
the participating countries as denominations of the euro until January 1,
2002, the participating countries will no longer be able to direct independent
interest rates for the legacy currencies. The authority to set monetary policy
will now reside with the new European Central Bank. We do not anticipate any
material impact from the euro conversion on our financial information systems,
which currently accommodate multiple currencies. We do not believe that the
euro conversion issue will have any material impact on our pricing or market
strategies or our financial condition and results of operations.
At June 30, 1999, we had not entered into any agreements or purchased any
financial instruments that expose us to material market risk.
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.
22
<PAGE>
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.
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 and is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. We do not expect the adoption of SFAS 133
to have a material impact on our results of operations.
23
<PAGE>
BUSINESS
Overview
We design, manufacture and sell high quality fiber optic components and
modules 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 and
include:
. narrowband wavelength division multiplexers, commonly referred to as
WDMs, which allow multiple communication signals to be carried on one
fiber optic connection;
. wideband wavelength division multiplexers, which are used in optical
amplifiers to differentiate signals or enhance performance;
. isolators, which act as one-way valves for optical signals, preventing
the light from traveling in the wrong direction;
. couplers, which are used to combine or split optical signals; and
. micro-optic integrated components, which combine two or more of the above
optical component functions into a single package.
Our products are deployed in land-based and undersea long distance networks,
as well as in cable and metropolitan area networks. Our customers include many
of the leading telecommunications equipment manufacturers, including Alcatel,
CIENA, Corning, Fujitsu, Lucent, Nortel and Pirelli.
Industry Background
In order to meet the increase in demand for high capacity, high speed data
transmission, networks have been evolving to optical technologies which offer
several advantages. Within optical networks, transmission signals travel in
the form of light at very high speeds. Additionally, each light signal can be
divided into different colors or wavelengths. Each data-carrying wavelength
can then be transmitted together with a large number of other wavelengths.
This technology is known as wavelength division multiplexing, which is
commonly referred to in the industry as WDM.
Another important technology is the amplification of the optical signal.
This is accomplished using optical amplifiers. Optical amplifiers create cost
savings for service providers by reducing the need for expensive equipment
that converts the optical signal to and from an electrical signal.
Our components are the building blocks for WDM and optical amplifier
systems, and, therefore, many of them are necessary to enable optical
networking.
Many service providers have increased the capacity of their networks by
installing fiber optic cable for long distance routes and, more recently, for
metropolitan area networks. However, the rapid increase in demand for high
capacity, high speed data transmission has created capacity constraints
throughout these networks. As service providers seek to address these capacity
constraints by installing new fiber or expanding the transmission capacity of
existing fiber, we expect the demand for fiber optic components and modules to
increase.
Today, service providers can address their capacity constraints by either
installing new fiber or expanding the transmission capacity of existing fiber.
The expansion of transmission capacity can be accomplished by utilizing
technologies such as time division multiplexing and, more recently, WDM. Time
division multiplexing increases the transmission speed of optical signals
whereas WDM increases
24
<PAGE>
the number of optical signals transmitted simultaneously on a single fiber.
Regardless of the method used for addressing capacity constraints, we expect
the demand for optical networking equipment, including components, modules and
systems, to increase.
This increase in demand is driven by the service providers' need to provide
subscribers with more services at lower costs. We are focused on building on
our position as a leading supplier of fiber optic components and modules in
order to capture additional growth opportunities in the marketplace.
Company Strategy
Our goal is to provide a broad range of high quality components in large
volumes for the telecommunications and cable markets. To meet this goal, we
plan to:
. Maintain and Expand Our Technology Leadership. We intend to continue to
invest in new product development and product enhancements that will
drive the growth of optical systems. As of June 30, 1999, we had over 100
U.S. patents issued and pending. We currently focus our product
development efforts on components for growth areas such as WDM, optical
amplification and optical switching. Our long-term goal is to supply the
enabling optical components that will allow networks to avoid the need
for the costly conversions between optical and electrical signals.
. Design and Build Increasingly Integrated Components and Modules. We
intend to continue expanding our product line with increasingly
integrated components and modules. Expertise that we have developed in
the design of our current components will help us to develop new and more
integrated products. Additionally, we believe that there is growing
demand from telecommunications equipment manufacturers for more
integrated components and modules. Integration provides many benefits to
our customers, including cost reductions as well as performance and
reliability improvements. In addition, these integrated components allow
telecommunications equipment manufacturers to design smaller systems.
. Strengthen Existing and Develop New Customer Relationships. We believe
that our strong customer relationships are a competitive advantage that
enable us to more effectively target our product development and
manufacturing efforts. We have established relationships with key
telecommunications equipment manufacturers by working as a partner to
solve their product needs. We intend to strengthen our existing customer
relationships by continuing to deliver a high level of service and
capitalize on our reputation for high quality products to penetrate new
key accounts.
. Increase Presence in Metropolitan Area and Cable Markets. We plan to
extend beyond our traditional long distance markets into new markets,
such as metropolitan area and cable networks. We believe that
technological advancements and cost reductions in optical components and
modules are beginning to enable the growth of optical networking into
these markets.
. Enhance and Expand Manufacturing Capabilities. Telecommunications
equipment manufacturers are increasingly demanding higher volumes of
components with shorter delivery lead times, higher quality and lower
price. To meet these demands, we have been increasing our manufacturing
capacity, investing in automated manufacturing processes and adding lower
cost, offshore manufacturing facilities.
. Expand Sales and Marketing Efforts. The target customer base for our
optical components and modules requires a focused sales and marketing
effort. We believe it is necessary to expand these efforts to improve
service to existing customers and to effectively target new customers. We
intend to selectively expand our direct sales force and network of
independent sales representatives to serve existing customers and to
pursue additional customer opportunities.
25
<PAGE>
. Pursue Complementary Acquisitions. To enhance our internal development,
we intend to actively pursue acquisitions of complementary products,
technologies and businesses. We have made two acquisitions to date and
have signed an agreement to buy a third company. We plan to pursue
opportunities that contribute new technologies and products, low cost
manufacturing capabilities, or broadened customer relationships.
Technology and Products
Fiber optic systems manufactured by our customers are used to send and
receive communications signals. This requires transmitting, amplifying,
multiplexing, isolating, routing, monitoring and receiving optical signals,
which are typically carried by individual wavelengths of light. Many of the
capabilities for these functions are enabled at the component level. We have
developed a broad range of components to address these needs within optical
networks.
Our products are divided into five main categories: wavelength division
multiplexing (WDM) components and modules, isolators, couplers, micro-optic
integrated components and other products.
WDM Components and Modules. We manufacture a number of different WDM
components and modules. Our narrowband WDM multiplexer combines light sources
of different wavelengths for simultaneous transmission along a single fiber.
We also manufacture wideband WDM components for use in optical amplifiers.
Wideband WDM components combine and separate wavelengths that are far apart,
such as a transmission signal and an amplifying signal.
Most of our WDM components use thin film filters to enable the transmission
of specific optical wavelengths and the reflection of others. Thin film
filters employ various coatings on glass to discriminate between wavelengths.
This technology offers accuracy in separating wavelengths, low signal loss,
and insensitivity to temperature change.
Isolators. We currently offer a wide range of isolator products, including a
high reliability isolator for undersea networks. An isolator prevents
reflected signals from traveling past it in the wrong direction while still
allowing the unimpeded passage of signals in the original direction. Our
isolators offer low signal loss, which means that a high percentage of light
passes through and only small amounts of light are lost.
Couplers. We offer several types of couplers, which combine or split optical
signals. Couplers are often used to tap off a small portion of a light stream
for monitoring purposes or to distribute the signal to multiple points. We
have developed a patented technology called Unifuse, which we believe produces
more robust and reliable couplers.
Micro-Optic Integrated Components. Micro-optic integrated components are
modules that integrate two or more optical component functions into a single
package. These functions include isolator, WDM and coupler functions. For
example, we have developed a product that combines coupler and isolator
functions into a single module for use in optical amplifiers. This integration
reduces the total component count in a system and provides many benefits for
our customers, including:
. decreasing the need to store multiple components;
. reducing the physical dimensions of the system;
. lowering production costs; and
. improving performance and reliability.
We design and manufacture a range of micro-optic integrated components for a
variety of applications.
26
<PAGE>
Other Products. We manufacture a variety of other components and modules
that perform various functions within an optical system. These products
include:
. attenuators, which are used to adjust the strength of optical signals;
. circulators, which are used to direct signals;
. switches, which are used to flexibly reroute signals; and
. wavelength lockers, which prevent the drifting of wavelengths at the
transmission point.
Currently, the majority of our products are designed into long distance
networks. We recently began to offer these products for metropolitan and cable
networks, which are areas that we expect will offer growth opportunities in
the future.
Through our recent acquisition of ElectroPhotonics, we have two additional
products for optical networks:
. Dispersion equalization modules, which ensure that an optical signal
arrives cleanly at the end of an optical fiber. Different colors of light
travel along an optical fiber at slightly different speeds, and light
signals that carry information always have some small variation in the
color of the light. The dispersion equalization modules cancel out those
differences in speed so that all the colors of the light signal arrive at
the same time.
. Optical performance monitors, which watch the optical signals passing
through an optical fiber. They count which wavelengths (colors) of light
signals are present. They check to see how strong each wavelength signal
is and whether it is interfering with other signals. As communication
systems move more towards optical networks, these traffic monitors become
increasingly important to prevent "optical gridlock."
Customers
We sell our products primarily to telecommunications equipment
manufacturers. Customers that purchased more than $1 million of our products
in fiscal 1999 were:
Alcatel Italia Fujitsu
Alcatel ITS Lucent
Alcatel Network Systems MCI WorldCom
Alcatel Submarine Networks NEC
Antec Nortel Networks
CIENA Pirelli
Corning Tyco International
A small number of customers have historically accounted for a substantial
portion of our net revenues. In fiscal 1999 our three largest customers were
Alcatel and related entities, Corning and Pirelli. During that period, sales
to Alcatel and related entities accounted for 35% of our revenues, sales to
Corning accounted for 17%, and sales to Pirelli accounted for 12%.
Developing strong relationships with telecommunications equipment
manufacturers is a key focus of our sales efforts. We work closely with our
customers from the initial product design through the manufacturing process to
the delivery of the final product. This ongoing level of interaction enables
us to better align our product development efforts with our customers'
evolving product needs.
Optical networking systems companies are beginning to develop next
generation optical networks that will require optical components and modules.
We are dedicating sales and marketing resources to both new and more
established telecommunications equipment manufacturers.
27
<PAGE>
Research and Development
We currently have 117 employees engaged in research and development,
including 61 engineers with advanced degrees, 29 of whom have Ph.D.s. We want
to continue to develop core technologies with applications for product
solutions in each of our target markets. Our research and development
expenses, excluding purchased in-process research and development, were $14.7
million for fiscal 1999 and $7.7 million for fiscal 1998. We plan to continue
to increase our research and development budget and staffing levels in fiscal
2000. The focus of our research and development will be to further broaden the
product base and to improve the manufacturability and performance of existing
products.
Manufacturing
We currently manufacture our products at our facilities in San Jose,
California, Ontario, Canada and Taipei, Taiwan. Our in-house manufacturing
capabilities include product design, optical assembly, integration and testing
of our components and modules. We maintain a system of optical assembly
stations located in clean rooms to manufacture custom and standard products.
Customer expectations for innovative product solutions, high volume capacity,
high quality and on-time delivery require flexible manufacturing processes.
Telecommunications equipment manufacturers require high quality and
reliability in the components incorporated into their systems. We emphasize
quality assurance through ongoing staff training and internal manufacturing
systems and procedures throughout our various manufacturing processes.
The materials that we require for the manufacture of our products are
generally available from several sources, although a number of materials are
available only from sole source suppliers. In the fourth quarter of fiscal
1999, we experienced a shortage of thin film filters from our suppliers, which
caused delays in shipments, lost orders and reduced revenues. Specifically,
the shortage was related to poor yields during the filter manufacturing
process. Such a shortage could recur in the future. However, we have been
expanding our internal thin film filter manufacturing capacity and are working
internally and with our suppliers in an effort to improve yields.
We intend to increase our level of manufacturing automation and expand into
additional facilities as required. In May 1999, we expanded the size of our
San Jose facilities from approximately 160,000 square feet to approximately
240,000 square feet. We financed this facilities expansion through a
combination of cash flows from operations and equipment financing. In addition
to our facilities in San Jose, we recently acquired or established
manufacturing facilities in Ontario, Canada and Taipei, Taiwan.
Based on the long-term growth outlook of the fiber optic component market,
we plan to continue increasing our manufacturing capacity in North America and
overseas.
Sales and Marketing
We market and sell our products through a network of nine domestic and 15
international sales representatives and distributors. Our sales
representatives and distributors are independent organizations that generally
have exclusive geographic territories and are generally compensated on a
commission basis.
We also employ 55 people in sales and marketing who manage key customer
accounts and support our sales representatives and distributors. Our customers
often have unique technical specifications and performance requirements for
components and typically require specific product designs. As a result, our
sales efforts require close cooperation between our independent sales
representatives and distributors and our in-house personnel.
28
<PAGE>
In support of our selling effort, we conduct marketing programs intended to
position and promote our products within the telecommunications industry.
Marketing personnel coordinate our participation in trade shows and design and
implement our advertising efforts. In addition, the marketing group gathers
and maintains market research and tracks industry trends and developments in
order to anticipate customer needs for new products and develop pricing
strategies.
Competition
The market for fiber optic components is intensely competitive and
characterized by rapidly changing technology. The principal competitive
factors in our business are:
. optical performance of components;
. quality and reliability;
. manufacturing capacity;
. ability to deliver on-time;
. customer relationships;
. pricing;
. comprehensiveness of product offerings;
. customization to customer specifications; and
. strength of distribution channels.
We currently experience competition from various companies, including ADC
Telecommunications, Corning, Gould Electronics, and JDS Uniphase in couplers;
FDK Corporation, JDS Uniphase, Kyocera, and Shinkosha K.K. in isolators, and
Corning, JDS Uniphase, Lucent, and Optical Coating Laboratory in WDM
components. Competitors in any portion of our business are also capable of
rapidly becoming competitors in other portions of our business. We also face
competition from numerous smaller companies. Some of our current and potential
competitors may be able to:
. respond more quickly to new or emerging technologies or standards and to
changes in customer requirements;
. devote greater resources to the development, promotion and sale of
products; and
. deliver competitive products at a lower price.
Some competitors manufacture their products in countries offering
significantly lower labor costs than in the United States.
Existing and potential customers are also current and potential competitors.
These companies may develop or acquire additional competitive products or
technologies in the future which may make them reduce or cease their purchases
from us.
In addition, we believe that the size of suppliers will be an increasingly
important part of purchasers' decision-making criteria in the future. To
address these issues, we will focus on broadening our product line through
internal development and strategic initiatives. We will also focus on
expanding our manufacturing capacity for faster time to market for our newer
products.
Patents and Intellectual Property Rights
We rely primarily on patent, copyright, trademark and trade secrets to
protect our proprietary technologies and processes. We also generally enter
into confidentiality agreements with our employees and partners, and generally
control access to and distribution of our documentation and other proprietary
information. There can be no assurance that such measures will provide
meaningful
29
<PAGE>
protection for our proprietary technologies and processes. As of June 30,
1999, we had over 100 U.S. patents issued and pending which expire on dates
ranging from 2007 and 2018.
Employees
As of June 30, 1999, we had 1,316 employees, of whom 1,074 were primarily
engaged in manufacturing, 117 were engaged in research and development, 55
were engaged in sales, marketing and technical support and 70 were engaged in
administration. Our employees are not represented by any collective bargaining
agreement, and we have not experienced a work stoppage. We believe our
employee relations are good.
Facilities
Our principal offices and facilities are located primarily in San Jose,
California. We own three buildings in San Jose totalling approximately 180,000
square feet, 20,000 square feet of which is leased to a third party through
May 2001. We lease approximately 80,000 square feet in San Jose under a lease
that expires in February 2006 and approximately 5,000 square feet in San Jose
under a lease that expires on March 31, 2000. We also own five acres of land
nearby. In addition, we lease facilities in Ontario, Canada and Taipei,
Taiwan. We believe that our existing facilities are adequate to meet our
current needs.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to each of
our executive officers and directors as of July 29, 1999.
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Michael J. Fitzpatrick(1)....... 50 Chairman, President, and Chief Executive
Officer
Ming Shih....................... 46 Senior Vice President, Sales and Marketing
Sanjay Subhedar................. 47 Senior Vice President, Operations, Chief
Financial Officer and Secretary
Philip J. Anthony............... 47 Vice President, Engineering
Jim Northington................. 52 Vice President, Manufacturing
William H. Diamond, Jr. ........ 43 Vice President, Marketing
Walter G. Kortschak(2)(3)....... 40 Director
David W. Dorman(2).............. 45 Director
Donald J. Listwin............... 40 Director
Joseph W. Goodman(3)............ 63 Director
Peter Y. Chung(3)............... 31 Director
</TABLE>
- --------
(1) Member of the Employee Stock Option Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Michael J. Fitzpatrick has been Chairman of the Board since April 1999 and
President and Chief Executive Officer since October 1997. From July 1994 to
October 1997, Mr. Fitzpatrick served as President and Chief Executive Officer
of Pacific Telesis Enterprises, a service provider. While at Pacific Telesis,
Mr. Fitzpatrick also served as Executive Vice President of Marketing and Sales
from January 1994 to July 1994 and Executive Vice President of Statewide
Markets with Pacific Bell, an affiliate of Pacific Telesis, from September
1993 to January 1994. From October 1991 to August 1993, Mr. Fitzpatrick was
President and Chief Executive Officer of Network Systems Corporation, an
internetworking company. Mr. Fitzpatrick also serves as a director of
NorthPoint Communications Group, Inc., a national provider of local data
network services. Mr. Fitzpatrick received a B.A. from Duke University.
Ming Shih, one of our founders, was promoted to Senior Vice President, Sales
and Marketing in July 1998. Prior to that he served as corporate vice
president as well as in various senior management roles at E-TEK, with
responsibility for engineering, manufacturing and sales and marketing. Mr.
Shih received an M.S. from the Illinois Institute of Technology and an M.S.
from the Florida Institute of Technology.
Sanjay Subhedar joined us in December 1997 as Vice President, Finance and
Chief Financial Officer and was promoted to Senior Vice President, Operations
and Chief Financial Officer in July 1998. Mr. Subhedar was also appointed as
our Secretary in March 1998. From February 1986 to July 1996, Mr. Subhedar
served as Chief Financial Officer of StrataCom, Inc., a wide area networking
company. Following StrataCom's merger with Cisco Systems, Inc., an
internetworking company, in July 1996, Mr. Subhedar served as Vice President
of Cisco's WAN Business Unit until October 1997.
Mr. Subhedar received a B.S. from the University of Bombay, India, and an
M.B.A. from Indiana University.
Philip J. Anthony joined us in June 1998 as Vice President, Engineering.
Prior to joining us, Dr. Anthony served in various capacities at Lucent
Technologies Inc., a manufacturer of communications systems, software and
products (and at its predecessors Bell Laboratories and AT&T
31
<PAGE>
Corp.), most recently as Director of Passive Devices and Integrated Optical
Modules in the Optoelectronic Business of the Lucent Microelectronics Group
from October 1997 to June 1998. From September 1987 to October 1997, he served
as the department head of various research and development departments in the
photonics laboratories of Bell Laboratories. Dr. Anthony received a B.S. from
the University of Dayton, and an M.S. and Ph.D. from the University of
Illinois. He is a fellow of the IEEE and serves as the Vice President of
Publications for the Lasers and Electro-Optics Society.
Jim Northington joined us in July 1998 as Vice President, Manufacturing.
From November 1994 to July 1998, Mr. Northington served in various capacities
at SMART Modular Technologies, Inc., a manufacturer of computer memory modules
and cards. While at SMART Modular, he served as the Vice President, Worldwide
Operations from November 1997 to July 1998, as Vice President, Quality
Assurance and Corporate Development from July 1996 to November 1997, and as
Vice President, Operations from November 1994 to July 1996. From August 1989
to November 1994, Mr. Northington was a Principal at APS Products where, as a
self-employed consultant, he provided manufacturing operations expertise to
clients with a primary focus on adapter cards, peripherals and systems
products. Mr. Northington received a B.S. from Long Beach State College.
William H. Diamond, Jr. joined us as Vice President, Marketing in October
1998. Prior to joining us, Mr. Diamond served as Director of Marketing for
Lucent Technologies Optoelectronics, a manufacturer of fiber optic components
and subsystems for communications applications, from July 1997 to October
1998. From April 1996 to July 1997, Mr. Diamond was Managing Director, Europe,
Middle East, Africa, for Best Power Technology, Inc., a unit of General
Signal, a manufacturer of various industrial and electronic goods. Prior to
joining Best Power, Mr. Diamond served as UK General Manager and European
Sales Manager for AT&T Microelectronics Europe from January 1996 to April
1996. While at AT&T Microelectronics Europe, Mr. Diamond also served as
European Marketing Director for Optoelectronics from April 1992 to January
1996 and UK General Manager from June 1994 to July 1996. Mr. Diamond received
a B.A. from Holy Cross College and an M.B.A. from Georgetown University.
Walter G. Kortschak has served as one of our directors since July 1997. He
was Chairman of the Board of Directors from July 1997 until April 1999. Mr.
Kortschak is a General Partner of Summit Partners, a private equity capital
firm in Palo Alto, California, where he has been employed since June 1989.
Summit Partners and its affiliates manage a number of venture capital funds,
including Summit Ventures IV, L.P., Summit Investors III, L.P. and Summit
Subordinated Debt Fund II, L.P. Mr. Kortschak serves as a director of several
privately held companies. Mr. Kortschak received a B.S. from Oregon State
University, an M.S. from The California Institute of Technology and an M.B.A.
from the University of California, Los Angeles.
David W. Dorman has served as one of our directors since June 1998. Mr.
Dorman is the Chief Executive Officer of the AT&T/BT Global Venture where he
has been employed since April 1999. Prior to that, Mr. Dorman was the
Chairman, President and Chief Executive Officer of PointCast Incorporated, a
company providing broadcast news through the Internet and corporate intranets.
Prior to joining PointCast in November 1997, Mr. Dorman served as the
Executive Vice President of SBC Communications from August 1997 to November
1997, following the merger of SBC and Pacific Telesis. Prior to that, Mr.
Dorman served as President and Chief Executive Officer of Pacific Bell from
July 1994 to August 1997. From 1981 to July 1994, Mr. Dorman held various
senior management positions at Sprint Corporation, a telecommunications
company. Mr. Dorman also serves as a director of 3Com Corporation, Science
Applications International Corporation, and Scientific-Atlanta, Inc.
Mr. Dorman received a B.S. from the Georgia Institute of Technology.
Donald J. Listwin has served as one of our directors since July 1998. Mr.
Listwin is an Executive Vice President at Cisco Systems, Inc., where he has
been employed since 1990. In April 1997, Mr. Listwin was named the Senior Vice
President of Cisco's Service Provider Line of Business. Prior
32
<PAGE>
to that, he was Senior Vice President of Cisco's Market Development from
August 1996 to April 1997, Vice President and General Manager of Cisco's
Access Business Unit from September 1995 to August 1996, and Vice President of
Marketing from September 1993 to September 1995. Mr. Listwin also serves as a
director of TIBCO Software Inc., a software company. Mr. Listwin received a
B.S. from the University of Saskatchewan, Canada.
Joseph W. Goodman has served as one of our directors since July 1998. Dr.
Goodman has served as Acting Dean of Engineering, Senior Associate Dean of
Engineering, and Chairman of the Department of Electrical Engineering at
Stanford University. He has been employed at Stanford University in various
capacities since 1963, and has held the William Ayer Chair of Electrical
Engineering since 1988. He received a B.A. degree from Harvard University and
M.S. and Ph.D. degrees from Stanford University.
Peter Y. Chung served as one of our directors from July 1997 until July 1998
and then rejoined our Board in December 1998. Mr. Chung is a General Partner
of Summit Partners, a private equity capital firm in Palo Alto, California,
where he has been employed since August 1994. Summit Partners and its
affiliates manage a number of venture capital funds, including Summit Ventures
IV, L.P., Summit Investors III, L.P. and Summit Subordinated Debt Fund II,
L.P. From August 1989 to July 1992, Mr. Chung worked in the Mergers and
Acquisitions Department of Goldman, Sachs & Co. Mr. Chung also serves as a
director of Splash Technology Holdings, Inc., a developer of color server
systems, and Ditech Communications Corporation, a telecommunications equipment
company, as well as several privately held companies. Mr. Chung received a
B.A. from Harvard University and an M.B.A. from Stanford University.
Our Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Each class of directors currently consists of two or
more directors. At each annual meeting of stockholders, one class of directors
is elected to a three-year term to succeed the directors of the same class
whose terms are then expiring. The Class I directors, whose terms will expire
at our 1999 Annual Meeting of Stockholders, are Joseph W. Goodman and Peter Y.
Chung. The Class II directors, whose terms will expire at our 2000 Annual
Meeting of Stockholders, are David W. Dorman and Donald J. Listwin. The Class
III directors, whose terms will expire at our 2001 Annual Meeting of
Stockholders, are Walter G. Kortschak and Michael J. Fitzpatrick.
Our executive officers are elected by, and serve at the discretion of, the
Board of Directors.
There are no family relationships among our directors or officers.
Board Committees
The Audit Committee of the Board of Directors makes recommendations
concerning the engagement of independent public accountants, reviews the plans
and results of the audit engagement with our independent public accountants,
reviews the independence of our independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of our internal
accounting controls. Current members of the Audit Committee are Peter Y.
Chung, Joseph W. Goodman and Walter G. Kortschak.
The Compensation Committee of the Board of Directors determines compensation
for our executive officers and administers our 1998 Stock Plan, 1998 Director
Option Plan and 1998 Employee Stock Purchase Plan. The Compensation Committee
currently consists of David W. Dorman and Walter G. Kortschak.
The Employee Stock Option Committee of the Board of Directors determines
stock option grants for employees below the executive officer level. Michael
J. Fitzpatrick is currently the only member of the Employee Stock Option
Committee.
33
<PAGE>
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any other entity that has one or more
executive officers serving as a member of our Board of Directors or
Compensation Committee.
Director Compensation
Except for the grants of stock options, we do not currently compensate our
directors. Directors are reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors or any
committees. The directors of our company are generally eligible to participate
in our 1998 Stock Plan and, to the extent that a director is also an employee
of our company, to participate in our 1998 Employee Stock Purchase Plan. The
directors of our company who are not employees of our company and who do not
own more than 5% of our common stock will also receive periodic stock option
grants under our 1998 Director Option Plan. No options have been granted under
our 1998 Director Option Plan. In fiscal year 1999, Messrs. Dorman and Listwin
and Dr. Goodman received options to purchase 40,000 shares at an exercise
price of $10.00 per share under the 1997 Equity Incentive Plan.
Executive Compensation
The following table sets forth information regarding the compensation of our
Chief Executive Officer and our four next most highly compensated executive
officers who earned more than $100,000 during the fiscal year ended June 30,
1999. Compensation for fiscal years ended June 30, 1999, 1998 and 1997 is
included.
Other annual compensation primarily represents imputed interest income
resulting from a 0% loan made to several of the named executive officers to
fund the exercise of options to purchase our common stock. Mr. Diamond's other
annual compensation represents reimbursement for relocation expenses. The
restricted stock awards represent shares that were purchased at fair market
value, as determined by our Board of Directors. The awards are subject to
rights of repurchase which lapse periodically over a two- to four-year period.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ---------------------
Restricted Securities
Other Annual Stock Underlying
Name and Principal Positions Year Salary Bonus Compensation Awards* Options
- ---------------------------- ---- -------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fitzpatrick.. 1999 $300,000 $ 135,000 $387,317 -- 433,000
Chairman of the Board,
President & 1998 188,077 300,000 258,000 2,825,000 --
Chief Executive Officer 1997 -- -- -- -- --
Ming Shih............... 1999 204,473 50,000 135,129 -- --
Senior Vice President, 1998 233,423 215,000 159,000 555,555 500,000
Sales & Marketing 1997 190,769 1,815,577 -- -- --
Sanjay Subhedar......... 1999 196,634 45,000 231,111 -- 300,000
Senior Vice President,
Operations, 1998 86,154 -- -- 1,200,000 --
Chief Financial Officer
and Secretary 1997 -- -- -- -- --
Philip J. Anthony....... 1999 166,920 69,200 63,239 125,000 125,000
Vice President of
Engineering 1998 -- -- -- -- --
1997 -- -- -- -- --
William H. Diamond,
Jr. ................... 1999 121,154 -- 77,682 -- 250,000
Vice President of
Marketing 1998 -- -- -- -- --
1997 -- -- -- -- --
</TABLE>
- --------
* As of June 30, 1999, the value of 2,475,000 restricted shares held by Mr.
Fitzpatrick was $117,717,188; the value of 758,218 restricted shares held
by Mr. Shih was $36,062,744; and the value of 1,125,000 restricted shares
held by Mr. Subhedar was $53,507,813.
34
<PAGE>
Option Grants in Fiscal Year 1999
The following table presents additional information concerning the option
awards shown in the Summary Compensation Table for fiscal year 1999.
All options were granted at an exercise price equal to the fair market value
of our common stock as determined by our Board of Directors on the date of the
grant. Our common stock was not publicly traded at the time of the option
grants listed below.
Potential realizable values are net of exercise price, but before taxes
associated with the exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
performance of our common stock, overall market conditions and the option
holders' continued employment through the vesting period.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Exercise Stock Price Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Per Expiration ------------------------------
Name Granted * Fiscal Year Share Date 5% 10%
- ---- ---------- ------------ --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fitzpatrick.. 433,000 14.1% $10.00 7/30/08 $ 2,723,114 $ 6,900,905
Philip A. Anthony....... 50,000 1.6 10.00 7/30/08 314,447 796,871
William H. Diamond...... 250,000 8.1 10.00 10/19/08 1,572,237 3,984,356
Ming Shih............... -- -- -- -- -- --
Sanjay Subhedar......... 300,000 9.8 10.00 7/30/08 1,886,684 4,781,227
</TABLE>
- --------
* With the exception of Mr. Subhedar, all of the options included above
become exercisable at a rate of 1/4 of the shares subject to the option one
year after the date of the grant and an additional 1/48 of the shares at
the end of each month thereafter, subject to continued service as an
employee. One quarter of Mr. Subhedar's options vested on December 2, 1998,
an additional one quarter will vest on July 30, 1999, and the remaining
options will vest at the rate of 2% per month for 24 months. The term of
all options shown above is ten years.
Aggregated Option Exercises and Fiscal 1999 Year-End Option Values
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during fiscal year 1999 and the number
of shares of our common stock subject to exercisable and unexercisable options
held as of June 30, 1999 by each of the executive officers named in the
Summary Compensation Table.
The value of "in-the-money" stock options represents the positive spread
between the exercise price of options and the fair market value of the
underlying shares on June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year End Fiscal Year End ($)
Acquired Value --------------------------- ---------------------------
Name on Exercise Realized ($) Exercisable / Unexercisable Exercisable / Unexercisable
- ---- ----------- ------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fitzpatrick.. 0 $0.00 0 433,000 $ 0.00 $ 12,286,375
Philip J. Anthony....... 0 0.00 31,250 143,750 886,719 4,078,906
William H. Diamond...... 0 0.00 0 250,000 0.00 7,093,750
Ming Shih............... 0 0.00 300,000 200,000 10,537,500 7,025,000
Sanjay Subhedar......... 0 0.00 75,000 225,000 2,128,125 6,384,375
</TABLE>
35
<PAGE>
Employment Agreements and Change of Control Arrangements
On July 23, 1997, we entered into an employment agreement with Jing Jong
Pan. Mr. Pan agreed to serve as an "E-TEK Fellow," and as the head of one of
our research and development divisions, for a minimum three-year period. Under
the agreement, we may, however, terminate Mr. Pan's employment with us or he
may resign. During the term of the agreement, Mr. Pan will be entitled to
receive an annual base salary of at least $200,000.
On October 1, 1997, we entered into an employment agreement with Michael J.
Fitzpatrick to serve as our President and Chief Executive Officer. The
agreement provides that Mr. Fitzpatrick is an "at-will" employee, that he will
be paid a minimum base salary of $300,000 per annum, and that he will be
eligible to receive an annual bonus of up to $300,000. The agreement also
provides that if Mr. Fitzpatrick is terminated for any reason other than
"cause," if he resigns for "good reason," or upon a change of control of E-
TEK:
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary and pro rated bonus until the earlier of the
expiration of 12 months or his commencement of employment with another
firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
In addition, the agreement provides that in the event that Mr. Fitzpatrick's
employment with us is terminated by him or us within 6 months following a
"change of control" of E-TEK, the vesting of all of his options and restricted
stock will be fully accelerated and Mr. Fitzpatrick will be entitled to
receive a severance payment in an amount equal to two times his base salary
and bonus.
On December 2, 1997, we entered into an employment agreement with Sanjay
Subhedar to serve as our Vice President and Chief Financial Officer. The
agreement provides that Mr. Subhedar is an "at-will" employee, that he will be
paid a minimum base salary of $175,000 per annum, and that he will be eligible
to receive an annual bonus of up to $100,000. The agreement also provides that
if Mr. Subhedar is terminated for any reason other than "cause," or if he
resigns for "good reason":
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary until the earlier of the expiration of 12 months
or his commencement of employment with another firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
In addition, the agreement provides that upon a "change of control" of E-
TEK, the vesting of all of his options and restricted stock will be
accelerated by 12 months (but will not be further accelerated beyond the
acceleration described in the foregoing sentence upon any subsequent
termination of his employment with us following a change of control).
On May 26, 1998, we entered into an employment agreement with Philip J.
Anthony to serve as our Vice President of Engineering. The agreement provides
that Mr. Anthony will be an "at-will" employee, that he will be paid a base
salary of $160,000 per annum (subject to annual review), and that he will be
entitled to receive a bonus of up to 30% of his then current base salary. The
agreement also provides that in the event that Mr. Anthony is terminated for
any reason other than "cause," or if he resigns for "good reason":
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary until the earlier of the expiration of 12 months
or his commencement of employment with another firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
36
<PAGE>
On July 21, 1998, we entered into an employment agreement with Jim
Northington to serve as our Vice President of Manufacturing. The agreement
provides that Mr. Northington will be an "at-will" employee, that he will be
paid a base salary of $160,000 per annum (subject to annual review), and that
he will be entitled to receive a bonus of up to 30% of his then current base
salary.
On September 21, 1998, we entered into an employment agreement with William
H. Diamond, Jr. to serve as our Vice President of Marketing. The agreement
provides that Mr. Diamond will be an "at-will" employee, that he will be paid
a base salary of $180,000 per annum (subject to annual review), and that he
will be entitled to receive a bonus of up to 30% of his then current base
salary. The agreement also provides that in the event that Mr. Diamond is
terminated for any reason other than "cause," or if he resigns for "good
reason":
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary until the earlier of the expiration of 12 months
or his commencement of employment with another firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
Stock Plans
1998 Employee Stock Purchase Plan
On August 14, 1998, our Board of Directors adopted the 1998 Employee Stock
Purchase Plan. Under the 1998 Purchase Plan, eligible employees may purchase
common stock at a price equal to 85% of the lower of the fair market value of
our common stock at the beginning or end of each six-month offering period.
Participation is limited to 10% of an employee's compensation (not to exceed
amounts allowed by the Internal Revenue Code). A total of 1,500,000 shares of
our common stock has been reserved for issuance under the 1998 Purchase Plan,
plus annual increases equal to the lesser of:
. 750,000 shares;
. 1% of the outstanding shares on such date; or
. such lesser amount as may be determined by the Board of Directors.
To date, 120,127 shares have been issued under the 1998 Purchase Plan.
1998 Stock Plan
At June 30, 1999, approximately 4,727,273 shares of common stock were
authorized for issuance under our 1998 Stock Plan, which serves as the
successor equity incentive program to our 1997 Equity Incentive Plan and 1997
Executive Equity Incentive Plan. The 1998 Stock Plan provides for the grant of
incentive stock options to employees (including officers and employee
directors) and for the grant of non-statutory stock options and stock purchase
rights to employees, directors and consultants. The following shares are
currently reserved for issuance under the 1998 Stock Plan:
. 3,000,000 shares of our common stock (plus shares which have been
reserved but unissued under our 1997 Plan);
. any shares returned to the 1997 Equity Incentive Plan and the 1997
Executive Equity Incentive Plan as a result of termination of options or
repurchase of shares by E-TEK; plus
. annual increases equal to the lesser of 3,000,000 shares, or 4% of the
outstanding shares.
Unless terminated sooner, the 1998 Stock Plan will terminate automatically
in September 2008. In fiscal year 1999, 1,139,151 options were granted under
this plan.
37
<PAGE>
1998 Director Option Plan
On August 14, 1998, our Board of Directors adopted the 1998 Director Option
Plan. A total of 250,000 shares of our common stock, plus an annual increase
equal to the optioned stock underlying options granted in the immediately
preceding year, have been reserved for issuance under the Director Plan. As of
June 30, 1999, 250,000 shares were available for grant under this plan.
Limitation of Liability and Indemnification
Our certificate of incorporation provides that a director of E-TEK will not
be personally liable for monetary damages to us or our stockholders for a
breach of fiduciary duty as a director, except for liability as a result of:
. a breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an act related to the unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law; or
. transactions from which the director derived an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies, such as injunctive relief or rescission.
Our certificate of incorporation also authorizes us to indemnify our
officers, directors and other agents to the full extent permitted under the
Delaware General Corporation Law. We have entered into separate
indemnification agreements with our directors and executive officers that
provide broader indemnification protection than the indemnification provisions
contained in the Delaware General Corporation Law. The indemnification
agreements require us, among other things, to indemnify our officers and
directors against certain liabilities that may arise by reason of their status
or service as officers or directors (other than liabilities arising from
willful misconduct of a culpable nature), and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. These agreements extend similar indemnification arrangements to
stockholders whose representatives serve as our directors.
At present, there is no pending litigation or proceeding involving our
directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
38
<PAGE>
CERTAIN TRANSACTIONS
Recapitalization
Until July 23, 1997, E-TEK was owned by two founders. In July 1997, we
underwent a recapitalization in which we issued 30 million shares of
mandatorily redeemable class A convertible preferred stock representing a
controlling stake in E-TEK for $120 million. This convertible preferred stock
had significant rights and preferences over the common stock, including rights
to elect a majority of our directors, cumulative dividends and a liquidation
preference. In connection with the recapitalization, we also repurchased $120
million in common stock from the founders.
Following the completion of our initial public offering, all shares of
convertible preferred stock converted into an aggregate of 30,000,000 shares
of common stock.
In connection with the recapitalization, E-TEK, the purchasers of
convertible preferred stock and the founders entered into a registration
agreement pursuant to which these shareholders acquired registration rights in
respect of the shares of our capital stock acquired in connection with the
recapitalization. See "Description of Capital Stock--Registration Rights".
Pursuant to the recapitalization, we entered into agreements with the
founders and with other executives of E-TEK pursuant to which these persons
purchased shares of common stock with the proceeds of a loan from us.
The purchasers of convertible preferred stock and common stock in connection
with the recapitalization included, among others, the following directors,
executive officers and holders of more than 5% of the outstanding common
stock, and certain of their family members:
<TABLE>
<CAPTION>
No. of Purchase Type of
Name Title Shares Price Stock
- ---- ----- ---------- ------------ ---------------------
<S> <C> <C> <C> <C>
Summit/E-TEK Holdings, 27,000,000 $108,000,000 Convertible Preferred
L.L.C. (1)............. --
Ming Shih............... Senior Vice President, 1,111,111(2) 2,555,555 Common
Sales and Marketing
Kung Shih............... President of FibX 1,111,110(2) 2,555,553 Common
</TABLE>
- --------
(1) Walter G. Kortschak and Peter Y. Chung, members of our Board of Directors,
were affiliated with Summit/E-TEK Holdings, L.L.C. Certain of these shares
are currently held directly by Summit Subordinated Debt Funds II, L.P. and
Summit Investors III, L.P. See "Management" and "Principal and Selling
Stockholders".
(2) Includes 555,555 shares that are subject to a right of repurchase by E-
TEK, which lapses periodically over a three-year period which commenced in
July 1997. Ming Shih and Kung Shih are brothers.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and executive officers. The provisions of these agreements are described under
"Management--Limitation of Liability and Indemnification".
Loans to Officers
From time to time we have made interest-free loans to certain of our
executive officers to fund the exercise of stock options held by these
executive officers. These loans are evidenced by promissory notes which mature
on the dates set forth below, subject to certain acceleration events. These
39
<PAGE>
promissory notes are secured by the shares of common stock purchased with the
proceeds of these loans, and are either full recourse or substantial recourse
against the assets of the borrower. The following table sets forth the name
and position of the relevant officers, certain information with respect to the
promissory notes issued to evidence such loans, and the number of shares of
our common stock purchased with the proceeds of these loans.
<TABLE>
<CAPTION>
Principal Shares Issuance Maturity
Name and Position(s) Amount Purchased Date Date
- -------------------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Michael J. Fitzpatrick............... $5,198,000 2,260,000 11/13/97 11/13/2002
Chairman, President and Chief
Executive Officer 1,299,500 565,000 11/13/97 11/13/2002
Sanjay Subhedar...................... 3,900,000 1,200,000 12/11/97 12/11/2002
Senior Vice President, Operations,
Chief Financial Officer and Secre-
tary
Ming Shih............................ 1,277,776 555,555 07/23/97 07/23/2006
Senior Vice President, Sales and
Marketing 1,277,778 555,556 07/23/97 07/23/2006
Philip J. Anthony.................... 1,250,000 125,000 06/25/98 06/25/2003
Vice President, Engineering
</TABLE>
During fiscal 1999, Mr. Fitzpatrick paid $805,000, Mr. Subhedar paid
$243,750, and Mr. Shih paid $2,094,133 against their loans.
We believe that all transactions with affiliates described above, other than
the interest-free loans made to executive officers, were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors, and will be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of June 30, 1999, and as adjusted
to reflect the sale of the shares offered hereby, by:
. each of our stockholders who is known to be the beneficial owner of more
than 5% of our common stock;
. each of our directors;
. each of our executive officers listed in the Summary Compensation Table;
. all of our directors and executive officers as a group; and
. all other selling stockholders.
Except as indicated herein, and as provided by applicable community property
laws, the persons named in the table have sole voting and investment power
with respect to all shares of common stock.
The applicable percentage of ownership prior to completion of the offering
is based on 62,054,438 shares of common stock outstanding as of June 30, 1999.
The applicable percentage ownership after completion of the offering gives
effect to the sale of 6,000,000 shares of common stock in the offering.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. For purposes of calculating beneficial
ownership, common stock subject to options currently exercisable or
exercisable on or prior to 60 days after June 30, 1999 are deemed outstanding
for computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially Owned
Before Offering Number After Offering
Name and Address of ------------------ of Shares ------------------
Beneficial Owners(1) Number Percent Being Offered Number Percent
-------------------- ---------- ------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Summit Ventures IV, L.P.
Summit Subordinated Debt
Fund II, L.P.
Summit Investors III,
L.P.(2)
c/o Summit Partners
499 Hamilton Avenue,
Suite 200
Palo Alto, California
94301.................. 22,199,305 35.8% 1,616,770 20,582,535 31.2%
Jing Jong Pan(3).......... 8,891,000 14.3 -- 8,891,000 13.5
Theresa Pan(4)............ 8,139,500 13.1 -- 8,139,500 12.3
Peter Y. Chung(5)......... 21,977,312 1,600,602 20,376,710 30.8
Walter G. Kortschak(6).... 22,199,305 35.8 1,616,770 20,582,535 31.2
Michael J.
Fitzpatrick(7)........... 2,584,382 4.2 128,966 2,455,416 3.7
David W. Dorman(8)........ 40,000 * -- 40,000 *
Joseph W. Goodman(8)...... 40,000 * -- 40,000 *
Donald J. Listwin(8)...... 40,000 * -- 40,000 *
Ming Shih(9).............. 1,070,718 1.7 -- 1,070,718 1.6
Sanjay Subhedar(10)....... 1,276,195 2.1 68,963 1,207,232 1.8
Philip J. Anthony (11).... 174,787 * -- 174,787 *
Jim Northington(12)....... 56,891 * -- 56,891 *
William H. Diamond, Jr.... 339 * -- 339 *
All directors and
executive officers as a
Group (11 persons)(13)... 27,482,617 43.8 1,814,701 25,667,918 38.8
The Chase Manhattan Bank,
as Trustee for
First Plaza Group Trust
(14)..................... 2,374,485 3.9 172,920 2,201,565 3.3
c/o Chase Manhattan Bank
3 Chase Metrotech Center
Brooklyn, New York 11245
Other selling stockholders
as a group (15).......... 21,500 * 12,379 9,121 *
</TABLE>
41
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) Except as otherwise noted, the address of each person listed in the table
is c/o E-TEK Dynamics, Inc., 1865 Lundy Avenue, San Jose, California
95131.
(2) Represents 19,868,378 shares held by Summit Ventures IV, L.P., 2,108,934
shares held by Summit Subordinated Debt Fund II, L.P. and 221,993 shares
held by Summit Investors III, L.P. The shares to be sold represent
1,477,009 shares to be sold by Summit Ventures IV, L.P., 153,593 shares
to be sold by Summit Subordinated Debt Fund II, L.P. and 16,168 shares to
be sold by Summit Investors III, L.P. If the underwriters' option to
purchase additional shares in the offering is exercised in full, an
additional 651,154 shares will be sold by Summit Ventures IV, L.P., an
additional 69,117 shares will be sold by Summit Subordinated Debt Fund
II, L.P., and an additional 7,275 shares will be sold by Summit Investors
III, L.P.
(3) Mr. Pan is the spouse of Theresa Pan.
(4) Ms. Pan is the spouse of Jing Jong Pan and the sister of Ming Shih. All
such shares are the separate property of Ms. Pan.
(5) Represents 19,868,378 Shares held by Summit Ventures IV, L.P. and
2,108,934 shares held by Summit Subordinated Debt Fund II, L.P. Mr.
Chung, a director of E-TEK, is (i) a general partner of Stamps, Woodsum &
Co. IV, which is the general partner of Summit Partners IV, L.P., which
is the general partner of Summit Ventures IV, L.P. and (ii) a general
partner of Stamps, Woodsum & Co. IV, which is the general partner of
Summit Ventures SD II, LLC, which is the general partner of Summit
Subordinated Debt Fund II, L.P. Mr. Chung disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest therein.
(6) Represents 19,868,378 shares held by Summit Ventures IV, L.P., 2,108,934
shares held by Summit Subordinated Debt Fund II, L.P. and 221,993 shares
held by Summit Investors III, L.P. Mr. Kortschak, a director of E-TEK, is
(i) a general partner of Stamps, Woodsum & Co. IV, which is the general
partner of Summit Partners IV, L.P., which is the general partner of
Summit Ventures IV, L.P. and (ii) a general partner of Stamps, Woodsum &
Co. IV, which is the general partner of Summit Partners SD II, LLC, which
is the general partner of Summit Subordinated Debt Fund II, L.P. Mr.
Kortschak is also a general partner of Summit Investors III, L.P. Mr.
Kortschak disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(7) Includes 108,251 shares of common stock issuable upon the exercise of
options. If the underwriters' option to purchase additional shares is
exercised in full, Mr. Fitzpatrick will sell an additional 58,034 shares
in the offering.
(8) Represents shares of common stock issuable upon the exercise of options.
(9) Ming Shih is the brother of Theresa Pan. Includes 312,500 shares of
common stock issuable upon the exercise of options.
(10) Includes 150,000 shares of common stock issuable upon the exercise of
options. If the underwriters' option to purchase additional shares is
exercised in full, Mr. Subhedar will sell an additional 31,035 shares in
the offering.
(11) Includes 48,958 shares of common stock issuable upon the exercise of
options.
(12) Includes 54,166 shares of common stock issuable upon the exercise of
options.
(13) Includes shares of common stock of E-TEK issuable upon the exercise of
stock options and shares beneficially owned by Summit Ventures IV, L.P.,
Summit Subordinated Debt Fund II, L.P. and Summit Investors III, L.P.,
with which Messrs. Chung and Kortschak are associated, as to which shares
they disclaim beneficial ownership, except to the extent of their
pecuniary interest therein. See Notes (5)-(12).
(14) The Chase Manhattan Bank acts as the Trustee (the "Trustee") for First
Plaza Group Trust (the "Trust"), a trust under and for the benefit of
certain employee benefit plans of General Motors Corporation ("GM") its
subsidiaries and certain former subsidiaries. These shares may be deemed
to be owned beneficially by General Motors Investment Management
Corporation ("GMIMCO"), a wholly owned subsidiary of GM. GMIMCO's
principal business is providing investment advice and investment
management services with respect to the assets of certain employee
benefit plans of GM, its subsidiaries and certain former subsidiaries and
with respect to the assets of certain direct and indirect subsidiaries of
GM and associated entities. GMIMCO is serving as the Trust's investment
manager with respect to these shares and in that capacity has sole power
to direct the Trustee as to the voting and disposition of these shares.
Because of the Trustee's limited role, beneficial ownership of these
shares by the Trustee is disclaimed. The address of GMIMCO is 767 Fifth
Avenue, New York, New York 10153. If the underwriters' option to purchase
additional shares is exercised in full, GMIMCO will sell an additional
77,814 shares in the offering.
(15) If the underwriters' option to purchase additional shares is exercised in
full, the other selling stockholders will sell an additional 5,571 shares
in the offering.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 300,000,000 shares of common stock,
$.001 par value, and 25,000,000 shares of undesignated preferred stock, $.01
par value. The following is a summary of the material terms of our capital
stock. You should refer to our certificate of incorporation and our bylaws for
more detailed information. Copies of our certificate of incorporation and our
bylaws have been filed with the Securities and Exchange Commission as exhibits
to our registration statement of which this prospectus forms a part.
Common Stock
As of June 30, 1999, there were 62,054,438 shares of our common stock
outstanding. As of July 22, 1999 we had approximately 297 holders of record of
our common stock. Assuming no exercise of the underwriters' option to purchase
additional shares and no exercise of options to purchase common stock after
June 30, 1999, there will be 66,054,438 shares of our common stock outstanding
after giving effect to the sale of all the shares of our common stock to be
sold in connection with the offering.
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Holders of common stock do not
have cumulative voting rights under our certificate of incorporation or
bylaws. Therefore, holders of a majority of the shares voting for the election
of directors can elect all of our directors, subject to the classified board
provisions set forth in our certificate of incorporation. If this happens, the
holders of the remaining shares will not be able to elect any directors.
The shares of common stock offered in this offering, when issued, will be
fully paid and nonassessable and will not be subject to any redemption or
sinking fund provisions. Holders of common stock do not have any preemptive,
subscription or conversion rights. Holders of common stock are entitled to
receive such dividends as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose, subject to the
rights of preferred stockholders and the terms of any existing or future
agreements between us and our debt holders. Since January 1, 1995, we have not
declared or paid any cash dividends on our common stock. We presently intend
to retain future earnings, if any, for use in the operation and expansion of
our business and do not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy".
In the event of the liquidation, dissolution or winding up of E-TEK, the
holders of our common stock are entitled to share ratably in all assets
legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of preferred stock
then outstanding.
Preferred Stock
We are authorized to issue 25,000,000 shares of preferred stock. The Board
of Directors has the authority to issue preferred stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions of the
shares, including:
. dividend rights;
. dividend rates;
. conversion rights;
. voting rights;
. terms of redemption;
43
<PAGE>
. redemption prices;
. liquidation preferences; and
. the number of shares constituting a series or the designation of a
series.
Our Board can issue preferred stock without any further vote or action by
our stockholders. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of E-TEK without further
action by the stockholders and may adversely affect the market price, and the
voting and other rights, of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. We have no current plans to issue any shares of preferred
stock.
Anti-Takeover Effects of the Certificate of Incorporation, Bylaws and Delaware
Law
Certificate of Incorporation and Bylaws
Our certificate of incorporation provides that the Board of Directors is
divided into three classes of directors with each class serving a staggered
three-year term. Our classified board may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of E-TEK.
Our classified board may also maintain the incumbency of our Board of
Directors, as it generally makes it more difficult for stockholders to replace
a majority of the directors. Our certificate of incorporation also eliminates
the right of stockholders to act without a meeting. This and other provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or management of E-TEK. The amendment of any of these provisions would
require approval by holders of at least two thirds of the combined voting
power of all of our outstanding common stock and preferred stock entitled to
vote. Amendment of these provisions would not require approval if an amendment
is approved by a majority of our directors not affiliated with or associated
with any person or entity holding 20% or more of the voting power of our
outstanding capital stock.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
44
<PAGE>
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of any class or series of stock of the
corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Registration Rights
The holders of a majority of the shares held by certain investors in E-TEK
at the time of the recapitalization may demand registration by us of all or
any portion of their shares of our common stock in connection with the sale of
shares by these investors. There is no limit to the number of these demand
registrations, but we are not obligated to pay the expenses of more than three
demand registrations on Form S-1. These investors are also entitled to notice
of, and to participate in, any registration proposed by us other than
registrations related to acquisitions or employee stock plans. These investors
have agreed not to sell any of our securities during (1) the seven days before
an offering starts and (2) the 90 days after the effectiveness of the
registration statement for this offering, and for any underwritten
registration (demand or piggyback) of shares of our common stock that includes
shares registered pursuant to the rights granted under the registration
agreement.
In connection with our acquisition of ElectroPhotonics, we granted
registration rights with respect to the 400,062 shares of our common stock we
issued to the former ElectroPhotonics shareholders. We are required to file a
registration statement on Form S-3 in early 2000 to register their resales of
these shares. Subject to certain limitations, we are required to keep the
registration statement effective for three years and one month. Prior to the
effectiveness of this registration statement, these shareholders are also
entitled to notice of, and to participate in, any other registered offering by
us other than registrations related to acquisitions, employee stock plans or
the conversion of debt securities. We are required to pay the expenses of
these registrations.
In connection with our proposed acquisition of Kaifa, we intend to grant
registration rights with respect to the shares of our common stock we issue to
the Kaifa shareholders. These shareholders are entitled to notice of, and to
participate in, any registered offering by us other than this offering and
registrations related to acquisitions, employee stock plans or the conversion
of debt securities. We are required to pay the expenses of these
registrations. These registration rights expire one year after the closing
date of the acquisition.
Listing
Our common stock is quoted on the Nasdaq National Market under the symbol
"ETEK."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is EquiServe, and
their telephone number is (781) 575-3400.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
66,054,438 shares of common stock, assuming no exercise of the underwriters'
option to purchase additional shares or stock options after June 30, 1999. All
of the 6,000,000 shares sold in the offering (6,900,000 shares if the
underwriters' option to purchase additional shares is exercised in full) will
be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of E-TEK as
that term is defined in Rule 144 under the Securities Act. Sales by affiliates
will be subject to certain limitations and restrictions described below. Of
the remaining 60,054,438 shares, approximately 44,411,074 shares are subject
to lock-up agreements in which the holders of the shares have agreed not to
sell any shares for a period of 90 days after the date of this prospectus.
8,719,500 shares are freely tradable without restriction or further
registration under the Securities Act. The remaining shares not subject to
lock-up agreements may be sold without registration under the Securities Act
to the extent permitted by Rule 144 or another exemption under the Securities
Act, which rules are summarized below. Of these shares, 6,368,259 shares are
subject to volume limitations contained in Rule 144 and 555,605 shares may be
resold without regard to those volume limitations.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of either of the following:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 660,000 shares immediately after this offering, or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are subject to specific manner of sale provisions and
notice requirements and to the availability of current public information
about E-TEK.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell its shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering. The sale of these shares, or the perception that
sales will be made, could adversely affect the price of our common stock after
the offering because a greater supply of shares would be, or would be
perceived to be, available for sale in the public market.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares in reliance on Rule 144, but without
compliance with various restrictions, including the holding period, contained
in Rule 144.
On February 5, 1999, we filed a Registration Statement on Form S-8
registering 11,568,769 shares of our common stock subject to outstanding
options or reserved for future issuance under our 1997 Equity Incentive Plan,
1997 Executive Equity Incentive Plan, 1998 Stock Plan, 1998 Director Option
Plan and 1998 Employee Stock Purchase Plan.
46
<PAGE>
On March 26, 1999, we filed a Registration Statement on Form S-8 registering
5,816,666 shares of our common stock subject to outstanding options or
reserved for future issuance under our 1997 Equity Incentive Plan and 1997
Executive Equity Incentive Plan.
As of June 30, 1999, there were a total of 13,618,392 shares of common stock
subject to outstanding options granted under all of our stock option plans
including the 1998 Stock Plan, the 1998 Employee Stock Purchase Plan and the
1998 Director Option Plan. Of those, 5,710,835 shares were vested as of June
30, 1999, and an additional 529,033 will become vested within 90 days of the
effective date of this offering.
Registration Rights
Upon completion of this offering, the holders of 43,821,082 shares of our
common stock or their transferees, will be entitled to various rights with
respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock--Registration Rights".
47
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for E-TEK by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California and for the underwriters by Sullivan & Cromwell, Los
Angeles, California.
EXPERTS
The consolidated financial statements as of June 30, 1998 and 1999, and for
each of the three years in the period ended June 30, 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority
as experts in auditing and accounting.
The financial statements of ElectroPhotonics as of April 30, 1999 and July
31, 1998 and for the nine-month period ended, April 30, 1999 and the year
ended July 31, 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, chartered accountants,
given on their authority as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered in
this offering. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to E-TEK and the
shares of common stock offered in the offering, reference is made to the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete, and reference is
made to the copy of the contract or other document filed as an exhibit to the
registration statement.
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. Our filings with the Commission are available
to the public over the Internet at the Commission's website at
http://www.sec.gov. This site contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. You may also read and copy any document we
file with the Commission at its public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the public reference room by calling the Commission at 1-800-SEC-0330.
We intend to furnish to our stockholders annual reports containing our
audited financial statements and quarterly reports containing unaudited
interim financial information for the first three fiscal quarters of each
fiscal year.
48
<PAGE>
E-TEK DYNAMICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
E-TEK Dynamics ----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity ............................ F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
ElectroPhotonics Corporation
Auditors' Report........................................................... F-22
Balance Sheets............................................................. F-23
Statements of Operations and Deficit....................................... F-24
Statements of Cash Flows................................................... F-25
Notes to Financial Statements.............................................. F-26
Unaudited Pro Forma Consolidated Statement of Operations................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
E-TEK Dynamics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of E-
TEK Dynamics, Inc. and its subsidiaries at June 30, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 20, 1999, except as to
Note 14, which is as of July 27, 1999
F-2
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 21,918 $ 55,090
Accounts receivable...................................... 15,463 29,831
Advance to joint venture................................. 7,000 --
Inventories.............................................. 6,909 20,367
Deferred tax assets...................................... 7,873 13,542
Other current assets..................................... 343 3,542
-------- --------
Total current assets................................... 59,506 122,372
Property and equipment, net................................ 30,872 61,874
Long-term investments...................................... -- 11,665
Goodwill and other intangibles, net........................ -- 34,585
-------- --------
Total assets........................................... $ 90,378 $230,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 8,281 $ 17,762
Accrued liabilities...................................... 16,187 26,352
Income taxes payable..................................... -- 4,337
Current portion of capital lease obligations............. 1,240 1,277
Current portion of long-term debt........................ 216 6,101
-------- --------
Total current liabilities.............................. 25,924 55,829
Capital lease obligations, net of current portion.......... 3,557 2,281
Long-term debt, net of current portion..................... 10,251 19,232
Deferred income taxes...................................... -- 3,481
-------- --------
Total liabilities...................................... 39,732 80,823
-------- --------
Commitments and contingencies (Note 13)
Mandatorily Redeemable Convertible Preferred Stock, no par
value, 30,000 shares authorized, issued and outstanding;
none authorized, issued or outstanding ................... 125,144 --
-------- --------
Stockholders' equity:
Preferred Stock, none authorized, issued or outstanding;
$0.01
par value, 25,000 shares authorized, none issued and
outstanding............................................. -- --
Common Stock, no par value, 65,000 shares authorized,
27,299 shares issued and outstanding; $0.001 par value,
300,000 shares authorized, 62,054 shares issued and
outstanding............................................. 19,468 63
Additional paid-in capital............................... -- 216,124
Notes receivable from stockholders....................... (14,215) (11,454)
Deferred compensation.................................... (4,753) (3,805)
Distribution in excess of net book value................. (83,901) (83,901)
Retained earnings........................................ 8,903 32,646
-------- --------
Total stockholders' equity............................. (74,498) 149,673
-------- --------
Total liabilities and stockholders' equity............. $ 90,378 $230,496
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal
Year Ended June 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues...................................... $73,076 $106,924 $172,664
Cost of goods sold................................ 30,599 49,063 85,123
------- -------- --------
Gross profit.................................... 42,477 57,861 87,541
------- -------- --------
Operating expenses:
Research and development........................ 3,953 7,702 14,687
Selling, general and administrative............. 15,290 21,097 24,516
Purchased in-process research and development... -- -- 4,207
Amortization of intangibles..................... -- -- 300
------- -------- --------
Total operating expenses...................... 19,243 28,799 43,710
------- -------- --------
Operating income.................................. 23,234 29,062 43,831
Interest income................................... 962 1,992 3,784
Interest expense.................................. (571) (988) (1,573)
------- -------- --------
Income before income taxes........................ 23,625 30,066 46,042
Provision for income taxes........................ 8,477 12,142 18,417
------- -------- --------
Net income........................................ 15,148 17,924 27,625
Convertible Preferred Stock accretion............. -- 9,021 3,882
------- -------- --------
Net income available to Common Stockholders....... $15,148 $ 8,903 $ 23,743
======= ======== ========
Net income per share:
Basic........................................... $ 0.30 $ 0.39 $ 0.55
Diluted......................................... $ 0.30 $ 0.32 $ 0.45
Shares used in net income per share calculations:
Basic........................................... 50,000 22,970 43,152
Diluted......................................... 50,000 55,561 61,746
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
-----------------
Notes Distribution
Additional Receivable in Excess of Total
Paid-in from Deferred Net Book Retained Stockholders'
Shares Amount Capital Stockholders Compensation Value Earnings Equity
------- -------- ---------- ------------ ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996................... 50,000 $ 1,963 $ -- $ -- $ -- $ -- $ 18,988 $ 20,951
Net income.............. -- -- -- -- -- -- 15,148 15,148
------- -------- -------- -------- ------- -------- -------- ---------
Balance at June 30,
1997................... 50,000 1,963 -- -- -- -- 34,136 36,099
Repurchase of Common
Stock.................. (30,000) (1,963) -- -- (83,901) (34,136) (120,000)
Exercise of Common Stock
options for cash....... 88 210 -- -- -- -- -- 210
Exercise of Common Stock
options for Notes
Receivable from
stockholders........... 7,211 18,215 -- (13,615) (4,600) -- -- --
Deferred compensation
related to Common Stock
options................ -- 1,043 -- -- (1,043) -- -- --
Amortization of deferred
compensation related to
Common Stock options... -- -- -- -- 290 -- -- 290
Imputed interest and
compensation expense
related to Notes
Receivable............. -- -- -- (600) 600 -- -- --
Convertible Preferred
Stock accretion........ -- -- -- -- -- -- (9,021) (9,021)
Net income.............. -- -- -- -- -- -- 17,924 17,924
------- -------- -------- -------- ------- -------- -------- ---------
Balance at June 30,
1998................... 27,299 19,468 -- (14,215) (4,753) (83,901) 8,903 (74,498)
Effect of Delaware
re-incorporation....... -- (19,441) 19,441 -- -- -- -- --
Exercise of Common Stock
options for cash....... 158 -- 460 -- -- -- -- 460
Issuance of Common Stock
under Employee Stock
Purchase Plan.......... 120 -- 1,225 -- -- -- -- 1,225
Exercise of Common Stock
options for Notes
Receivable from
Shareholders........... 125 1 1,249 (934) (316) -- -- --
Repurchase of Common
Stock.................. (48) -- (131) 93 38 -- -- --
Deferred Compensation
related to Common Stock
options................ -- -- 1,413 -- (1,413) -- -- --
Amortization of deferred
compensation related to
Common Stock options... -- -- -- -- 540 -- -- 540
Imputed interest and
compensation expense
related to Notes
Receivable............. -- -- -- (960) 960 -- -- --
Repayment of Notes
Receivable from
Stockholders........... -- -- -- 4,562 1,139 -- -- 5,701
Issuance of Common Stock
in conjunction with
initial public
offering, net of
issuance costs......... 4,000 4 43,386 -- -- -- -- 43,390
Convertible Preferred
Stock accretion........ -- -- -- -- -- -- (3,882) (3,882)
Conversion of
Convertible Preferred
Stock to Common Stock.. 30,000 30 128,996 -- -- -- -- 129,026
Issuance of Common Stock
in conjunction with the
purchase of
ElectroPhotonics....... 400 1 13,708 -- -- -- -- 13,709
Increase in investment
carrying value in ADVA
(Note 5)............... -- -- 5,222 -- -- -- -- 5,222
Tax benefit from stock
options................ -- -- 1,155 -- -- -- -- 1,155
Net income.............. -- -- -- -- -- -- 27,625 27,625
------- -------- -------- -------- ------- -------- -------- ---------
Balance at June 30,
1999................... 62,054 $ 63 $216,124 $(11,454) $(3,805) $(83,901) $ 32,646 $ 149,673
======= ======== ======== ======== ======= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years ended
June 30,
-----------------------------
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 15,148 $ 17,924 $ 27,625
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 3,086 6,148 11,805
Stock compensation expense.................... -- 890 1,500
Imputed interest income....................... -- (600) (960)
Tax benefits from employee stock options...... -- -- 1,155
Purchased in-process research and
development.................................. -- -- 4,207
Changes in assets and liabilities (net of the
effect of the acquisition of
ElectroPhotonics):
Accounts receivable.......................... (9,977) 586 (14,238)
Inventories.................................. (2,519) (2,808) (13,458)
Deferred income taxes........................ (2,478) (4,017) (5,668)
Other current assets......................... 160 342 (2,729)
Accounts payable............................. 3,273 3,567 8,924
Accrued liabilities.......................... 5,909 6,875 9,681
Income taxes payable......................... 854 (1,215) 4,337
-------- --------- --------
Net cash provided by operating activities... 13,456 27,692 32,181
-------- --------- --------
Cash flows from investing activities:
Additions to property and equipment............ (15,284) (16,267) (41,792)
Payment from (advance to) joint venture........ -- (7,000) 7,000
Long-term investments.......................... -- -- (2,964)
Acquisition of ElectroPhotonics, net of cash
received...................................... -- -- (25,654)
Maturities and sale of short-term investments.. 354 14,983 --
Purchase of short-term investments............. (6,426) (4,143) --
-------- --------- --------
Net cash used in investing activities....... (21,356) (12,427) (63,410)
-------- --------- --------
Cash flows from financing activities:
Repurchase of Common Stock..................... (120,000) --
Proceeds from issuance of Mandatorily
Redeemable Convertible Preferred Stock........ -- 116,123 --
Payment to stockholder for note................ (200) -- --
Proceeds from exercise of Common Stock
options....................................... -- 210 460
Proceeds from issuance of Common Stock, net.... -- -- 43,390
Proceeds from Employee Stock Purchase Plan..... -- -- 1,225
Principal repayments by stockholders on note
receivable.................................... 1,384 -- 5,701
Principal payments on capital lease
obligations................................... (700) (757) (1,240)
Borrowings on long-term debt................... 7,700 3,000 20,175
Payments on long-term debt..................... (51) (182) (5,310)
-------- --------- --------
Net cash provided by (used in) financing
activities................................. 8,133 (1,606) 64,401
-------- --------- --------
Net increase in cash and cash equivalents....... 233 13,659 33,172
Cash and cash equivalents at beginning of
period......................................... 8,026 8,259 21,918
-------- --------- --------
Cash and cash equivalents at end of period...... $ 8,259 $ 21,918 $ 55,090
======== ========= ========
Supplemental disclosure of cash flow
information:
Interest paid.................................. $ 514 $ 1,036 $ 1,525
Income taxes paid.............................. $ 10,103 $ 17,549 $ 17,243
Non-cash investing and financing activities:
Common Stock issued for the acquisition of
ElectroPhotonics.............................. $ -- $ -- $ 13,709
Acquisition of property and equipment through
capital leases................................ $ 2,918 $ 2,783 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The company and description of business
E-TEK Dynamics, Inc. ("E-TEK" or "the Company") is a leader in the design
and manufacture of components and modules for fiber optic networks. The
product range includes WDM components and modules, isolators, couplers and
micro-optic integrated components. These products are designed into Optical
Amplifiers and WDM systems for communication networks. Applications include
land and undersea, as well as emerging metropolitan and access, networks. E-
TEK's customers are telecommunications equipment manufacturers that build
optical networks for service providers. E-TEK operates in one business
segment.
Until July 23, 1997, the Company was owned by two founders ("the Founders").
In July 1997, the Company underwent a recapitalization in which it sold a
controlling stake for $120 million in Mandatorily Redeemable Class A
Convertible Preferred Stock ("Convertible Preferred Stock") which had
significant rights and preferences over the Common Stock, including rights to
elect a majority of E-TEK's directors, cumulative dividends and a liquidation
preference. In connection with the recapitalization, the Company also
repurchased $120 million in Common Stock from the Founders. The redemption was
accounted for as a recapitalization and, accordingly, no change in the
accounting basis of E-TEK's net assets has been made in the accompanying
consolidated financial statements. The amount of cash paid to the stockholders
exceeded the net assets of the Company at the time of the redemption by
$83,901,000. This amount has been recorded in the equity section as
distribution in excess of net book value.
Pursuant to the recapitalization, the Company amended its articles of
incorporation to change the authorized number of shares to 90,000,000, of
which 30,000,000 were designated as Convertible Preferred Stock and 60,000,000
were designated as Common Stock. Also as of that date, there was a stock split
in which each outstanding share of Common Stock was converted into 493.72476
shares of Common Stock. All shares and per share amounts were restated to
reflect the stock split.
In June and November 1998, the Company amended its articles of incorporation
again to increase authorized shares of Common Stock to 65,000,000 shares and
300,000,000 shares, respectively. The Company is also authorized to issue
25,000,000 shares of Preferred Stock.
The Company completed its initial public offering on December 2, 1998.
Following the completion of the initial public offering, all shares of
Convertible Preferred Stock converted into an aggregate of 30,000,000 shares
of Common Stock.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation
All intercompany transactions and accounts have been eliminated.
F-7
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equity method of accounting
The Company accounts for its investment in foreign joint ventures using the
equity method of accounting. The Company accounts for the increase or decrease
of its proportionate share of net book value in equity basis investees from
the investees' issuance of stock at a price above or below the net book value
per share as a change to additional paid-in capital.
Revenue recognition
Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and allowances.
Revenue is deferred on shipments of new products as to which customer
acceptance is considered to be uncertain.
Warranty expense
At the time of product shipment, the Company provides for the estimated
costs that may be incurred under warranties for the product shipped.
Research and development
Research and development costs are expensed as incurred.
Stock-based compensation
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees". The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Cash and cash equivalents
E-TEK considers all liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
which is fifteen years for buildings and range from three to five years for
other property and equipment.
Goodwill and other intangible assets
Goodwill and other intangible assets are being amortized using the straight-
line method over two to three years.
F-8
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-lived Assets to be
Disposed of" ("SFAS 121"), the Company reviews long-lived assets based upon a
gross cash flow basis and will reserve for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
fully recoverable. Based on its most recent analysis, the Company believes
that there was no impairment of the long-lived assets as of June 30, 1999.
Income taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and the amounts reported for financial reporting purposes.
Deferred income taxes are provided on unremitted earnings from the foreign
joint ventures to the extent they are not considered permanently reinvested.
Fair value of financial instruments
For certain of the Company's financial instruments, including cash, cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amount approximates fair value due to their short
maturities. The estimated fair value of fixed rate long-term debt is primarily
based on the borrowing rates currently available to the Company for bank loans
with similar terms and maturities. This fair value approximated the carrying
amount of long-term debt at June 30, 1999.
Comprehensive income
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income is defined as the change in equity
of a company during a period from transactions and other events and
circumstances excluding transactions resulting from investments from owners
and distributions to owners. The comprehensive income did not differ from the
net income for the years presented.
Recently issued accounting standards
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, 2000. The Company does not expect the adoption
of SFAS 133 to have a material impact on its results of operations.
NOTE 2--ACQUISITION OF ELECTROPHOTONICS:
The Company completed the acquisition of ElectroPhotonics Corporation in
Canada on June 22, 1999. ElectroPhotonics develops optical networks components
and modules including WDM components, dispersion equalization modules and
optical network performance monitoring subsystems. The Company accounted for
the transaction as a purchase and has included the operating results of
ElectroPhotonics since the acquisition date in the accompanying consolidated
financial statements. The Company issued approximately 400,000 shares of
Common Stock with a market value of $13,709,000 and paid $26,728,000 in cash
in exchange for all of the equity of ElectroPhotonics. Including acquisition
costs of $460,000 and assumed liabilities of $582,000, the total
F-9
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase price was $41,479,000. The purchase price was allocated to
identifiable tangible and intangible assets and to goodwill as follows (in
thousands):
<TABLE>
<S> <C>
Cash and marketable securities.................................... $ 1,074
Property & equipment.............................................. 712
Developed technology.............................................. 933
Core technology................................................... 2,335
In-process research and development............................... 4,207
Acquired workforce................................................ 230
Trade names....................................................... 238
Other assets...................................................... 601
Residual goodwill................................................. 31,149
-------
$41,479
=======
</TABLE>
The valuations of the intangible assets, including developed technology,
core technology, in-process research and development, acquired workforce and
trade names, were based on an independent appraisal. In the appraisal,
projected incremental cash flows of projects were discounted using discount
rates ranging from 14% for developed technology to 24% for in-process research
and development. The discount rates used reflect difficulties and risks
regarding technological feasibility, market acceptance and other matters.
Goodwill is being amortized over three years. Developed technology and core
technology are being amortized over two to three years. In-process research
and development was expensed at the time of the acquisition in accordance with
generally accepted accounting principles.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding acquired in-process research and
development, as if the acquisition of ElectroPhotonics had occurred at the
beginning of fiscal 1998. The unaudited pro forma summary is not necessarily
indicative of what would have occurred had the acquisition been made as of the
beginning of fiscal 1998 or of results which may occur in the future.
<TABLE>
<CAPTION>
June 30,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Net revenues............................................ $107,407 $173,094
Net income.............................................. 8,202 19,706
Diluted net income per share............................ $ 0.14 $ 0.32
</TABLE>
F-10
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--BALANCE SHEET DETAIL:
<TABLE>
<CAPTION>
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable:
Trade receivables.................................... $ 20,358 $ 39,980
Less: Allowances for doubtful accounts and sales
returns............................................. (4,895) (10,149)
-------- --------
$ 15,463 $ 29,831
======== ========
Inventories:
Raw materials........................................ $ 3,459 $ 10,613
Work in process...................................... 1,566 7,577
Finished goods....................................... 1,884 2,177
-------- --------
$ 6,909 $ 20,367
======== ========
Property and equipment:
Machinery and equipment.............................. $ 22,429 $ 49,237
Computers and software............................... 2,008 3,078
Furniture and fixtures............................... 470 2,163
Automobiles.......................................... 138 27
Building improvements................................ 4,734 16,669
Land and buildings................................... 11,610 11,610
-------- --------
41,389 82,784
Less: Accumulated depreciation....................... (10,517) (20,910)
-------- --------
$ 30,872 $ 61,874
======== ========
Goodwill and other intangible assets:
Goodwill............................................. -- $ 31,149
Purchased technologies............................... -- 3,268
Other intangible assets.............................. -- 468
-------- --------
-- 34,885
Less: Accumulated amortization....................... -- (300)
-------- --------
$ -- $ 34,585
======== ========
Accrued liabilities:
Accrued compensation................................. $ 7,408 $ 10,887
Accrued warranty..................................... 3,735 4,620
Accrued commissions.................................. 2,151 3,120
Accrued professional services........................ 839 1,221
Accrued marketing expenses........................... 270 1,185
Deferred revenues.................................... 1,000 915
Accrued sales and property taxes..................... 127 504
Other................................................ 657 3,900
-------- --------
$ 16,187 $ 26,352
======== ========
</TABLE>
NOTE 4--NET INCOME PER SHARE:
Basic net income per share is computed by dividing net income available to
Common Stockholders by the weighted average number of common shares
outstanding during the period.
F-11
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Diluted net income per share is calculated using the weighted average number
of outstanding shares of Common Stock plus dilutive Common Stock equivalents.
For all periods presented, Common Stock equivalents consist of Convertible
Preferred Stock, unvested Common Stock subject to repurchase and Common Stock
options using the treasury stock method based on the average stock price for
the period.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
--------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income........................................ $15,148 $17,924 $ 27,625
Convertible Preferred Stock accretion............. -- 9,021 3,882
-------- -------- --------
Net income available to Common Stockholders
(Basic).......................................... 15,148 8,903 23,743
Convertible Preferred Stock accretion............. -- 9,021 3,882
-------- -------- --------
Net income available to Common Stockholders and
assumed conversions (Diluted).................... $ 15,148 $ 17,924 $ 27,625
-------- -------- --------
Denominator:
Denominator for basic earnings per share--weighted
average common shares............................ 50,000 22,970 43,152
Effect of dilutive securities
Common Stock options............................ -- 296 1,998
Unvested Common Stock subject to repurchase..... -- 4,104 4,166
Convertible Preferred Stock..................... -- 28,191 12,430
-------- -------- --------
Denominator for dilutive earnings per share--
adjusted weighted average common shares and
assumed conversions.............................. 50,000 55,561 61,746
-------- -------- --------
Basic earnings per share.......................... $ 0.30 $ 0.39 $ 0.55
======== ======== ========
Diluted earnings per share........................ $ 0.30 $ 0.32 $ 0.45
======== ======== ========
</TABLE>
NOTE 5--JOINT VENTURES:
FibX
During fiscal 1998, the Company entered into an agreement with a Taiwanese
company to form a joint venture in Taiwan to develop, manufacture and
distribute fiber optic components and products. The Company and the other
investor each contributed $7,000,000 in cash for a 50% interest in the joint
venture. Under the joint venture agreement and a related license agreement,
the Company received $7,000,000 from the joint venture for certain technology
of the Company that was licensed to the joint venture.
The $7,000,000 cash contributed by the Company and the $7,000,000 receivable
from the joint venture offset so that, in substance, the Company received a
50% interest in the joint venture in exchange for a technology license that
had no carrying value in the Company's financial statements. In accordance
with Emerging Issues Task Force Consensus No. 89-7, the Company did not record
any gain on the exchange and, therefore, the carrying value of the Company's
investment in FibX as of June 30, 1998 was nil. The Company's equity interest
in FibX was subsequently diluted to 45% through the issuance of equity to
other parties.
F-12
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, FibX began to manufacture certain products for the
Company. The Company sells certain components to and buys finished goods from
FibX. The transactions between the Company and FibX during fiscal 1999 were
immaterial. The Company's share of the equity loss in FibX was immaterial for
fiscal 1999 and, therefore, the carrying value of the Company's investment in
FibX was still nil as of June 30, 1999.
On July 6, 1999, the Company purchased an additional interest in FibX from
other investors for $12,000,000 in cash. After the purchase, the Company's
interest in FibX was increased to approximately 96%. The purchase resulted in
goodwill and other intangible assets of approximately $6,000,000 (unaudited),
which will be amortized in accordance with the Company's accounting policy.
The pro forma combined results of operations for fiscal 1998 and 1999 were not
materially different than the actual results.
ADVA
During fiscal 1995, the Company contributed $250,000 for a 40% ownership
interest in a German company ("ADVA") that develops and manufactures fiber
optic components and products. The other 60% interest was held by the
Company's German distributor, AMS Opto Tech GmbH ("AMS"). During the quarter
ended April 1, 1999, the Company contributed an additional $2,500,000 to
maintain its 40% interest in ADVA. On March 30, 1999, ADVA completed its
initial public offering and began trading on the Neuer Markt of the Frankfurt
Stock Exchange. The Company's ownership interest in ADVA was reduced to 33%
after ADVA's initial public offering. The Company increased the carrying value
of its investment to reflect the increase in the Company's share of ADVA's net
book value. The Company recorded the increase, net of the deferred tax
liability, as a credit to additional paid-in capital. At June 30, 1999, the
carrying value of the Company's investment in ADVA was $10,665,000. The market
value of the investment at June 30, 1999 was $121,803,000.
NOTE 6--DEBT:
In November 1996, the Company obtained a $7,700,000 term loan from a
financial institution, which bears interest at a rate of 7.85% per annum.
Monthly principal and interest payments are $59,000, with a final payment of
all remaining unpaid principal and interest on December 1, 2001. This loan is
secured by the Company's land and buildings with a net book value of
$11,610,000 at June 30, 1999. The outstanding balance of this note as of June
30, 1999 was $7,426,000.
In September 1997, the Company obtained a $3,000,000 term loan from a bank,
which bore interest at a rate of LIBOR plus 1.7% per annum. Monthly principal
and interest payments amounted to $27,000, with a final payment of all
remaining unpaid principal and interest on September 30, 2000. This note was
paid off fully during fiscal 1999.
In November 1998, the Company obtained a $5,440,000 term loan from a
financial institution, which bears interest at a rate of 6.46% per annum.
Monthly principal and interest payments amount to $129,000 with a final
payment of all remaining unpaid principal and interest in October 2002. Should
the Company elect to prepay any remaining balance of this note, they are
subject to a penalty not to exceed 3% of the original principal balance. This
note is secured by certain equipment owned by the Company. At June 30, 1999,
the outstanding balance of this note was $4,525,000.
In January 1999, the Company obtained a $7,890,000 term loan from a
financial institution, which bears interest at a rate of 6.38% per annum.
Monthly principal and interest payments amount to $241,000 with a final
payment of all remaining unpaid principal and interest in January 2002. Should
the Company elect to prepay any remaining balance of this note, it would pay a
penalty not to
F-13
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exceed 3% of the original principal balance. This note is secured by certain
equipment owned by the Company. At June 30, 1999, the outstanding balance of
this note was $6,882,000.
In April 1999, the Company obtained a $6,845,000 term loan from a financial
institution, which bears interest at a rate of 6.89% per annum. Monthly
principal and interest payments amount to $211,000 with a final payment of all
remaining unpaid principal and interest in April 2002. Should the Company
elect to prepay any remaining balance of this note, it would pay a penalty not
to exceed 3% of the original principal balance. This note is secured by
certain equipment owned by the Company. At June 30, 1999, the outstanding
balance of this note was $6,501,000.
Future principal payments under long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year ending June 30,
---------------------------
<S> <C>
2000.............................................................. $ 6,101
2001.............................................................. 6,523
2002.............................................................. 12,342
2003.............................................................. 367
-------
Total principal payments.......................................... 25,333
Less: Current portion............................................. (6,101)
-------
Long-term portion of principal payments........................... $19,232
=======
</TABLE>
NOTE 7--INCOME TAXES:
The provision for income taxes was as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current
Federal................................... $ 9,492 $ 14,216 $ 21,586
State..................................... 1,463 1,943 2,499
-------- -------- --------
10,955 16,159 24,085
-------- -------- --------
Deferred
Federal................................... (2,170) (3,500) (4,855)
State..................................... (308) (517) (813)
-------- -------- --------
(2,478) (4,017) (5,668)
-------- -------- --------
$ 8,477 $ 12,142 $ 18,417
======== ======== ========
Tax rate reconciliation:
Federal income tax statutory rate......... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit... 2.9 2.6 2.3
Permanent differences..................... -- 4.7 3.9
Foreign sales corporation benefit......... (2.7) (4.2) (3.0)
Research and development credit........... (0.7) (1.0) (1.1)
Other..................................... 1.4 3.3 2.9
-------- -------- --------
35.9% 40.4% 40.0%
======== ======== ========
</TABLE>
F-14
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------
1998 1999
------ -------
<S> <C> <C>
Deferred tax assets:
Inventory reserves....................................... $1,444 $ 2,579
Uniform cost capitalization for inventory................ 789 1,250
Sales return and bad debt reserves....................... 2,268 3,906
Warranty reserves........................................ 1,437 1,780
Vacation and other accruals.............................. 657 2,428
State taxes.............................................. 693 910
Other.................................................... 585 689
------ -------
7,873 13,542
Deferred tax liabilities................................... -- (3,481)
------ -------
Net deferred tax assets.................................... $7,873 $10,061
====== =======
</TABLE>
Deferred tax liabilities of $3,481,000 at June 30, 1999 related to the tax
effect of a book/tax basis difference for the Company's investment in ADVA.
NOTE 8--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On December 2, 1998, all shares of Convertible Preferred Stock converted
into an aggregate of 30,000,000 shares of Common Stock. Prior to the
conversion, the holders of the Convertible Preferred Stock had various rights
and preferences as follows:
Voting
Each share of Convertible Preferred Stock had voting rights equal to an
equivalent number of shares of Common Stock into which it was convertible and
voted together as one class with the Common Stock. Holders of Convertible
Preferred Stock had the right to elect three of the five members of the Board
of Directors.
Cumulative dividends
Dividends on each share of Convertible Preferred Stock accrued at a rate of
8% per annum of the liquidation value of $4.00 per share. For the years ended
June 30, 1998 and 1999, the Company recorded $9,021,000 and $3,882,000,
respectively, for the accretion of the value of the Convertible Preferred
Stock related to the 8% dividend per annum on the $120,000,000 liquidation
value of the Convertible Preferred Stock.
The holders of the Convertible Preferred Stock were also entitled to
participate in dividends on Common Stock, when and if declared by the Board of
Directors, based on the number of shares of Common Stock held on an as-if
converted basis.
Redemption
The holders of the Convertible Preferred Stock had the option to redeem the
stock at the then liquidation value if there were a change in ownership of the
Company. The liquidation value was defined as the greater of (i) an amount of
$4.00 per share, plus any unpaid dividends or (ii) the consideration per share
payable to holders of Common Stock assuming conversion to Common Stock of all
outstanding Convertible Preferred Stock, plus any unpaid dividends, prior to
liquidation.
F-15
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--RESTRICTED STOCK AND STOCK OPTION PLANS:
Restricted stock
During fiscal 1998 and 1999, under the Company's 1997 stock option plans,
the Company issued 7,211,000 and 125,000 shares of Common Stock, respectively,
to employees and officers of the Company in exchange for promissory notes in
an aggregate principal amount of $18,215,000 and $1,250,000, respectively.
These notes, which are secured by the shares of Common Stock, are generally
full recourse and payable in five years from the purchase date or upon
termination of employment by the Company, whichever comes first. Because these
notes do not bear interest, the $18,215,000 and $1,250,000 face values were
discounted using a 6% interest rate to $13,615,000 and $934,000, respectively,
with the difference recorded as deferred compensation cost. During fiscal 1998
and 1999, the Company recognized $600,000 and $960,000, respectively, of
compensation expense and $600,000 and $960,000, respectively, of interest
income related to this imputed interest income. These shares sold in exchange
for the promissory notes are subject to a right of repurchase by the Company,
subject to vesting, which is generally over a four year period from the grant
date, until vesting is complete.
In addition, under the Company's 1997 stock option plans, the Company issued
88,000 and 158,000 shares of Common Stock to employees of the Company for
$210,000 and $460,000 in cash during fiscal 1998 and fiscal 1999,
respectively. These shares sold are subject to a right of repurchase by the
Company, subject to vesting, which is generally over a four year period from
the date of grant, until vesting is complete.
At June 30, 1999, there were 3,139,000 shares of Common Stock purchased
under the Company's 1997 stock option plans subject to repurchase.
1997 Equity Incentive Plan
In July 1997, the Company adopted the 1997 Equity Incentive Plan (the
"Equity Plan") which provided for granting of incentive stock options and non-
statutory stock options to employees, officers and consultants of the Company
for up to 10,556,000 shares of Common Stock.
Under the Equity Plan, incentive stock options were granted at a price that
is not less than 100% of the fair market value of the stock on the date of
grant,. Non-statutory stock options were granted at a price that was not to be
less than 85% of the fair market value of the stock on the date of grant. The
exercise price of any option granted to a 10% stockholder would not be less
than 110% of the fair market value of the stock on the date of grant.
Options are exercisable immediately subject to repurchase options held by
the Company which generally lapse over a maximum period of four years at such
times and under such conditions as determined by the Board of Directors. In
August 1998, the Equity Plan was terminated and the remaining options
available for grant under the Equity Plan were transferred to the 1998 Stock
Plan.
1997 Executive Equity Incentive Plan
In October 1997, the Company adopted the 1997 Executive Equity Incentive
Plan (the "Executive Plan") which provided for granting of incentive stock
options and non-statutory stock options to officers or directors of the
Company for up to 4,444,000 shares of Common Stock.
Under the Executive Plan, incentive stock options are granted at a price
that was not less than 100% of the fair market value of the stock on the date
of grant. Non-statutory stock options were
F-16
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granted at a price that was not to be less than 85% of the fair market value
of the stock on the date of grant. The exercise price of any option granted to
a 10% stockholder would not be less than 110% of the fair market value of the
stock on the date of grant.
Options were exercisable immediately subject to repurchase by the Company
which generally lapse over a maximum period of four years at such times and
under such conditions as determined by the Board of Directors. In August 1998,
the Executive Plan was terminated and the remaining options available for
grant under the Executive Plan were transferred to the 1998 Stock Plan.
1998 Stock Option Plan
In August 1998, the Company adopted the 1998 Stock Plan (the "1998 Plan") to
replace the Equity Plan and Executive Plan. The 1998 Plan provides for the
grant of incentive stock options to employees (including officers and employee
directors) and for the grant of non-statutory stock options and stock purchase
rights to employees, directors and consultants. A total of (i) 3,000,000
shares of the Company's Common Stock (plus shares which have been reserved but
unissued under the Company's Equity Plan and Executive Plan), (ii) any share
returned to the Equity Plan and the Executive Plan as a result of termination
of options or repurchase of shares by the Company, and (iii) annual increases
equal to the lesser of 3,000,000 shares, or 4% of the outstanding shares, are
currently reserved for issuance pursuant to the 1998 Plan.
The term of stock options granted under the 1998 Plan is generally 10 years.
Under the 1998 Plan, incentive stock options are granted at a price that is
not less than 100% of the fair market value of the stock on the date of grant.
Non-statutory stock options are granted at a price that is not to be less than
85% of the fair market value of the stock on the date of grant. The exercise
price of any option granted to a 10% stockholder will not be less than 110% of
the fair market value of the stock on the date of grant. Options vest in four
years under the 1998 Plan.
Directors' Stock Option Plan
In August, 1998, the Company adopted the 1998 Director Option Plan (the
"Director Plan"). A total of 250,000 shares of the Company's Common Stock,
plus an annual increase equal to the optioned stock underlying options granted
in the immediately preceding year, have been reserved for issuance under the
Director Plan.
Under the Director Plan, non-statutory stock options are granted at 100% of
the fair value of the stock on the date of grant. The term of stock options
granted under the Director Plan is generally 10 years. Options vest in four
years. At June 30, 1999, no options have been issued under the Director Plan.
1998 Employee Stock Purchase Plan
In August 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible employees
may purchase Common Stock at a price equal to 85% of the lower of the fair
market value of the Common Stock at the beginning of a 24-month period or end
of each six-month segment within such offering period. Participation is
limited to 10% of an employee's compensation (not to exceed amounts allowed by
the Internal Revenue Code). A total of 750,000 shares of Common Stock have
been reserved for issuance under the 1998 Purchase Plan, plus annual increases
equal to the lesser of (i) 750,000 shares, (ii) 1% of the outstanding shares
on such date, or (iii) such lesser amount as may be determined by the Board of
Directors. To date, 120,000 shares of Common Stock have been issued under the
1998 Purchase Plan.
F-17
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activities under all of E-TEK's stock option
plans:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Outstanding Exercise
for Grant Shares Price
-------------- -------------- --------
(in thousands) (in thousands)
<S> <C> <C> <C>
Shares authorized..................... 15,000 -- $ --
Granted............................... (10,525) 10,525 2.97
Exercised............................. -- (7,299) 2.52
Cancelled............................. 176 (176) 2.41
------- ------
Balance at June 30, 1998.............. 4,651 3,050 4.05
Shares authorized..................... 3,250 -- --
Granted............................... (3,095) 3,095 18.68
Exercised............................. -- (283) 6.05
Repurchased........................... 48 -- 2.65
Cancelled............................. 123 (123) 8.39
------- ------
Balance at June 30, 1999.............. 4,977 5,739 $11.75
======= ======
</TABLE>
The weighted average fair value of options granted for fiscal 1998 and 1999
was $0.75 and $10.18, respectively.
Under the 1997 option plans, options are exercisable immediately and subject
to repurchase by the Company which generally lapse over a period of four
years. At June 30, 1999, 4,150,000 options with a weighted average exercise
price of $6.08 were outstanding and exercisable, of which 1,316,000 options
were vested.
Management calculated deferred compensation of $1,043,000 and $1,413,000
related to the option grants during fiscal 1998 and fiscal 1999, respectively.
Such deferred compensation is amortized over the vesting period, which is
generally four years. Amortization expense amounted to $290,000 and $540,000
for fiscal 1998 and 1999, respectively.
Option groups outstanding at June 30, 1999 and related weighted average
exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at June 30, 1999 at June 30, 1999
----------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------- --------------- ------------ ------------- -------------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 2.30 -
$ 2.30 876 8.11 $ 2.30 876 $ 2.30
$ 3.25 -
$ 3.25 1,281 8.60 $ 3.25 1,281 $ 3.25
$ 4.20 -
$ 8.00 273 8.83 $ 6.42 273 $ 6.42
$10.00 -
$10.00 2,143 9.13 $ 10.00 1,674 $10.00
$12.00 -
$43.50 1,166 9.76 $ 32.64 46 $12.00
------------ -----
$ 2.30 -
$43.50 5,739 8.97 $ 11.75 4,150 $ 6.08
============ =====
</TABLE>
F-18
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for the awards under a method
prescribed by SFAS No. 123, the Company's net income and pro forma net income
per share would have been decreased to the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Net income:
As reported............................................ $ 17,924 $ 27,625
======== ========
Pro forma.............................................. $ 16,681 $ 24,398
======== ========
Net income available for Common Stockholders:
As reported............................................ $ 8,903 $ 23,744
======== ========
Pro forma.............................................. $ 7,660 $ 20,517
======== ========
Net income per share:
As reported:
Basic................................................. $ 0.39 $ 0.55
======== ========
Diluted............................................... $ 0.32 $ 0.45
======== ========
Pro forma:
Basic................................................. $ 0.33 $ 0.48
======== ========
Diluted............................................... $ 0.30 $ 0.34
======== ========
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes Model. The minimum value method was used for fiscal
1998 and for the period between July 1, 1998 and December 1, 1998 with the
following assumptions: a risk-free interest rate of 6.00% for fiscal 1998 and
5.91% for the period between July 1, 1998 and December 1, 1998; an expected
term of option of 5 years and a dividend yield of 0.00% for both periods. For
the period between December 2, 1998 and June 30, 1999, the following
assumptions were used in the fair value calculations: a risk-free interest
rate of 5.91%, a volatility rate of 82%, an expected term of option of 5 years
and a dividend yield of 0.00%.
Sales under the 1998 Purchase Plan were 120,000 shares at an average price
per share of $10.20 in fiscal 1999. Pro forma compensation expense for the
grant date fair value, as defined by SFAS 123, of the purchase rights granted
under the 1998 Purchase Plan was calculated using the Black-Scholes Model with
the following assumptions: an expected life of 1.25 years, an expected
volatility rate of 80%, a dividend yield of 0.00 % and a risk-free interest
rate of 5.91%. The weighted average fair value per share, as defined by SFAS
123, of rights to purchase stock under the 1998 Purchase Plan was $4.95.
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
NOTE 10--EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) Savings Plan (the "Plan"). All employees are
eligible to participate in the Plan following certain minimum eligibility
requirements. Under the Plan, employees
F-19
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
may elect to contribute up to 15% of their pre-tax compensation to the Plan,
subject to annual limitations. Matching employer contributions are 25% of the
employees' contributions but limited to the first 10% of the employees'
deferral. Employer contributions are vested over five years after employees'
two years of services and employee contributions are 100% vested at all times.
The Company's contribution to the plan was $211,000, $313,000 and $1,027,000
for fiscal 1997, 1998 and 1999, respectively.
NOTE 11--MAJOR CUSTOMERS AND CONCENTRATION OF RISKS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
trade accounts receivable. The Company invests primarily in money market
accounts and marketable securities with high quality financial, government or
corporate institutions. The Company sells its products to original equipment
manufacturers and distributors. The Company performs ongoing credit
evaluations of its customers' financial condition and maintains an allowance
for uncollectible accounts receivable based upon the expected collectibility
of all accounts receivable. At June 30, 1998, two customers and their
affiliates accounted for 43% and 11% of accounts receivable. At June 30, 1999,
four customers and their affiliates accounted for 30%, 15%, 11% and 11% of
accounts receivable.
During fiscal 1997, three customers and their affiliates accounted for 27%,
22% and 12% of total revenues. During fiscal 1998, three customers and their
affiliates accounted for 30%, 16% and 14% of total revenues. During fiscal
1999, three customers and their affiliates accounted for 35%, 17% and 12% of
total revenues. Export sales were approximately 42%, 53%, and 42% of total net
sales for fiscal 1997, 1998 and 1999, respectively.
NOTE 12--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in a single industry segment--the design and
manufacture of components and modules for fiber optic networks. The Company
operates in three geographic regions: the United States, Europe and
Asia/Pacific. The following is a summary of sales by geographic area (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
--------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States................................... $ 42,532 $ 50,724 $ 92,319
Europe.......................................... 27,107 49,251 73,090
Asia/Pacific.................................... 3,437 6,949 7,255
</TABLE>
NOTE 13--COMMITMENTS AND CONTINGENCIES:
Leases
The Company has entered into a number of noncancelable lease agreements
involving machinery and equipment and automobiles. The principal portions of
the minimum rentals have been capitalized and the related assets and
obligations recorded using the interest rates implicit in the respective
leases.
During fiscal 1999, the Company entered into a facility lease for one
manufacturing plant. The lease expires in 2006.
F-20
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments under all noncancelable leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Ending June 30, Leases Leases
--------------------------- --------- -------
<S> <C> <C>
2000.................................................... $ 1,964 $1,508
2001.................................................... 1,908 1,508
2002.................................................... 1,908 546
2003.................................................... 1,908 417
2004.................................................... 1,908 --
Thereafter.............................................. 3,498 --
------- ------
Total minimum lease payments............................ $13,094 3,979
=======
Less: Amount representing interest...................... (421)
------
Present value of capitalized lease obligations.......... 3,558
Less: Current portion................................... (1,277)
------
Long-term portion of capitalized lease obligations...... $2,281
======
</TABLE>
At June 30, 1998 and June 30, 1999, the cost of machinery and equipment and
automobiles under capital leases, net of accumulated depreciation, was
$4,025,000 and $2,195,000, respectively.
Total rent expense on all operating leases was $283,000, $472,000 and
$365,000 for fiscal 1997, 1998 and 1999, respectively.
Contingencies
The Company is party to litigation matters and claims which are normal in
the course of its operations. While the results of such litigations and claims
cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on its
financial position and results of operations or cash flows.
NOTE 14--SUBSEQUENT EVENT:
On July 27, 1999, the Company signed a definitive agreement to acquire SMC
Kaifa (Holdings) Ltd., for a total purchase price of 697,000 shares of its
Common Stock and cash of $12,000,000. The Company estimates that the purchase
will result in approximately $36,000,000 of goodwill and other intangible
assets which will be amortized over 3 years. The closing of the transaction is
subject to several conditions, including required governmental approvals. The
Company cannot be certain that the acquisition will be completed.
F-21
<PAGE>
AUDITORS' REPORT
To the Shareholder of E-TEK Electrophotonics Solutions Corporation (formerly
Electrophotonics Corporation)
We have audited the balance sheets of E-TEK Electrophotonics Solutions
Corporation (formerly Electrophotonics Corporation) as at April 30, 1999 and
July 31, 1998 and the statements of operations and deficit and cash flows for
the nine-month period ended April 30, 1999 and the year ended July 31, 1998.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at April 30, 1999 and July
31, 1998 and the results of its operations and its cash flows for the nine-
month period ended April 30, 1999 and the year ended July 31, 1998 in
accordance with generally accepted accounting principles in Canada.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
July 21, 1999 (except for note 12(c)
which is as at July 23, 1999)
Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the company's ability to continue as a going concern,
such as those described in Note 1 to the financial statements. Our report to
the shareholders dated July 21, 1999, except for note 12(c) which is as at
July 23, 1999, is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
July 21, 1999 (except for note 12(c)
which is as at July 23, 1999)
F-22
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
BALANCE SHEETS
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
April July
30, 31,
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,714 $ 5,492
Accounts receivable -- net of allowance for doubtful
accounts of $40 (1998 -- $0).............................. 136 136
Investment tax credits recoverable......................... 399 510
Inventory.................................................. 225 48
Prepaid expenses and other receivables..................... 108 95
------- -------
3,582 6,281
Capital assets (note 4)...................................... 838 588
License -- net of accumulated amortization of $25 (1998 --
$0)......................................................... 145 170
------- -------
$ 4,565 $ 7,039
======= =======
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities................... $ 837 $ 708
Current portion of term loan (note 6)...................... 45 20
------- -------
882 728
Term loan (note 6)........................................... -- 40
------- -------
882 768
------- -------
SHAREHOLDERS' EQUITY
Capital stock (note 7)
Common shares.............................................. 7,865 7,519
Warrants................................................... -- 92
Contributed surplus........................................ 5 5
Stock options.............................................. 72 --
Deficit...................................................... (4,259) (1,345)
------- -------
3,683 6,271
------- -------
$ 4,565 $ 7,039
======= =======
Going concern (note 1)
</TABLE>
F-23
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended
April 30, July 31,
1999 1998
------------ ----------
<S> <C> <C>
Revenue................................................ $ 428 $ 686
Cost of goods sold..................................... 348 467
------- -------
Gross profit......................................... 80 219
Interest income........................................ 148 133
------- -------
228 352
------- -------
Operating expenses:
Research and development, net (note 5)............... 1,341 811
Marketing and sales.................................. 583 312
Administrative ...................................... 816 648
Interest............................................. 13 18
Amortization......................................... 389 139
------- -------
3,142 1,928
------- -------
Loss before income taxes............................... (2,914) (1,576)
Recovery of deferred income taxes...................... -- 43
------- -------
Loss for the period.................................... (2,914) (1,533)
Retained earnings (deficit)-- Beginning of period...... (1,345) 188
------- -------
Deficit -- End of period............................... $(4,259) $(1,345)
======= =======
Going concern (note 1)
</TABLE>
F-24
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
Nine-month
period ended Year ended
April 30, July 31,
1999 1998
------------ ----------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Loss for the period.................................. $(2,914) $(1,533)
Items not affecting cash
Amortization....................................... 389 139
Deferred income taxes.............................. -- (43)
Issuance of stock options for common shares for
services rendered................................. 72 --
------- -------
(2,453) (1,437)
Changes in non-cash operating working capital items
Accounts receivable.................................. -- (38)
Investment tax credits recoverable................... 111 (292)
Inventory............................................ (177) 149
Prepaid expenses and other receivables............... (13) (90)
Accounts payable and accrued liabilities............. 129 476
------- -------
(2,403) (1,232)
------- -------
Investing activities:
License.............................................. -- (170)
Capital asset purchases.............................. (614) (671)
------- -------
(614) (841)
Financing activities:
Repayment of bank term loan.......................... (15) (20)
Issuance of common shares............................ 254 7,507
Issuance of warrants................................. -- 109
Decrease in amounts due to shareholders.............. -- (29)
------- -------
239 7,567
------- -------
Increase (decrease) in cash and cash equivalents during
the period ........................................... (2,778) 5,494
Cash and cash equivalents -- Beginning of period....... 5,492 (2)
------- -------
Cash and cash equivalents -- End of period............. $ 2,714 $ 5,492
======= =======
Supplemental information:
Interest paid........................................ $ 10 $ 8
======= =======
Issuance of stock options for common shares for
services rendered................................... $ 72 $ --
======= =======
</TABLE>
F-25
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
(tabular amounts in thousands of dollars)
(amounts in Canadian dollars, except where otherwise noted)
1--GOING CONCERN
These financial statements are prepared on a going concern basis, which
assumes that E-TEK Electrophotonics Solutions Corporation (the company) will
realize its assets and discharge its liabilities in the normal course of
business. The company incurred an operating loss of $2,914,000 for the nine-
month period ended April 30, 1999 (July 31, 1998--$1,533,000) and reported a
deficit at April 30, 1999 of $4,259,000 (July 31, 1998-$1,345,000). The
ability of the company to continue as a going concern is dependent upon
obtaining adequate sources of financing and developing and maintaining
profitable operations. Should the company be unable to continue as a going
concern, assets and liabilities would require restatement on a liquidation
basis, which would differ materially from the going concern basis.
On June 22, 1999, the company was acquired by a U.S. public company (note
12(b)). Management anticipates that this transaction will provide the funding
and create the strategic alliances necessary to meet the company's plans.
Nevertheless, there are no assurances that these arrangements will be
successful or that, together with the projected cash flow from the operations
of the company, they will be sufficient to meet its obligations as they become
due.
2--NATURE OF OPERATIONS
The company was formed on June 18, 1999 through an amalgamation of 3030155
Nova Scotia Company and Electrophotonics Corporation Limited (see note 12(a)).
The business of the company was previously operated as Electrophotonics
Corporation, a company incorporated on August 9, 1993 under the laws of the
Province of Ontario, Canada.
The company is a developer of components and modules for optical networks.
The company is in the early stages of commercial manufacturing and marketing
of its products.
3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in Canadian dollars in
accordance with accounting principles generally accepted in Canada, which, in
the case of the Company, differ in certain respects from those in the United
States as explained in Note 11. The principal accounting policies of the
company are summarized below.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from the sale of the company's products is recognized when shipment
occurs and title passes to the customer. A provision is made for estimated
warranty costs at the time of the sale. The
F-26
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
company calculates a return provision based on historical experience and makes
appropriate reserves at the time the revenue is recognized.
Cash and cash equivalents
The company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be cash
equivalents.
Financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, receivables, accounts payable and term
loan approximate fair value due to their short-term maturities.
Certain risks and concentrations
The company's financial instruments, which are exposed to concentration of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. The company maintains its accounts for cash and cash equivalents
with large low-credit-risk financial institutions in Canada in order to reduce
its exposure. The company performs ongoing credit valuations of its customers'
financial condition. At April 30, 1999, two customers accounted for 32% and
24% of total accounts receivable. At July 31, 1998, three customers accounted
for 34%, 23% and 21% of total accounts receivable. Revenue from a single
customer represented 41% of total revenue for the nine-month period ended
April 30, 1999 and 34% of total revenue for the year ended July 31, 1998.
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the exchange rate prevailing at the
balance sheet date. Non-monetary assets and liabilities and transactions are
translated at exchange rates prevailing at the respective transaction dates.
Revenue and expenses are translated at average rates prevailing during the
period. Exchange gains and losses are included in the statements of operations
and deficit.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined by the first-in, first-out method.
Capital assets
Capital assets are recorded at cost, net of accumulated amortization.
Amortization charges are calculated on a straight-line basis over the
estimated three-year useful lives of the assets. Leasehold improvements are
amortized over the term of the lease plus one renewal period, or the estimated
lives, whichever is shorter. The Company reviews capital assets for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of an asset may not be recoverable. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amounts by which
the carrying amount of the assets exceeds the projected future cash flows
arising from the asset.
F-27
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
Licences
External costs of licences are recorded at cost and amortized over their
estimated useful lives of five years. If the carrying amount of a licence is
no longer recoverable, the related unamortized cost is written down to fair
value.
Research and development
Research costs are expensed as incurred. Development costs are expensed as
incurred unless a project meets the criteria under generally accepted
accounting principles for deferral and amortization. The company has not
deferred any development costs to date. Investment tax credits earned on
scientific research and experimental development expenditures are accounted
for using the cost reduction method and accordingly are deducted from the
related research and development expenses or related assets in the year of
expenditure, provided there is reasonable assurance they will be realized.
Income taxes
The company follows the deferral method of tax allocation in accounting for
income taxes. Under the deferral method, income taxes are provided for based
on accounting income for tax purposes included in the financial statements,
regardless of when such income is subject to taxes under tax laws. The
differences between the taxes currently payable and taxes accrued are reported
as deferred income taxes on the balance sheet. Deferred tax assets for loss
carry-forwards are recorded when virtual certainty exists that the benefits
will be realized.
4--CAPITAL ASSETS
<TABLE>
<CAPTION>
April 30, 1999
------------------------
Accumulated
Cost amortization Net
------ ------------ ----
$ $ $
<S> <C> <C> <C>
Computer equipment 132 52 80
Technical equipment 278 120 158
Optical equipment 734 256 478
Furniture and fixtures 201 79 122
Leasehold improvements 41 41 --
------ ---- ----
1,386 548 838
====== ==== ====
<CAPTION>
July 31,1998
------------------------
Accumulated
Cost amortization Net
------ ------------ ----
$ $ $
<S> <C> <C> <C>
Computer equipment 68 20 48
Technical equipment 127 58 69
Optical equipment 440 70 370
Furniture and fixtures 101 32 69
Leasehold improvements 36 4 32
------ ---- ----
772 184 588
====== ==== ====
</TABLE>
F-28
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
5--RESEARCH AND DEVELOPMENT EXPENDITURES
<TABLE>
<CAPTION>
April July 31,
30, 1999 1998
-------- --------
$ $
<S> <C> <C>
Gross research and development expenditures 1,341 1,151
Less: Investment tax credits -- (340)
-------- --------
Research and development expenditures--net 1,341 811
======== ========
</TABLE>
6--TERM LOAN
The company has arranged a term loan, bearing interest at prime plus 2.5%,
repayable in monthly instalments of $1,667, guaranteed under the Small
Business Loans Act. Subsequent to April 30, 1999 the term loan was repaid in
full.
7--CAPITAL STOCK
a) Common shares
<TABLE>
<CAPTION>
April July
30, 31,
1999 1998
------- -------
<S> <C> <C>
Authorized...................................................
Unlimited common shares....................................
Issued and outstanding.......................................
2,331,374 (1998-2,288,174) common shares................. $ 7,865 $ 7,519
======= =======
</TABLE>
The common share transactions are as follows:
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998
---------------- ----------------
Number of Number of
shares Amount shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Issued -- Beginning of period............ 2,288,174 $7,519 100 $ --
On stock split(i)........................ -- -- 999,900 --
On exercise of employee stock options
(i)..................................... 15,000 -- -- --
Issued for private placement #1 -- net of
issued costs (ii)....................... -- -- 430,000 1,265
Issued for private placement #2 -- net of
issue costs (iii)....................... 580,000 4,793
On conversion of warrants (ii), (iii).... 28,200 346 278,174 1,461
--------- ------ --------- -----
Issued-End of period..................... 2,331,374 7,865 2,288,174 7,519
========= ====== ========= =====
</TABLE>
F-29
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
b) Warrants
The warrant transactions are as follows:
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998
---------------- -----------------
Number of Number of
warrants Amount warrants Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Issued--Beginning of period............. 28,200 $92 -- $
Issued in connection with private
placement #1 (ii)...................... -- -- 215,000 106
Issued for brokerage services (ii),
(iii).................................. -- -- 80,000 147
On conversion of brokerage warrants
(ii)................................... -- -- 22,500 10
Converted into common shares............ (28,200) (92) (278,174) (166)
Expired................................. -- -- (11,126) (5)
------- --- -------- ----
Issued--End of period................... -- 28,200 92
======= === ======== ====
</TABLE>
i) On September 25, 1997, the company subdivided each of the issued common
shares into 10,000 common shares, increasing the total number of common
shares issued and outstanding from 100 to 1,000,000 and the number of
stock options outstanding from 1.5 to 15,000. These options were
exercised for an aggregate total of $3 cash on November 2, 1998.
ii) Private placement #1
On September 26, 1997, the company issued 430,000 units at a price of
$3.50 per unit for cash proceeds of $1,505,000. Each unit consists of
one common share and one-half of a warrant, entitling the holder to
purchase an additional common share of the company for $4.75. The
warrants expire on June 30, 1998. Costs of the transaction include fees
of $90,300 and an issuance of 45,000 warrants with a fair value of
$43,292. Each warrant entitled the holder to purchase a unit consisting
of one common share of the company and one-half of a warrant for a
price of $3.50 per unit. Each whole warrant entitled the holder to
purchase an additional common share of the company for a price of $4.75
per share. These warrants expire on June 30, 1998.
The fair values of the warrants were estimated using the Black-Scholes
option-pricing model. The following assumptions were used in the model:
no annual dividends, expected volatility of 70%, risk free interest
rate of 3.81%, and expected life of nine months.
Based on the fair value of the underlying instruments within the units
$1,265,071 of the net proceeds was allocated to common shares and the
balance of $106,337 was allocated to the private placement #1 warrants.
During fiscal 1998, 204,250 private placement #1 warrants were
exercised for cash proceeds of $970,188. The remaining warrants expired
on June 30, 1998. The amount of $5,000 attributed to the expired
warrants has been reflected as contributed surplus.
During fiscal 1998, 45,000 brokerage warrants were exercised for cash
proceeds of $157,500. Of the additional 45,000 half warrants acquired
upon the exercise of the brokerage warrants, 44,624 half warrants were
exercised for cash proceeds of $105,982 and the remaining 376 half
warrants expired on June 30, 1998.
F-30
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
iii) Private placement #2
On February 9, 1998, the company issued 580,000 common shares at a
price of $9.00 per share for cash proceeds of $5,220,000. Costs of the
transaction include fees of $313,200 and an issuance of 35,000
brokerage warrants with a fair value of $114,091. Each warrant entitled
the holder to purchase one common share of the company for a price of
$9.00 per share. These warrants expire on February 5, 1999.
The fair values of the brokerage warrants were estimated using the
Black-Scholes option-pricing model. The following assumptions were used
in the model: no annual dividends, expected volatility of 70%, interest
rate of 5.06%, and expected life of one year.
During fiscal 1998, 6,800 brokerage warrants were exercised for cash
proceeds of $61,200. During the nine-month period ended April 30, 1999,
the remaining 28,200 brokerage warrants were exercised for cash
proceeds of $253,900.
c) Stock Options
On September 26, 1997, the company approved a stock option plan for the
benefit of certain key employees, officers and directors. The plan allows
options to be issued aggregating not more than 10% of the issued and
outstanding shares of the company. Each option under the incentive plan allows
for the purchase of one common share and expires not later than ten years from
the date granted. Any unvested options may be cancelled if employment is
terminated.
<TABLE>
<CAPTION>
Number
-------
<S> <C>
Balance--July 31, 1997.......................................... 15,000
Granted at $3.50................................................ 114,750
Granted at $9.00................................................ 88,014
Exercised....................................................... --
Cancelled....................................................... --
-------
Balance--July 31, 1998.......................................... 217,764
Granted at $9.00................................................ 26,400
Exercised....................................................... (15,000)
Cancelled....................................................... (17,418)
-------
Balance--April 30, 1999......................................... 211,746
=======
</TABLE>
F-31
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
As at April 30, 1999, the company had stock options outstanding as follows:
<TABLE>
<CAPTION>
Fiscal
year Number of
Class of option holder issued options issued Expiry Exercise price
- ---------------------- ------- -------------- ------ --------------
$
<S> <C> <C> <C> <C>
December 2000-
Employees................ 1998 98,013 September 2002 3.50-9.00
August 2001-
1999 17,400 April 2002 9.00
December 2000-
Executive officers....... 1998 20,833 September 2002 3.50
Directors not executives December 2000-
or employees............ 1998 54,000 May 2003 3.50-9.00
October 2000-
Non-employees............ 1998 12,500 October 2002 3.50
1999 9,000 April 2002 9.00
-------
211,746
=======
</TABLE>
The options are subject to various vesting requirements as outlined in the
plan.
Non-employee options
The fair value of stock options granted to non-employees was estimated on
the date the non-employee earned the option using the Black-Scholes option-
pricing model with the following weighted average assumptions: no annual
dividend, expected volatility of 70%, interest rate of 4.88% and expected life
of three years. The weighted average fair value of stock options earned in the
nine-month period ended April 30, 1999 was $6.83. The resulting values have
been charged to the statements of operations and deficit in the period that
services were rendered. The fair value of the stock options charged to the
statements of operations and deficit in 1999 was $71,672.
8--INCOME TAXES
Investment tax credits
Investment tax credits have been claimed on qualifying research and
development expenditures and are subject to review and audit by Revenue
Canada. As a result, amounts recovered may differ from the amounts recorded in
the financial statements.
Assuming the Company is a qualifying corporation for the taxation year that
includes the nine-month period ended April 30, 1999, during the period ended
April 30, 1999, the company has generated refundable investment tax credits of
approximately $425,000. The benefit of these refundable investment tax credits
has not been recorded in the accounts.
F-32
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
The company has non-refundable investment tax credits available for carry-
forward against future years' federal income taxes payable of approximately
$153,000, expiring $108,000 in 2006 and $45,000 in 2007, and unclaimed
scientific research and development expenditures of $1,733,000 that may be
carried forward indefinitely. The benefit of these amounts has not been
recorded in the accounts.
Income taxes
The company has income tax loss carry-forwards of $2,077,000 for federal
purposes and $3,351,000 for provincial purposes. The benefit of these losses
has not been recorded in the accounts. The income tax loss carry-forwards
expire as follows:
<TABLE>
<CAPTION>
Federal Provincial
------- ----------
<S> <C> <C>
2000....................................................... $ -- $ 23
2001....................................................... 47
2002....................................................... -- 99
2003....................................................... 579 1,350
2004....................................................... 1,498 1,832
------ ------
2,077 3,351
====== ======
</TABLE>
9--COMMITMENTS
The company's commitments under premises and equipment leases are as
follows:
<TABLE>
<S> <C>
2000................................................................... $57
2001................................................................... 9
2002................................................................... 2
2003................................................................... 2
---
70
---
</TABLE>
10--UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than
a date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
F-33
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
11--UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with generally
accepted accounting principles in Canada (Canadian GAAP) which, in the case of
the company conform, in all material respects with generally accepted
accounting principles in the United States (U.S. GAAP), except as set forth
below.
Accounting for income taxes
Under Canadian GAAP, the deferral method is used, whereby deferred tax
assets for loss carry-forwards may be recognized if it is virtually certain
that the benefit will be realized. Under U.S. GAAP, the liability method is
used, whereby deferred tax assets for loss carry-forwards are recognized and
reduced by a valuation allowance if it is more likely than not that some or
all of the deferred tax assets will not be realized. The difference between
the deferral and liability methods has had no effect on the statements of
operations and deficit. The company has maintained its 100% valuation
allowance on the net deferred tax asset because of the lack of profitability
in the past, the risk that taxable income may not be generated in the future
and the non-transferable nature of the deferred tax asset.
The deferred tax balances are summarized as follows:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
Deferred tax assets
Share issue costs....................................... $ 145 $ 178
Research expenses....................................... 773 482
Non-capital losses...................................... 1,125 404
------- ------
2,043 1,064
------- ------
Deferred tax liabilities
Capital assets.......................................... 152 179
Warranty and other provisions........................... 178 228
------- ------
330 407
------- ------
1,713 657
Valuation allowance....................................... (1,713) (657)
------- ------
Net deferred tax asset.................................... -- --
------- ------
</TABLE>
The valuation allowance increased by $1,056,000 during the nine-month period
ended April 30, 1999.
Accounting for stock-based compensation
Under U.S. GAAP, the company has elected to continue to measure compensation
cost related to awards of stock options using the intrinsic value based method
of accounting (APB25).
In accordance with APB25, the compensation component related to options
granted during the year ended July 31, 1998 is $518,468 and during the nine-
month period ended April 30, 1999 is $192,042, which would be amortized into
the results of operations over the option vesting period.
F-34
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
Under Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-based
Compensation," the company is required to have pro forma disclosures of the
loss for the period as if the fair value based method of accounting had been
applied for stock options granted to employees and directors.
For disclosure purposes, the fair value of each stock option granted to
employees and directors was estimated on the date of grant using the Black-
Scholes option-pricing model, with the following weighted average assumptions
used for stock options granted:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- ----------
<S> <C> <C>
Annual dividends.......................................... nil nil
Expected volatility....................................... -- --
Interest rate............................................. 4.98% 5.12%
Expected life............................................. 3 years 3.45 years
</TABLE>
Under the above model, the total value of stock options granted to employees
and directors was $628,604 during the year ended July 31, 1998 and $213,291
during the nine-month period ended April 30, 1999, which would be amortized on
a pro forma basis over the option vesting period. Had the company determined
compensation cost for these plans in accordance with SFAS No. 123, the company
pro forma loss would have been unchanged at $1,533,000 for the year ended July
31, 1998 and $2,986,000 for the nine-month period ended April 30, 1999.
Operations
The reconciliation of the loss determined in accordance with Canadian GAAP
to the loss determined as result of the application of the above-noted U.S.
accounting principles is as follows:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
Loss for the period as reported............................. $(2,914) $(1,533)
Accounting for stock based compensation..................... (58) --
------- -------
Loss for the period in accordance with U.S. GAAP............ (2,972) (1,533)
======= =======
</TABLE>
12 SUBSEQUENT EVENTS
a) On June 14, 1999, Electrophotonics Corporation, a company incorporated
under the laws of the Province of Ontario, Canada, received a continuance to
carry on business in the Province of Nova Scotia, Canada, changed its name to
Electrophotonics Corporation Limited and amended its authorized capital to a
maximum of 100 million common shares. On June 18, 1999, Electrophotonics
Corporation Limited was amalgamated with 3030155 Nova Scotia Company, a
company incorporated under the laws of the Province of Nova Scotia, Canada, to
form an amalgamated company named E-TEK Electrophotonics Solutions
Corporation.
b) On June 22, 1999, the company was acquired by Lundy Technology Co.
(Lundy), a wholly owned subsidiary of E-TEK Dynamics Inc. (E-TEK), a U.S.
public company. Immediately prior to the acquisition, 101,068 stock options
were converted into common shares of the company for proceeds of $449,000.
Promissory notes pertaining to these stock option conversions of $246,000 were
issued by the company. Lundy acquired all of the company's outstanding common
shares, in exchange for a combination of approximately 400,000 shares of Class
A common stock of Lundy and US$26,728,000 in cash. Shares of Class A common
stock of Lundy are exchangeable into the shares of common stock
F-35
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
of E-TEK at the option of the holder within two years of the transaction. As
of June 22, 1999, the value of E-TEK common stock that could have been
received upon the conversion of the shares of Class A common stock of Lundy
was US$13,709,000. All unexercised options were cancelled on the date of the
transaction.
c) On July 23, 1999, the company entered into an agreement to lease premises
for future minimum commitments of approximately $1,260,000, payable over the
next five years commencing August 1, 1999.
F-36
<PAGE>
E-TEK DYNAMICS, INC. ACQUISITION OF ELECTROPHOTONICS CORPORATION
Unaudited Pro Forma Financial Information
On June 22, 1999, E-TEK Dynamics ("the Company" or "E-TEK") acquired
ElectroPhotonics Corporation ("ElectroPhotonics"), a Canadian-based privately
held company that develops optical networks components and modules. Under the
term of the agreement, E-TEK acquired all of the outstanding stock of
ElectroPhotonics in exchange for 400,000 shares of E-TEK's Common Stock and
$26.7 million in cash. The Company's shares were valued at $34.27 per share
based on the average closing price of E-TEK Common Stock three days before and
three days after the transaction, as quoted on the Nasdaq National Market. In
addition, the Company incurred $460,000 in acquisition costs. The transaction
was accounted for using the purchase method of accounting and the results of
ElectroPhotonics were included in the results of E-TEK from June 22, 1999, the
closing date of the transaction.
The following unaudited Pro Forma Consolidated Statement of Operations for
the year ended June 30, 1999 gives effect to the acquisition by E-TEK of
ElectroPhotonics as if it had occurred on July 1, 1998. It has been derived
from the Consolidated Statement of Operations of E-TEK for the year ended June
30, 1999 appearing elsewhere in the Prospectus and the unaudited Statement of
Operations of ElectroPhotonics for the period from July 1, 1998 to June 21,
1999. The unaudited Pro Forma Consolidated Statement of Operations should be
read in conjunction with the historical financial statements and notes thereto
of E-TEK and ElectroPhotonics included elsewhere in this Prospectus.
F-37
<PAGE>
E-TEK DYNAMICS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
----------------------
Acquisition
E-TEK ElectroPhotonics(1) Adjustments Combined
-------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues.............. $172,664 $ 430 -- $173,094
Cost of goods sold........ 85,123 330 -- 85,453
-------- ------- ------- --------
Gross profit.............. 87,541 100 -- 87,641
-------- ------- ------- --------
Operating expenses:
Research and
development............ 14,687 1,217 -- 15,904
Selling, general and
administrative......... 24,516 1,709 -- 26,225
Purchased in-process
research and
development............ 4,207 -- (4,207)(2) --
Amortization of
intangibles............ 300 -- 11,706 (2) 12,006
-------- ------- ------- --------
Total operating
expenses............. 43,710 2,926 7,499 54,135
-------- ------- ------- --------
Operating income (loss)... 43,831 (2,826) (7,499) 33,506
Interest income, net...... 2,211 127 (1,200)(3) 1,138
-------- ------- ------- --------
Income (loss) before
income taxes............. 46,042 (2,699) (8,699) 34,644
Provision for income
taxes.................... 18,417 -- (3,479)(4) 14,938
-------- ------- ------- --------
Net income (loss)......... 27,625 (2,699) (5,220) 19,706
Convertible Preferred
Stock accretion.......... 3,882 -- -- 3,882
-------- ------- ------- --------
Net income (loss)
available to Common
Stockholders............. $ 23,743 $(2,699) $(5,220) $ 15,824
======== ======= ======= ========
Net income per share:
Basic................... $ 0.55 $ 0.36
Diluted................. $ 0.45 $ 0.32
Shares used in net income
per share calculation:
Basic................... 43,152 392 (5) 43,544
Diluted................. 61,706 392 (5) 62,098
</TABLE>
See accompanying notes to unaudited Pro Forma Consolidated Statement of
Operations for explanation of pro forma acquisition adjustments.
F-38
<PAGE>
E-TEK DYNAMICS, INC. ACQUISITION OF ELECTROPHOTONICS CORPORATION
Notes to Unaudited Pro Forma Financial Information
(1) Basis of Presentation
The statement of operations of ElectroPhotonics has been prepared in
accordance with accounting principles generally accepted in the U.S. The
amounts were translated from Canadian dollars to US dollars using the average
exchange rate for the period.
(2) Allocation of Purchase Price and Related Amortization
The purchase price was allocated to tangible net assets and identifiable
intangible assets with remaining the unallocated purchase price attributed to
goodwill. The fair value of tangible assets approximated their historical book
value at June 22, 1999. The identifiable intangible assets and goodwill, along
with their estimated lives for amortization, are as follows (in thousands):
<TABLE>
<CAPTION>
Life
----
<S> <C> <C>
Developed technology............................................ $ 933 2
Core Technology................................................. 2,335 3
In-process research and development............................. 4,207
Trade names..................................................... 238 1
Acquired work forces............................................ 230 2
Goodwill........................................................ 31,149 3
</TABLE>
The value assigned to in-process research and development was expensed at
the time of acquisition in accordance with generally accepted accounting
principles. The Pro Forma Consolidated Statement of Operations excludes the
charge for in-process research and development due to the non-recurring nature
of the charge.
(3) Interest Income
In connection with the payment of $27.2 million in cash paid for the
acquisition, including acquisition costs, interest income was reduced for the
period from July 1, 1998 to June 22, 1999 using the 4.4% annual interest rate
earned in such funds.
(4) Income Taxes
The provision for income taxes was adjusted to reflect adjustments (2) and
(3).
(5) Shares Used in Net Income Per Share Calculation
The number of shares used in net income per share calculation was adjusted
as if the 400,000 shares for the acquisition were issued as of July 1, 1998.
F-39
<PAGE>
UNDERWRITING
E-TEK, the selling stockholders and the underwriters for the offering (the
"Underwriters") named below have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .....................................
Morgan Stanley & Co. Incorporated.........................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated.............................................
Schroder & Co. Inc. ......................................
SoundView Technology Group, Inc...........................
U.S. Bancorp Piper Jaffray Inc............................
---------
Total................................................. 6,000,000
=========
</TABLE>
----------------
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
900,000 shares from certain selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the Underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the Underwriters by E-TEK and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the Underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by the Company
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling Stockholders
---------------------------------
No Exercise Full Exercise
---------------------------------
<S> <C> <C>
Per Share............................ $ $
Total................................ $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial price to public. Any such
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial price to public. If all the shares are not sold at the initial
price to public, the Underwriters may change the offering price and the other
selling terms.
E-TEK, its directors and officers and the selling stockholders have agreed
with the Underwriters not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90
days after the date of this prospectus, except with the prior written consent
of the Underwriters. This agreement does not apply to any existing employee
benefit plans or shares issued by E-TEK in connection with acquisitions. See
"Shares Eligible for Future Sale" for a discussion of certain transfer
restrictions relating to our outstanding shares of common stock.
U-1
<PAGE>
In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the
underwriting discount received by it because the Underwriters have repurchased
shares sold by or for the account of such Underwriter in stabilizing or short
covering transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by
the Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters and
selling group members, if any, that are market makers ("passive market
makers") in the common stock may make bids for or purchases of common stock in
the Nasdaq National Market until a stabilizing bid has been made. Rule 103
generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part,
. a passive market maker may not effect transactions or display bids for
common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers, and
. bids made by passive market makers must be identified as such.
E-TEK estimates that the total expenses for the offering, excluding
underwriting discounts and commissions, will be approximately $750,000.
E-TEK and the selling stockholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 14
Use of Proceeds.......................................................... 15
Price Range of Common Stock.............................................. 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 31
Certain Transactions..................................................... 39
Principal and Selling Stockholders....................................... 41
Description of Capital Stock............................................. 43
Shares Eligible For Future Sale.......................................... 46
Validity of Common Stock................................................. 48
Experts.................................................................. 48
Where You Can Find Additional Information................................ 48
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 Shares
E-TEK Dynamics, Inc.
Common Stock
-----------
[LOGO OF E-TEK DYNAMICS APPEARS HERE]
-----------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Schroder & Co. Inc.
SoundView Technology Group
U.S. Bancorp Piper Jaffray
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the common stock being registered. All amounts
shown are estimates except for the SEC registration fee, the NASD filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 78,767
NASD filing fee.................................................. 28,834
NASDAQ National Market listing fee............................... 17,500
Blue Sky qualification fees and expenses......................... 10,000
Printing and engraving expenses.................................. 100,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 100,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous.................................................... 54,899
--------
Total........................................................ $750,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Registrant's Certificate of Incorporation provides that each
person who is or who has agreed to become a director or officer of the
Registrant or who has agreed at the request of the Registrant's Board of
Directors or an officer of the Registrant to serve as an employee or agent of
the Registrant or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Registrant to the full extent permitted by the DGCL or any
other applicable laws. Such Certificate of Incorporation also provides that
the Registrant may enter into one or more agreements with any person which
provides for indemnification greater or different than that provided in such
Certificate, and that no amendment or repeal of such Certificate shall apply
to or have any effect on the right to indemnification permitted or authorized
thereunder for or with respect to claims asserted before or after such
amendment or repeal arising from acts or omissions occurring in whole or in
part before the effective date of such amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or any predecessor of the
Registrant.
The Registrant has entered into indemnification agreements with its
directors and certain of its officers.
The Registrant has purchased and maintained insurance on behalf of any
person who is a director or officer against any loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.
See also the undertakings set out in response to Item 17 herein.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since July 1, 1996, the Registrant has sold and issued the following
securities which were not registered under the Securities Act of 1933, as
amended:
1. On July 23, 1997, the Registrant issued 30,000,000 shares of its Class
A Convertible Preferred Stock for an aggregate purchase price of
$120,000,000, or $4.00 per share, to a group of 8 investors.
2. On July 23, 1997, the Registrant issued 1,111,111 shares of its Common
Stock for an aggregate purchase price of $2,555,555.30, or $2.30 per share,
to an executive officer of the Registrant.
3. On July 23, 1997, the Registrant issued 1,111,110 shares of its Common
Stock for an aggregate purchase price of $2,555,553.00, or $2.30 per share,
to an employee of the Registrant.
4. From July 1, 1996 to June 30, 1999, the Registrant issued to
employees, officers, directors and consultants of the Registrant options to
purchase an aggregate of 13,618,342 shares of Common Stock of the
Registrant, at exercise prices ranging from $2.30 per share to $43.50 per
share, pursuant to the Registrant's 1997 Equity Incentive Plan, 1997
Executive Equity Incentive Plan and 1998 Stock Plan.
5. From July 1, 1996 to June 30, 1999, the Registrant issued an aggregate
of 7,581,610 shares of Common Stock of the Registrant upon the exercise of
options at exercise prices ranging from $2.30 to $10.00 per share.
6. On June 22, 1999, the Registrant issued 400,062 shares of Common Stock
to the shareholders of ElectroPhotonics Corporation in connection with the
acquisition of ElectroPhotonics.
The issuances described in paragraphs 1, 2, 3 and 6 above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. In addition, the sale of securities described in paragraph 5 was
deemed to be exempt from the registration requirements of the Securities Act
in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and other instruments issued in such
transactions. The granting of stock options described in paragraph 4 above did
not require registration under the Securities Act, or an exemption therefrom,
insofar as such grants did not involve a "sale" of securities as such term is
used in Section 2(3) of the Securities Act. All recipients either received
adequate information about the Registrant or had access, through employment or
other relationships, to information about the Registrant.
Item 16. Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen Stock Certificate of the Registrant.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement for directors and officers of the
Company.
10.2* Employment Agreement, as amended, dated July 23, 1997, by and
between the Registrant and Jing Jong Pan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.3* Employment Agreement, dated October 1, 1997, by and between the
Registrant and Michael J. Fitzpatrick.
10.4* Employment Agreement, dated December 2, 1997, by and between the
Registrant and Sanjay Subhedar.
10.5* Employment Letter Agreement, dated May 26, 1998, by and between the
Registrant and Philip Anthony.
10.6* Employment Letter Agreement, dated July 21, 1998, by and between the
Registrant and Jim Northington.
10.7* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Ming Shih.
10.8* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Kung Shih.
10.9+ Lease, dated February 3, 1999, by and between the Registrant and
Mission West Properties, L.P.
10.10* 1998 Stock Plan.
10.11* 1998 Employee Stock Purchase Plan.
10.12* 1998 Director Option Plan.
10.13* 1997 Equity Incentive Plan.
10.14* 1997 Executive Equity Incentive Plan.
10.15* Recapitalization Agreement, as amended, dated June 27, 1997, by and
between the Registrant, the Purchasers named therein, Theresa Stone
Pan, Jing Jong Pan and the Trusts named therein.
10.16* Shareholders Agreement, dated July 23, 1997, by and between the
Registrant and the Shareholders named therein.
10.17* Registration Agreement, as amended, dated July 23, 1997, by and
among the Registrant, the Investors named therein, Theresa Stone
Pan, Jing Jong Pan and the J.J. & Theresa Pan Revocable Trust (the
"Registration Agreement").
10.18* Purchase and Sale Agreement for Real Property and Escrow
Instructions, dated August 28, 1996, by and between the Registrant
and TR Brell Cal Corp.
10.19* Purchase and Sale Agreement and Escrow Instructions, dated July 11,
1997, by and between the Registrant and Nexus Properties, Inc.
10.20* Standing Loan Agreement, dated November 8, 1996, by and between the
Registrant and Bank of America National Trust and Savings
Association.
10.21* Business Loan Agreement, as amended, dated September 30, 1997, by
and between the Registrant and Bank of America National Trust and
Savings Association.
10.22* Design and Construction Contract, as amended, dated March 30, 1998,
by and between the Registrant and Rudolph and Sletten, Inc.
10.23* Joint Venture Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
10.24* Distributorship Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
10.25* Supply Agreement, dated March 3, 1998, by and between the Registrant
and Walsin Lihwa Corporation.
10.26* Mutual Confidentiality Agreement, dated September 2, 1997, by and
between the Registrant and Walsin Lihwa Corporation.
10.27* Technical Licensing Agreement on Fiberoptic Products, dated December
17, 1997, by and between the Registrant and Walsin Lihwa
Corporation.
10.28* Employment Agreement, dated September 21, 1998, by and between the
Registrant and William H. Diamond, Jr.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.29+ Share Purchase Agreement, dated as of May 26, 1999, among the
Registrant, Shemiran Holdings Inc., A. Tino Alavic, Robert Maaskant,
Lundy Technology Co. and ElectroPhotonics Corporation.
10.30+ Registration Rights Agreement, dated as of June 22, 1999, by and
between the Registrant and the shareholders of E-TEK
ElectroPhotonics Solutions Corporation.
10.31+ Amendment No. 2 to Registration Agreement, dated July 23, 1999.
21.1+ List of E-TEK Dynamics Subsidiaries.
23.1 Consent of Independent Accountants.
23.2+ Consent of Wilson Sonsini Goodrich & Rosati (See Exhibit 5.1).
23.3 Consent of Independent Accountants.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- --------
*Incorporated by reference to the exhibit filed with the Registration
Statement on Form S-1 (No. 333-61763), as amended.
+Previously filed.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is readily available in the financial statements
or notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 10th day of August, 1999.
E-Tek Dynamics, Inc.
/s/ Michael J. Fitzpatrick
By: _________________________________
Michael J. Fitzpatrick
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Michael J. Fitzpatrick President, Chief August 10, 1999
- ------------------------------------- Executive Officer
Michael J. Fitzpatrick and Chairman of the
Board of Directors
(Principal
Executive Officer)
/s/ Sanjay Subhedar Senior Vice August 10, 1999
- ------------------------------------- President,
Sanjay Subhedar Operations, Chief
Financial Officer
and Secretary
(Principal
Financial Officer
and Principal
Accounting Officer)
* Director August 10, 1999
- -------------------------------------
Walter G. Kortschak
Director
- -------------------------------------
David W. Dorman
Director
- -------------------------------------
Joseph W. Goodman
* Director August 10, 1999
- -------------------------------------
Donald J. Listwin
* Director August 10, 1999
- -------------------------------------
Peter Y. Chung
*By: /s/ Sanjay Subhedar
- -------------------------------------
Sanjay Subhedar
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen Stock Certificate of the Registrant.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement for directors and officers of the
Company.
10.2* Employment Agreement, as amended, dated July 23, 1997, by and
between the Registrant and Jing Jong Pan.
10.3* Employment Agreement, dated October 1, 1997, by and between the
Registrant and Michael J. Fitzpatrick.
10.4* Employment Agreement, dated December 2, 1997, by and between the
Registrant and Sanjay Subhedar.
10.5* Employment Letter Agreement, dated May 26, 1998, by and between the
Registrant and Philip Anthony.
10.6* Employment Letter Agreement, dated July 21, 1998, by and between the
Registrant and Jim Northington.
10.7* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Ming Shih.
10.8* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Kung Shih.
10.9+ Lease, dated February 3, 1999, by and between the Registrant and
Mission West Properties, L.P.
10.10* 1998 Stock Plan.
10.11* 1998 Employee Stock Purchase Plan.
10.12* 1998 Director Option Plan.
10.13* 1997 Equity Incentive Plan.
10.14* 1997 Executive Equity Incentive Plan.
10.15* Recapitalization Agreement, as amended, dated June 27, 1997, by and
between the Registrant, the Purchasers named therein, Theresa Stone
Pan, Jing Jong Pan and the Trusts named therein.
10.16* Shareholders Agreement, dated July 23, 1997, by and between the
Registrant and the Shareholders named therein.
10.17* Registration Agreement, as amended, dated July 23, 1997, by and
among the Registrant, the Investors named therein, Theresa Stone
Pan, Jing Jong Pan and the J.J. & Theresa Pan Revocable Trust (the
"Registration Agreement").
10.18* Purchase and Sale Agreement for Real Property and Escrow
Instructions, dated August 28, 1996, by and between the Registrant
and TR Brell Cal Corp.
10.19* Purchase and Sale Agreement and Escrow Instructions, dated July 11,
1997, by and between the Registrant and Nexus Properties, Inc.
10.20* Standing Loan Agreement, dated November 8, 1996, by and between the
Registrant and Bank of America National Trust and Savings
Association.
10.21* Business Loan Agreement, as amended, dated September 30, 1997, by
and between the Registrant and Bank of America National Trust and
Savings Association.
10.22* Design and Construction Contract, as amended, dated March 30, 1998,
by and between the Registrant and Rudolph and Sletten, Inc.
10.23* Joint Venture Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
10.24* Distributorship Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.25* Supply Agreement, dated March 3, 1998, by and between the Registrant
and Walsin Lihwa Corporation.
10.26* Mutual Confidentiality Agreement, dated September 2, 1997, by and
between the Registrant and Walsin Lihwa Corporation.
10.27* Technical Licensing Agreement on Fiberoptic Products, dated December
17, 1997, by and between the Registrant and Walsin Lihwa
Corporation.
10.28* Employment Agreement, dated September 21, 1998, by and between the
Registrant and William H. Diamond, Jr.
10.29+ Share Purchase Agreement, dated as of May 26, 1999, among the
Registrant, Shemiran Holdings Inc., A. Tino Alavie, Robert
Maashant, Lundy Technology Co. and ElectroPhotonics Corporation.
10.30+ Registration Rights Agreement, dated as of June 22, 1999, by and
between the Registrant and the shareholders of E-TEK
ElectroPhotonics Solutions Corporation.
10.31+ Amendment No. 2 to Registration Agreement, dated July 23, 1999.
21.1+ List of E-TEK Dynamics Subsidiaries.
23.1 Consent of Independent Accountants.
23.2+ Consent of Wilson Sonsini Goodrich & Rosati (See Exhibit 5.1).
23.3 Consent of Independent Accountants.
24.1+ Power of Attorney (see pg. II-5).
27.1+ Financial Data Schedule.
</TABLE>
- --------
*Incorporated by reference to the exhibit filed with the Registration Statement
on Form S-1 (No. 333-61763), as amended.
+Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 20, 1999, except
as to Note 14 which is as of July 27, 1999, relating to the consolidated
financial statements of E-TEK Dynamics, Inc. which appears in such Prospectus.
We also consent to the references to us under the heading "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 10, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF CHARTERED ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 21, 1999, except
as to Note 12(c) which is as of July 23, 1999, relating to the financial
statements of E-TEK ElectroPhotonics Solutions Corporation (formerly
ElectroPhotonics Corporation), which appears in such Prospectus. We also
consent to the references to us under the heading "Experts" in such
Prospectus.
/s/ PricewaterhouseCoopers LLP
Toronto, Canada
August 10, 1999
