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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-
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AVANEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-3285348
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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40919 ENCYCLOPEDIA CIRCLE
FREMONT, CALIFORNIA 94538
(510) 897-4188
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $4,261,616,552 as of September 1, 2000, based upon
the closing price on the Nasdaq National Market reported for such date.
64,425,963 shares of the Registrant's Common Stock, $.001 par value, were
outstanding at September 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement which will be filed with the
Commission pursuant to Section 14a in connection with the 2000 Annual Meeting of
Stockholders are incorporated herein by reference in Part III of this Report.
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AVANEX CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 31
Item 3. Legal Proceedings........................................... 31
Item 4. Submission of Matters to a Vote of Security Holders......... 31
PART II
Item Market For Registrant's Common Equity and Related
5..... Stockholder Matters......................................... 32
Item 6. Selected Financial Data..................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item Financial Statements and Supplementary Data.................
8..... 43
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 63
Item 11. Executive Compensation...................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 63
Item 13. Certain Relationships and Related Transactions.............. 63
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 64
Schedule II -- AVANEX Corporation Valuation and Qualifying Accounts... 64
Signatures............................................................ 68
EXHIBITS
10.8.15 Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Brian Kinard dated October 22, 1999
10.8.16 Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Brett Casebolt dated January 31, 2000
10.31 Revolving Credit and Security Agreement between Comerica
Bank-California and the Registrant dated July 10, 2000
21.1 List of subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Edgar Financial Data Schedule
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PART I
ITEM 1. BUSINESS
OVERVIEW
Avanex Corporation is a leading global provider of cost-effective,
high-performance photonic processing solutions that enable optical
communications networks to achieve next-generation performance. The company's
photonic processing solutions are used by fiber optic transmission systems
providers and their network carrier customers to enhance system performance and
deliver resulting increases in network speed and capacity.
Communications network carriers are deploying fiber optic transmission
systems to improve the networks' ability to transmit and manage the high volume
of voice and data traffic generated by the growth of the Internet. Our photonic
processing technologies are designed to increase the performance of these
optical transmission systems.
Fundamentally, photonic processing technologies increase the speed and
capacity of fiber optic networks. More specifically, they directly increase the
number of data-carrying wavelengths of light that can travel on optical
networks, and they extend the distance an optical signal can travel without
electrical regeneration. Electrical regeneration adds expense and complexity to
network transmission systems. Unlike optical system components, photonic
processing solutions from Avanex perform optical signal processing and influence
systems architecture. And unlike optical systems, photonic processors are
micro-optics based, passive devices with built-in optical processing algorithms.
We are currently providing two photonic processing solutions through
commercial shipments of our PowerFilter(TM) Wavelength Separators and
PowerMux(TM) Wavelength Channel Processors. The PowerFilter, Avanex's initial
product, has been shipping to customers in volume since October 1999 and has
provided the bulk of our early revenue. Shipments of the PowerMux, which
incorporates our PowerFilter and adds functionality, began in March 2000. We
anticipate that the PowerMux will replace the PowerFilter in most applications
and be an increasing source of revenue to us. The PowerShaper Dispersion
Management Processor is expected to begin commercial shipments during the second
quarter of fiscal 2001. Additional new photonic processing solutions are in the
alpha and beta testing stages.
Current customers for Avanex photonic processors include; WorldCom, Inc.,
Nortel Networks Corporation, Lucent Technologies, Fujitsu Ltd., Hitachi Ltd.,
Sycamore Networks Inc., Sorrento Networks, Cogent Communications, and Cisco
Systems, Inc.
We were incorporated in October 1997 as a California corporation, and in
January 2000, prior to our initial public offering, we were reincorporated in
Delaware.
We have experienced a period of rapid growth during fiscal year 2000. The
number of personnel in our workforce has grown from 60 people by June 30, 1999
to 834 people by September 1, 2000. We have expanded our headquarters and
manufacturing facility to 145,000 square feet by leasing an adjacent building of
91,000 square feet. In addition, Avanex's The Photonics Center(TM) is being
moved to a new location in Richardson, Texas, that contains roughly three times
the space of the current site. The Photonics Center is a unique customer
demonstration and training center and product development center that houses our
own, dedicated 3,000-kilometer simulated optical network.
On July 25, 2000, we acquired substantially all of the assets and certain
liabilities of Holographix Inc. of Hudson, Massachusetts, a developer and
manufacturer of holographic diffraction gratings that are a key element of
Avanex's next generation PowerMux line of photonic processing solutions. This
facility operates as a wholly-owned subsidiary of Avanex Corporation.
On October 29, 1999, Avanex Cayman, a corporation organized under the laws
of the Cayman Islands, was formed as a wholly owned subsidiary of us, and we
transferred certain intellectual property to Avanex Cayman. In December 1999,
Avanex Cayman and Avanex Corporation entered into a Cost Sharing
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Agreement whereby Avanex Cayman granted to us rights to certain existing
intellectual property and other developed intellectual property, and both
parties agree to share the cost of further research and development.
We currently purchase several key components used in our products and
equipment from single or limited sources of supply, including Nippon Sheet
Glass, Hoya USA, Inc., CMI, Sumitomo Corporation of America, Casix, Inc.,
Browave Corporation, Agilent, and New Focus, Inc. These key components include
filters, lenses, specialty glass and test and measurement equipment. We have no
guaranteed supply arrangements with any of these suppliers and we typically
purchase our components and equipment through purchase orders.
We also currently have some of our subcomponents manufactured by Tianjin
Concord Micro-Optics, Inc., which is located in Tianjin, China, formerly a
wholly-owned subsidiary of Concord Micro-Optics, Inc., a California-based
company. Tianjin Concord Micro-Optics, Inc. is now a subsidiary of Hon Hai
Precision Industry Co., Ltd., a company organized under the laws of Taiwan
("CMI"). In addition, we plan to have some of our subcomponents and products
manufactured by additional third-party contract manufacturers.
INDUSTRY
The global communications infrastructure was built to accommodate voice
traffic. This voice network was designed using circuit-switched technology that
provides each data stream, such as a telephone call between two points, with a
dedicated channel, or circuit, for the duration of the call. This approach is
efficient for voice communications, which are low bit-rate, or low data-rate
transmissions among fixed geographic locations, and which are symmetrical,
involving the exchange of relatively equal amounts of information between
parties.
Today, the growth of the Internet and the related increase in activities
such as electronic commerce, the transmission of large data files,
Internet-based businesses and telecommuting have caused a significant increase
in the volume of non-voice traffic across the communications infrastructure.
According to Ryan, Hankin & Kent, a leading market research and consulting firm,
Internet traffic will increase from 350,000 terabytes per month, or TBpM, at the
end of 1999 to more than 15 million TBpM in 2003. In addition, data
transmissions have different characteristics than voice transmissions. Data
transmissions are characterized by large, relatively short-duration bursts of
data traffic followed by relatively long periods of silence. Further data
traffic is often asymmetrical and occurs among multiple geographic locations.
Consequently, the original circuit-switched network approach is proving to be
inefficient and inadequate for today's needs.
To cope with this increase in traffic and significant change in traffic
type, communications network providers have focused on delivering improvements
that provide more network capacity, or bandwidth, and increased transmission
speed. Paradoxically, the increase in performance of communications networks,
including the Internet, has attracted new users, more applications and an even
greater demand for bandwidth. The resulting need for additional network capacity
and performance has created a business environment in which network improvements
and increases in available bandwidth are constantly matched by advances in the
applications and services generating this demand.
In their effort to overcome the limitations of circuit-switched networks,
service providers have implemented various enhancements such as advanced
switching technology and equipment. Most significantly, the transport layer is
being upgraded from electrical transmission over copper wires to optical
transmission. Optical transmission technology transfers data in the form of
pulses of light along optical fibers, which are bundled together in fiber optic
cable. Optical transmission provides enormously higher quality and capacity than
electrical transmission.
Meeting the demand for bandwidth by deploying additional fiber optic cable
is both costly and complicated. Furthermore, the costs associated with laying
the cable underground and the purchasing of rights of way increase significantly
when the fiber optic cable is deployed in metropolitan areas.
Therefore, additional enhancements to the communications infrastructure
have been developed, including dense wavelength division multiplexing, or DWDM,
to greatly increase the capacity of the existing fiber optic infrastructure,
which obviates the need to deploy additional fiber optic cable. DWDM allows
numerous light signals, or wavelength channels, to travel down a single optical
fiber as a composite optical signal.
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While DWDM technology offers tremendous promise, it also faces challenges.
As data-carrying light travels over long fiber distances, they begin to lose
definition and intensity. One solution is periodic electrical regeneration, in
which the signal is converted from optical to electrical, boosted and converted
back to optical for continued transmission. Electrical regeneration, however, is
costly and adds complexity to network operations.
Secondly, although multiplexing is useful for extremely high-capacity lines
traveling long distances, there is no effective system for switching or routing
data and telephone calls within the framework of current network architectures.
Several equipment vendors have announced breakthroughs in optical switching, but
the technology remains in the development and testing stage.
At a more fundamental level, today's networks are being managed within the
constraints of the traditional, circuit-switch architecture. We believe a
transition to a next-generation optical architecture relying on increasing the
number of available light wavelengths must occur as the only effective solution
to meeting the increasing bandwidth demand.
TECHNOLOGICAL CHALLENGES OF THE TRANSITION TO AN ALL-OPTICAL NETWORK
The advent of all-optical networks is widely believed to be the solution to
increase the ability to transmit quickly, efficiently and cost-effectively
voice, data and video across the Internet. The technical challenges to achieve
an all-optical network include the following:
- Solutions that integrate effectively with existing deployments.
- Bandwidth that is virtually unlimited, clear transmission of optics
across long distances.
- The ability to simply and economically pick-up or drop-off specific
messages along a network route.
High Cost and Under-Utilization of Available Bandwidth. In order to
optimize their investments in the existing fiber optic infrastructure, service
providers require a low-cost solution that allows a large number of wavelength
channels carrying data to travel simultaneously over the same optical fiber.
Although current competing DWDM commercial offerings provide a partial solution,
this technology is expensive and the number of wavelength channels that can be
transmitted simultaneously is relatively low.
Additionally, DWDM technology currently offered by our competitors requires
that wavelength channels be transmitted with a large space between each channel
in order to prevent these lower quality optical channels from interfering with
each other. Therefore, as depicted in the following diagram, bandwidth is
under-utilized because wavelength channels are not densely packed.
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OPTICAL SIGNAL
Total Available Bandwidth
[Optical Signal Diagram]
[At the top of the diagram is the caption "Optical Signal". Across the top
of the diagram is a horizontal line with arrows at each end. The label above the
line is "Total Available Bandwidth." Beneath this line are three vertical boxes,
each bearing the label "Wavelength Channel," with an arch over each box. Beneath
these boxes is a horizontal line with the label "Bandwidth" beneath each
"Wavelength Channel" box and the label "Unused Bandwidth" beneath the space
between the "Wave Channel" boxes, which are under the arches.]
By spacing optical channels closer together and thereby utilizing a greater
portion of the available bandwidth for data transmission, communications service
providers can increase the efficiency of their optical networks by placing a
greater number of wavelength channels into a single optical fiber.
The Necessity of Optical-Electrical Conversion. Another technological
limitation of the current optical transmission system is the pervasiveness of
the process known as optical-electrical conversion, more commonly referred to as
opto-electrical conversion. Opto-electrical conversion is the conversion of the
incoming optical signal into an electrical signal and back into an outgoing
optical signal. This conversion is required in order to regenerate the signal to
overcome the limitations due to chromatic dispersion and attenuation and in
order to drop data from or add data to the composite optical signal.
Chromatic Dispersion. Chromatic dispersion occurs because different
wavelengths of optical signals transmitted over a single optical fiber travel at
different velocities. Because these wavelengths travel at different velocities,
the resulting wavelength delays distort the signal quality. This signal
distortion can only be avoided by spacing the individual optical signals far
apart and by regenerating the signal after it has traveled a short distance.
Attenuation. As optical signals travel over fiber, the signals degenerate
and are eventually lost because of a phenomenon known as attenuation. As
communications service providers attempt to send signals over even longer
distances, the attenuation gets worse, and the signal is lost. Therefore, the
signal requires regeneration after traveling a short distance.
Adding or Dropping of Data. As multiple optical signals (composite signals)
are transmitted across the network, it is often necessary to have some data
dropped off or added at a given location. This process is known as add/drop
multiplexing and is required because composite optical signals contain data with
different geographic destinations. In order to remove data from or add data to a
composite optical signal, that signal must be converted to an electrical signal
and then reconverted back to a composite optical signal, even if that signal
does not otherwise require regeneration at that location. Opto-electrical
conversion currently occurs at multiple points in the network, and in different
types of network equipment. This process is costly for the following reasons:
- The equipment is specific to a particular bit rate, protocol and signal
format and therefore is neither scalable nor flexible enough to handle
other transmission speeds, protocols or signal formats.
- It requires expensive equipment throughout the network.
- The equipment occupies valuable space.
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- The equipment consumes significant electrical power and generates excess
heat.
These costs increase as more wavelength channels are added to a single
optical fiber in DWDM systems because each channel of a DWDM system must undergo
this conversion process. Thus, opto-electrical conversion presents one of the
most significant technological limitations of the current communications
infrastructure.
COST CHALLENGES OF THE TRANSITION TO AN ALL-OPTICAL NETWORK
The cost of developing optical technology and products is high because of
the infancy of the technology and its related industry. Because of the emerging
nature of the industry, manufacturing yields are low, which also results in
additional costs. Furthermore, once a product is developed and manufactured, it
is often too bulky, complex and inflexible to be cost-effective.
DEPLOYMENT CHALLENGES OF THE TRANSITION TO AN ALL-OPTICAL NETWORK
Users of optical systems require miniaturized products because their
systems are often deployed in locations where space is limited. Few optical
product manufacturers have the ability to manufacture miniaturized, or
micro-optic, products that consistently meet standard specifications. In order
to develop an all-optical network, an optical solutions provider must understand
not only the optical systems, but also the network in which these optical
systems are to be deployed.
Traditionally, the optical component manufacturers have focused on
developing optical packaging expertise while systems manufacturers and service
providers have focused on developing network deployment and optical design
expertise.
Despite the advances in optical technology, several challenges still exist
(as described above), which prevent the widespread deployment of existing
optical solutions. As a result of these limitations, the current network is a
patchwork of various solutions placed throughout the network operating on
multiple protocols over multiple layers on both optical and electrical signals.
THE AVANEX SOLUTION
Avanex designs, manufactures and markets communications network solutions
based on our photonic processing technologies. Avanex's photonic processors are
designed to deliver the "Wavelengths in Abundance" required to overcome
limitations in today's network architectures and to improve the networks' speed
and carrying capacity. Avanex's photonic processors also are designed for
scalability, reduced complexity and lower cost as compared with current
alternatives, and feature miniaturized packaging to save valuable central office
space.
Avanex solutions bring photonic processing capabilities to the transport
layer of the network and significantly reduce the need for optical-to-electrical
(opto-electrical) conversion. Unlike existing component technologies, our
photonic processors perform optical signal processing, or change the signal
according to predetermined algorithms. Our photonic processors also differ from
conventional optical systems in that they currently do not require software and
electronics. We believe our photonic processors enable service providers and
optical systems manufacturers to cost-effectively maximize the capacity of
optical networks.
Our solutions provide the following key benefits:
Optimize Optical Network Performance. Our photonic processors are
designed to maximize the capacity of optical fiber and the efficiency and
reliability of optical transmission. Our photonic processors are designed
to significantly increase the number of data-carrying fiber-optic
wavelengths by employing smaller spacing between wavelength channels. They
also are designed to enable higher bit rates than currently available
solutions. Avanex photonic processors also provide variable chromatic
dispersion compensation, which minimizes fiber optic transmission errors
and directly increases the distance an optical signal can travel before
requiring electrical regeneration.
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Provide a Flexible and Scalable Solution. Applying our expertise in
networking design, we have developed solutions that are flexible, modular
and designed to be easily deployed into existing and future networks. Our
solution is scalable because our photonic processors are designed to work
equally well in small and large optical networks, as well as to facilitate
easy upgrading of an optical system to a higher number of channels. Our
photonic processors provide functionality that accommodates existing
protocols, including synchronous optical networks, or SONET, Internet
protocol, or IP and asynchronous transfer mode, or ATM. Our photonic
processors are designed to meet the demands placed on today's network, and
can be easily expanded to meet future demand.
Provide a Cost-Effective Optical Transport Solution. Our solutions are
designed to enable the transition to the next-generation, all-optical
network without the large capital investments or complex system design
challenges typically encountered in network deployment. The optical signal
processing capabilities of our photonic processors allow us to offer lower
cost solutions than those currently available. Through our micro-optic
packaging, or miniaturization, and integration, or the combination of
multiple optical components in a single package, our customers can use our
products to optimize the utilization of limited networking equipment space.
Our photonic processors also reduce the need for expensive opto-electrical
conversion at numerous points along the transmission path. In addition, our
products are designed to be used within the existing communications
infrastructure as well as in the next-generation, all-optical network,
which protects existing infrastructure investments and facilitates network
development efforts.
Facilitate the Deployment of Next-Generation Services and
Applications. Our solutions bring processing capabilities for the first
time to the transport layer of the network. We believe these capabilities
will enable our customers to offer a new set of services and applications,
including voice over Internet, virtual private network, or VPN and
business-to-business, or B2B e-commerce. These new offerings could provide
our customers with potential new revenue streams and opportunities for
further competitive differentiation.
THE AVANEX STRATEGY
Our objective is to be the leading provider of innovative, fiber
optic-based solutions that enable our customers to deploy and optimize fiber
optic networks. Key elements of our strategy include:
Leverage Technology Leadership and Expertise. We believe that we have
a unique combination of advanced optical technologies and system
architecture knowledge as well as advanced optical packaging technologies.
As of September 1, 2000, we have 45 patents issued or applied for in the
United States, nine of which are jointly filed with Fujitsu Ltd., and
eleven patents issued or applied for internationally, two of which are
jointly filed with Fujitsu Ltd. We intend to continue to focus our product
development efforts on providing photonic processing solutions that address
the need for a virtually unlimited number of low-cost wavelengths,
transported at very high data rates and at very long distances. In
developing new solutions, we intend to leverage our expertise with designs
that are cost-effective, scalable and flexible. We plan to increase our
research and development efforts as well as to evaluate externally
developed technology opportunities as they become available.
Expand Existing and Develop New Customer Relationships. We currently
provide our photonic processors to customers in the communications
industry, including communications service providers such as WorldCom,
Sycamore Networks Inc., Sorrento Networks and Cogent Communications and
optical systems manufacturers such as Nortel Networks Corporation, Lucent
Technologies, Fujitsu Ltd., Hitachi Ltd., and Cisco Systems. We intend to
leverage our relationships with these and other customers and develop new
relationships with potential customers in the service providers and optical
systems manufacturers markets. We also intend to provide a range of optical
solutions that meet the demands of our target markets.
Expand Sales and Marketing Efforts. Our marketing strategy is based on
a push-pull approach. With our pull approach, we target communications
service providers who can create demand for our
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products by purchasing our products directly or by requiring that the
systems they purchase incorporate our products. With our push approach, we
target optical systems providers who can buy our products and then resell
them as a part of their optical solutions. We plan to expand our North
American direct sales team, which will include customer representatives, a
technical sales force and application engineers. We intend to expand our
international presence by increasing both our direct sales force and
establishing relationships with additional international distributors and
representatives.
Expand Manufacturing Capabilities. We have expanded our headquarters
and manufacturing facility in Fremont, California to approximately 145,000
square feet, approximately three times its initial size and more than ten
times the size of our prior facility. We intend to continue to develop our
manufacturing and packaging expertise to enable us to consistently design,
develop and manufacture miniaturized, reliable and cost-effective products.
We intend to continue to invest in our manufacturing capabilities, as well
as expand our manufacturing facilities so that we can meet the needs of our
target markets. Our manufacturing is cell-based, or partitioned according
to similarities in responsibilities. We believe this type of manufacturing
organization allows us to expand our facilities more efficiently, both in
terms of cost and time. We are automating our testing process and plan to
extend this automation to other parts of the manufacturing process. Our
headquarters and manufacturing facility in Fremont, California have
successfully completed the initial audit for registration to the ISO 9001
Quality standard, the international business community's most stringent
standard for quality processes. We intend to continue to expand our
manufacturing capacity through a combination of improved efficiency,
increased manufacturing operations and contract manufacturing.
Enhance the Avanex Brand. We plan to enhance the Avanex brand
throughout the communications industry by engaging in a range of marketing
programs to position us as the leading global provider of photonic
processing solutions that enable next generation performance for optical
communications networks. These activities will include participation in
industry conferences and trade shows, advertisements in print publications,
direct marketing and Internet-based marketing. We also plan to build
awareness through product demonstrations and customer education and
training at The Photonics Center.
TECHNOLOGIES
Our optical signal processing technologies are designed to solve the
inherent complexity of, and limitations on, bandwidth, speed and distance in
conventional network and long-haul optical transmission systems. Our products
incorporate several core optical technologies that we believe will enable the
next-generation, all optical network. These include:
Integrated/Tuned Dielectric Filter Technology. Integrated/tuned
dielectric filter technology is the key enabler of Avanex's PowerFilter(TM)
Channel Separators. This technology allows certain wavelength channels, or
optical signals, to pass through multiple filters while reflecting other
optical signals. These filters are used in DWDM systems to separate, or
demultiplex, incoming optical signals and combine, or multiplex, outgoing
optical signals. During manufacturing, these filters can be tuned, or
adjusted, to different frequencies, reducing the number of types of filters
needed in a DWDM system, which reduces system size and cost. In addition,
because wavelengths do not have to pass through multiple filters within a
DWDM system, signal loss is kept to a minimum. Tunability also produces
higher manufacturing yield, which is difficult to achieve with
earlier-generation technology.
Spectral Segmentation Technology. Traditional DWDM technology
multiplexes and demultiplexes wavelength channels individually. Our
proprietary spectral segmentation solutions enable the multiplexing and
demultiplexing of wavelength channels in groups. This allows for more
efficient and flexible packaging and less degradation of the optical signal
because of the need for fewer subcomponents in the DWDM system. Our
PowerMux product incorporates this technology in the dense multiplexing and
demultiplexing of wavelength channels in a DWDM system.
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Virtually Imaged Phased Array (VIPA) Technology. Chromatic dispersion
occurs because different wavelengths of optical signals transmitted over a
single optical fiber travel at different speeds. Dispersion deteriorates
the quality of optical signals in high bit-rate transmission systems. The
farther the optical signal travels, the more it gets distorted. Dispersion
typically limits high bit-rate optical signal transmission to about 100
kilometers. Our VIPA dispersion compensation technology, utilized in our
PowerShaper product and based upon joint patents between Avanex and
Fujitsu, Avanex patents, and a license from Fujitsu of certain Fujitsu
patents, corrects for chromatic dispersion by compensating for the
differences in wavelength speed. Our technology allows one single product
to function across multiple wavelength channels and can compensate, or
correct for, different levels of chromatic dispersion. The VIPA technology
incorporated in Avanex's PowerShaper(TM) Dispersion Management Processors
can extend optical transmissions substantially without electrical
regeneration of the signal, which results in high network bandwidth
efficiency and lower cost.
Asymmetric Nonlinear Interferometer Technology. Asymmetric nonlinear
interferometer technology enables Avanex photonic processors to multiplex
virtually any number of channels, at any channel spacing and at any bit
rate. Employing this technology, Avanex has demonstrated its PowerMux(TM)
Channel Processor at 800 channels and an aggregate transmission rate of
three terabits per second on a single optical fiber. Frequency/phase
nonlinearity also enables "square-shaped" passbands that produce a crisp,
clear optical signal with low insertion loss and high channel isolation.
Micro-Optic Array Router Technology. Micro-optic array router
technology incorporated in Avanex's PowerMux Channel Processors
significantly reduces cost per channel of DWDM, making it practical for
metropolitan networks requiring high channel counts. In combination with
Avanex's Asymmetric Nonlinear Interferometer technology, array routing
enables the transmission of multiple channels at low costs and enables
high-speed signal processing. Array technology also enhances
manufacturability.
Electro-Restrictive, Electro-Optic and Magneto-Optic
Technologies. Electro-restrictive, electro-optic and magneto-optic
technologies enable high-speed photonic routing while maintaining signal
quality. Combined with Avanex's PowerMux Channel Processors, these
technologies enable Avanex's PowerExchanger(TM) Optical Add/Drop Processors
to deliver "switchless" routing of optical signals in fiber-optic
transmissions.
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PRODUCTS
Our adaptive photonic processors embody a revolutionary approach to
improving the performance of optical networks. The capability to deliver
virtually any DWDM channel count, any bit rate and any channel spacing breaks
the threshold of innovation. The following table sets forth current products and
their capabilities as well as some of our products in development:
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PRODUCT DESCRIPTION BENEFIT STATUS
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PowerFilter(TM) Integrated tunable wavelength -- Reduced signal loss Shipping.
Wavelength Channel filter multiplexer and -- Fewer types of filters
Processor demultiplexer
PowerMux(TM) and High density wavelength -- Accommodates virtually any Shipping for PowerMux.
PowerMux NxG(TM) division multiplexer processor number of wavelength
Wavelength Channel channels Beta testing for
Processors -- More efficient use of PowerMux NxG.
bandwidth for data
transmission
-- Low cost per wavelength
PowerShaper(TM) Fixed and variable dispersion -- Compact packaging Beta testing.
Dispersion compensator -- Broadband dispersion
Compensation compensation
Management Processor -- Tunable for use with
different wavelength spans
SuperPowerShaper(TM) Variable slope dispersion -- Extends wavelength distance Beta testing.
Dispersion Slope compensator of high bit-rate
Processor transmissions
PowerExchanger(TM) Channel adds and drops at any -- "Switchless" reconfigurable Beta testing for
Fixed And point add/drop/express function. reconfigurable.
Reconfigurable Add/ -- Ultra-low insertion loss
Drop Multiplexing -- Highly integrated Initial commercial
Processor configuration for a compact shipping for fixed.
footprint and reduced fiber
connection complexity
PowerExpress(TM) Optical signal regeneration and -- Ultra long-haul optical Beta testing.
Integrated Long-Haul reshaping transmission without
Processor electrical signal
regeneration
-- Mid-stage add/drop
functionality
</TABLE>
PowerFilter(TM) Wavelength Channel Processor. One of the limitations
of current optical filter technology is that too much of the incoming
optical signal is lost during the sequential filtering process, an
occurrence known as insertion loss. Our PowerFilter technology is designed
to correct much of this inefficiency, increasing transmission distance and
improving system performance. The central piece of the filter technology is
a thin film dielectric filter-based device, which offers wavelength-tuning
capabilities during the manufacturing process. Wavelength tuning allows a
single filter to filter multiple wavelength channels. Our proprietary
packaging schemes also consolidate filter types and parts. This, in turn,
provides an added advantage of cost savings on materials.
PowerMux(TM) and PowerMux NxG(TM) Wavelength Channel
Processors. PowerMux is a next generation DWDM product. It is capable of
multiplexing optical signals at smaller spacings between wavelength
channels, at higher bit rates and across greater distances than other
available solutions. The PowerMux allows DWDM multiplexing and
demultiplexing of optical signals at the origin and
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<PAGE> 12
destination of a transmission path, in addition to offering optical
add-drop multiplexing, known as OADM, at any point in the transmission
path. We believe this product allows our customers to use more fiber optic
bandwidth for the transport of data than can be delivered with alternative
DWDM equipment available today.
PowerShaper(TM) Dispersion Compensation Management Processor and
SuperPowerShaper(TM) Dispersion Slope Processor. PowerShaper, currently in
the beta testing stage, is a broadband chromatic dispersion compensation
processor and is specifically designed to correct the inherent bandwidth
and distance limitations in optical transmission systems resulting from
dispersion. The PowerShaper can act as a fixed or variable dispersion
compensator, which will permit system providers to optimize their network
for improved network performance. PowerShaper is designed to correct for
dispersion by reshaping the individual optical pulses at the receiving end
of the optical fiber and preventing them from mixing and corrupting the
transmission data. The SuperPowerShaper contributes to longer optical
transmission distances by combating the tendency of fiber optic signals to
drift and distort as they travel over longer distances. The
SuperPowerShaper complements the PowerShaper product, which is the
industry's first and only tunable chromatic dispersion compensator.
PowerExchanger(TM) Fixed and Reconfigurable Add/Drop Multiplexing
Processor. The reconfigurable PowerExchanger can selectively add or drop
any number of optical channels off the main trunk of a network, making it
suitable for the optical ring and mesh networks of the future. In simplest
terms, the PowerExchanger functions like a freeway interchange on the
Information SuperHighway, allowing channels of information to be directed
to their ultimate destinations at any point on the main trunk. The
reconfigurable feature gives network designers greater flexibility and
enables scalability as network needs increase.
PowerExpress(TM) Integrated Long-Haul Processor. The PowerExpress
offers ultra-long-haul fiber optic transmission without costly electrical
regeneration of the signal. The PowerExpress provides self-contained
optical regeneration and optical reshaping for maximum distance with a
minimum bit-error rate. The PowerExpress integrates PowerShaper and
mid-stage add/drop functionality along with optical regeneration
capability. Avanex has demonstrated the PowerExpress in a 3,000-kilometer
configuration.
SALES AND MARKETING
We are implementing a marketing strategy that is based on a push-pull
approach. Using the pull approach, we target communications service providers,
who can create demand for our products by purchasing our products directly or by
requiring that their systems incorporate our products. Using the push approach,
we target optical systems providers, who can buy our products and then resell
them as a part of their optical solutions.
Our marketing efforts are centered on demonstration and education of our
products' performance at trade shows and The Photonics Center, continued
publicity through paid advertising and direct mail and Internet-based
communication and promotion. We sell and market our products through a
combination of direct sales and international distributors and representatives.
As of September 1, 2000, our direct sales organization consisted of five
sales representatives operating in the United States, one supplier manufacturer
representative in Italy, one supplier manufacturer representative in Israel, and
two distributors in Japan.
We focus our direct sales efforts on service providers and optical systems
manufacturers. The direct sales account managers cover the market on an
assigned-account basis and work as a team with account-oriented systems
engineers. We also have application engineers who provide our customers with
assistance on the evolution of their networks as it relates to the deployment of
our products. These engineers help in defining the features that are required
for our products to be successful in specific applications. We currently have 12
system and application engineers working for us.
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<PAGE> 13
In order to further our international sales objectives, we have established
relationships with two distributors in Japan. These distributors have expertise
in deploying complex telecommunications equipment in their markets and provide
basic support required by our international customers. We believe that support
services are essential to the successful installation and ongoing support of our
products. We deliver these services directly to major customers and indirectly
through our international distributors.
As of September 1, 2000 we had six people in customer service and support,
located in our Fremont, California corporate headquarters.
THE PHOTONICS CENTER(TM)
To help market our technology and product performance and enable our
push-pull marketing strategy, we have established The Photonics Center in
Richardson, Texas, which is a leading-edge customer testing, demonstration and
training facility that enables deployment of our products in a simulated
network. As a result, we benefit from immediate feedback from our current and
potential customers about our photonic processors. The Photonics Center also
provides testing capabilities for the development of products and prototypes. In
addition, we believe that The Photonics Center shortens our products' evaluation
cycle with potential customers because they receive initial evaluation
information on our products before these products are shipped to the customer
location for full testing and evaluation. This initial information gives the
potential customer a better understanding of the product before delivery to
their location, which we believe gives us an advantage in the sales process.
The Photonics Center(TM) is being moved to a new location in Richardson,
Texas, that contains about three times the space of the current site.
MANUFACTURING
We currently manufacture all of our products in our Fremont, California
facility. We have expanded our headquarters and manufacturing facility to
145,000 square feet by leasing an adjacent building of 91,000 square feet. We
intend to devote significant resources to ensuring sufficient manufacturing
capacity and expect to continue to hire significant numbers of new manufacturing
employees.
The manufacturing of photonic processors requires the use of a highly
skilled manual workforce performing critical functions such as optical assembly,
optical alignment, soldering and component integration. We invest significant
resources in training and maintaining the quality of our manufacturing
workforce.
Furthermore, we develop proprietary automated testing equipment for
consistency in testing results and for efficiency. We also have grouped our
manufacturing operations into several product-specific or customer-specific
cells. We believe this provides a highly flexible and efficient operating
capability, and is designed to meet customer expectations for high volume
capacity, high quality and on-time delivery.
We are continuing to expand our manufacturing capacity to meet anticipated
demand for our products. If we are unable to expand our manufacturing capacity
on a timely basis to meet demand or if we do not accurately project demand, we
will have excess capacity or insufficient capacity, either of which will
seriously harm our business.
We emphasize quality assurance throughout the entire supply-chain and
manufacturing processes. We also install stringent quality control processes and
procedures, including incoming material inspection, in-process testing and
outgoing inspection.
We currently have some of our subcomponents manufactured by CMI, which is
located in Tianjin, China. In addition, we plan to have some of our
subcomponents and products manufactured by additional third party contract
manufacturers. Expanding our manufacturing capacity at different facilities,
some of which will be in foreign countries such as China, will be expensive and
will require management's time. The inability to obtain sufficient quantities of
these components may result in delays or reductions in product shipments, which
would harm our business.
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<PAGE> 14
We currently purchase several key components used in our products and
equipment from single or limited sources of supply, including Nippon Sheet
Glass, Hoya USA, Inc., CMI, Sumitomo Corporation of America, Casix, Inc.,
Browave Corporation, Agilent, and New Focus, Inc. These key components include
filters, lenses, specialty glass and test and measurement equipment. We have no
guaranteed supply arrangements with any of these suppliers and we typically
purchase our components and equipment through purchase orders.
QUALITY
We have established a quality assurance plan to improve our company-wide
quality system to ensure that our customers' requirements are consistently met.
This system is based on the international standard ISO 9001. Our Fremont
headquarters and manufacturing facility have successfully completed the initial
registration audit for registration to the ISO 9001 Quality standard; and we
expect to receive final, formal registration within the quarter ended December
31, 2000.
PRODUCT DEVELOPMENT
We have assembled a team of engineers and prototype production operators
with significant experience in optics, data networking and communications. We
believe our engineering team possesses expertise in the areas of optics,
micro-optic design, network system design and system-level software design. Our
product development efforts focus on enhancing our first generation of photonic
processors, developing additional optical network products and continuing to
develop next-generation technology to support the growth in network bandwidth
requirements.
As of September 1, 2000, we had 127 people in our product development
group, including applications and systems engineers in Richardson, Texas, and 52
pilot line operations personnel in Fremont, California. We have made, and will
continue to make, a substantial investment in research and development. Our
research and development expenses totaled $515,000 for the period from October
24, 1997 (inception) through June 30, 1998, $4.1 million for the fiscal year
ended June 30, 1999, and $15.6 million for the fiscal year ended June 30, 2000.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. While we have developed, and expect to continue to
develop, most new products and enhancements to existing products internally,
from time to time we may be required to license technology from third parties to
develop new products or product enhancements. These licenses may not be
available to us on commercially reasonable terms.
COMPETITION
The markets we are targeting are new and rapidly evolving, and we expect
these markets to become highly competitive in the future. While we do not have
any direct competitors in the photonic processor market today, we anticipate
that other companies will expand into our market in the future, and introduce
competitive products.
We face indirect competition from public and private companies providing
products that address the same optical network problems that our products
address. Additionally, the development of alternative solutions to optical
transmission problems by these and other competitors, particularly systems
companies who also manufacture components, could significantly limit our growth.
Some companies in the optical systems and component industry might compete
with us in the future, including Lucent Technologies, Nortel Networks, Alcatel,
Fujitsu, E-Tek Dynamics, Inc. and JDS Uniphase. These are large public companies
that have longer operating histories and significantly greater financial,
technical, marketing and other resources than we have. As a result, these
competitors are able to devote greater resources to the development, promotion,
sale and support of their products. In addition, our competitors that have large
market capitalizations or cash reserves, and are therefore much better
positioned
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<PAGE> 15
than we are to acquire other companies in order to gain new technologies or
products that may displace our product lines. Any of these acquisitions could
give our competitors a strategic advantage.
Many of our potential competitors have significantly more established sales
and customer support organizations than we do. In addition, many of our
competitors have much greater name recognition and have more extensive customer
bases, better developed distribution channels and broader product offerings than
does our company. These companies can use their customer bases and broader
product offerings and adopt aggressive pricing policies to gain market share. We
expect to encounter potential customers that, due to existing relationships with
our competitors, are committed to the products offered by these competitors. As
a result, these potential customers may not consider purchasing our products.
Existing and potential customers are also our potential competitors. These
customers may develop or acquire additional competitive products or technologies
in the future, which may cause them to reduce or cease their purchases from us.
In addition, customers who are also competitors may unfairly disparage our
products in order to gain a competitive advantage.
As a result of these factors, we expect that competitive pressures may
result in price reductions, reduced margins and loss of market share.
PATENTS AND INTELLECTUAL PROPERTY
Our success and ability to compete depend substantially upon our internally
developed technology. As of September 1, 2000, we have 45 patents issued or
applied for in the U.S., nine of which are jointly filed with Fujitsu Ltd., and
eleven patents issued or applied for outside of the U.S., two of which are
jointly filed with Fujitsu Ltd.
Our engineering teams have significant expertise in photonic, micro-optic
and systems-level design and manufacturing. While we rely on patent, copyright,
trade secret and trademark law to protect our technology, we also believe that
factors such as the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. We cannot assure you that others will not develop
technologies that are similar or superior to our technology.
We license technology from Fujitsu Ltd. that is critical to our PowerShaper
product. The license agreement is subject to termination upon the acquisition of
more than a 50% interest in us by certain major communications system suppliers.
Thus, if we are acquired by any of these specified companies, we will lose this
important license. The existence of this license termination provision may have
an anti-takeover effect in that it would discourage those specified companies
from making a bid to acquire us.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our proprietary information. Despite these efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and there can be no assurance that the steps taken
by us will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do
the laws of the United States.
Substantial litigation regarding intellectual property rights exists in the
networking industry, and we expect that optical communications products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segments grows and the functionality of products in
different industry segments overlaps. In addition, we believe that many of our
competitors in the communications business have filed or intend to file patent
applications covering aspects of their technology on which they may claim our
technology infringes.
We cannot make any assurances that other third parties will not claim
infringement by us with respect to our products and our associated technology.
Any such claims, with or without merit, could be time-consuming to defend,
result in costly litigation, divert management's attention and resources, cause
product shipment
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<PAGE> 16
delays or require us to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to us, if at all.
A successful claim of product infringement against us and failure or
inability by us to license the infringed or similar technology could seriously
harm our business. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.
EMPLOYEES
As of September 1, 2000, we employed 834 people, including 629 in
manufacturing, 127 in engineering, research and development, 23 in qualify, 15
in sales and marketing, and 40 in general and administrative capacities. Our
workforce includes, from time to time, temporary or contract employees. As of
September 1, 2000, our workforce included 163 such people, mostly in
manufacturing operations. None of our employees is represented by a labor union.
We have not experienced any work stoppages and we consider our relations with
our employees to be good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of who
is bound by an employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key employees could have a
material adverse effect on our business, financial condition and results of
operations.
Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense, particularly in the San Francisco
Bay Area where our headquarters are located, and we cannot make any assurances
that we can retain our key personnel in the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this report on Form 10-K that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, including, without limitations, statements regarding the
Company's expectations, hopes, beliefs, anticipations, commitments, intentions
and strategies regarding the future. Forward looking statements include, but are
not limited to, statements contained in "Item 1. Business," and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Actual results could differ from those projected in any
forward-looking statements for the reasons, among others, detailed below. The
fact that some of the risk factors may be the same or similar to our past
filings means only that the risks are present in multiple periods. We believe
that many of the risks detailed here are part of doing business in the industry
in which we compete and will likely be present in all periods reported. The fact
that certain risks are characteristic to the industry does not lessen the
significance of the risk. The forward-looking statements are made as of the date
of this Form 10-K and we assume no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
UNLESS WE GENERATE SIGNIFICANT REVENUE GROWTH, OUR INCREASING EXPENSES AND
NEGATIVE CASH FLOW WILL SIGNIFICANTLY HARM OUR FINANCIAL POSITION.
We have never been profitable. As of June 30, 2000, we had an accumulated
deficit of $86.8 million. We may incur operating losses for the foreseeable
future, and these losses may be substantial. Further, we may continue to incur
negative operating cash flow in the future.
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<PAGE> 17
We have experienced operating losses in each quarterly and annual period
since inception. The following table shows our operating losses for the periods
indicated:
<TABLE>
<CAPTION>
PERIOD OPERATING LOSS
------ --------------
<S> <C>
Year ended June 30, 2000.................................... $(44,356,000)
Year ended June 30, 1999.................................... (9,250,000)
From October 24, 1997 (inception) to June 30, 1998.......... (1,133,000)
</TABLE>
Due to insufficient cash generated from operations, we have funded our
operations primarily through the sale of equity securities, bank borrowings and
equipment lease financing. We have a large amount of fixed expenses and we
expect to continue to incur significant and increasing manufacturing, sales and
marketing, product development and administrative expenses. As a result, we will
need to generate higher revenues while containing costs and operating expenses
if we are to achieve profitability. Although our net revenue has grown from
$510,000 in the quarter ended June 30, 1999 to $19.3 million in the quarter
ended June 30, 2000, we cannot be certain that our revenues will continue to
grow or that we will ever achieve sufficient revenue levels to achieve
profitability. We will need to generate significant revenue growth to achieve
profitability and positive operating cash flow. Even if we do achieve
profitability and positive operating cash flow, we may not be able to sustain or
increase profitability or positive operating cash flow on a quarterly or annual
basis.
OUR REVENUES AND OPERATING RESULTS ARE VOLATILE, AND AN UNANTICIPATED DECLINE IN
REVENUE MAY DISPROPORTIONATELY AFFECT OUR NET INCOME OR LOSS IN A QUARTER.
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:
- Fluctuations in demand for and sales of our products, which will depend
on the speed and magnitude of the transition to an all-optical network;
- Cancellations of orders and shipment rescheduling;
- Our ability to significantly expand our manufacturing capacity at our new
facilities in Fremont, California, which commenced operations in November
1999;
- The ability of CMI and our other future contract manufacturers to timely
produce and deliver subcomponents in the quantity and of the quality we
require;
- The mix of our products sold;
- The practice of companies in the communications industry to sporadically
place large orders with short lead times;
- Competitive factors, including introductions of new products and product
enhancements by potential competitors, entry of new competitors into the
photonic processor market, including Lucent Technologies, Nortel Networks
and Fujitsu, and pricing pressures;
- Our ability to effectively develop, introduce, manufacture and ship new
and enhanced fiber optic products in a timely manner without defects;
- Our ability to control expenses, particularly in light of our limited
operating history;
- Availability of components for our products and equipment and increases
in the price of these components and equipment;
- Our ability to meet customer product specifications and qualifications;
- Seasonality of customer demand;
- Difficulties in collecting accounts receivable; and
- Economic conditions specific to the communications and related
industries.
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<PAGE> 18
A high percentage of our expenses, including those related to
manufacturing, engineering, sales and marketing, research and development and
general and administrative functions, are essentially fixed in the short term.
As a result, if we experience delays in generating and recognizing revenue, our
quarterly operating results are likely to be seriously harmed. As we expand our
manufacturing capacity, we will incur expenses in one quarter relating to the
expansion and related yield issues that may not result in off-setting revenue
until a subsequent quarter. New product introductions can also result in a
mismatching of research and development expenses and sales and marketing
expenses that are incurred in one quarter with revenues that are not recognized
until a subsequent quarter when the new product is introduced. If growth in our
revenues does not outpace the increase in our expenses, our results of
operations could be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not rely
on our results for one quarter as any indication of our future performance. It
is likely that in future quarters our operating results may be below the
expectations of public market analysts or investors. If this occurs, the price
of our common stock would likely decrease.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
PROSPECTS.
We are an early-stage company in the emerging photonic processor market. We
were first incorporated on October 24, 1997. Because of our limited operating
history, we have limited insight into trends that may emerge in our market and
affect our business. The revenue and income potential of the photonic processor
market, and our business in particular, are unproven. We began shipping our
PowerFilter and PowerMux products to customers for evaluation in April 1999.
Volume shipments of PowerFilter did not commence until the quarter ended
September 30, 1999; while volume shipments of PowerMux did not commence until
the quarter ended June 30, 2000. In addition, we only began shipping our
PowerShaper product for beta testing purposes in the quarter ended March 31,
2000. As a result of our limited operating history, we have limited financial
data that you can use to evaluate our business. You must consider our prospects
in light of the risks, expenses and challenges we might encounter because we are
at an early stage of development in a new and rapidly evolving market.
WE MUST RAPIDLY EXPAND OUR MANUFACTURING CAPACITY OR WE WILL NOT BE ABLE TO
DELIVER OUR PRODUCTS TO OUR CUSTOMERS IN A TIMELY MANNER.
We must devote significant resources in order to expand our manufacturing
capacity. We have very limited experience in rapidly increasing our
manufacturing capacity or in manufacturing products at high volumes, and we only
commenced manufacturing operations in the quarter ended June 30, 1999. We will
be required to hire, train and manage significant numbers of additional
manufacturing personnel in order to increase our production capacity. We
currently have some of our subcomponents manufactured by CMI. In addition, we
plan to have some of our subcomponents and products manufactured by additional
third party contract manufacturers. Expanding our manufacturing capacity at
different facilities, some of which will be in foreign countries such as China,
will be expensive and will require management's time. There are numerous risks
associated with rapidly increasing capacity, including:
- The inability to procure and install the necessary equipment;
- Lack of availability of manufacturing personnel;
- Difficulties in achieving adequate yields from new manufacturing lines;
and
- The inability to match future order volumes with capacity.
If we are unable to expand our manufacturing capacity in a timely manner or
if we do not accurately project demand, we will have excess capacity or
insufficient capacity, either of which will seriously harm our business.
Our planned manufacturing expansion and related capital expenditures are
being made in anticipation of a level of customer orders that may not be
realized or, if realized, may not be sustained over multiple quarters.
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<PAGE> 19
If anticipated levels of customer orders are not received, our gross margins
will decline and we will not be able to reduce our operating expenses quickly
enough to prevent a decline in our operating results.
IF WE FAIL TO PREDICT OUR MANUFACTURING REQUIREMENTS ACCURATELY, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS, WHICH COULD CAUSE US TO
LOSE ORDERS OR CUSTOMERS AND RESULT IN LOWER REVENUES.
We currently use a rolling 12-month forecast based primarily on our
anticipated product orders and our limited product order history to determine
our requirements for components and materials. We provide these forecasts to CMI
and use them internally as well. It is very important that we accurately predict
both the demand for our products and the lead time required to obtain the
necessary components and raw materials. Lead times for materials and components
that we order vary significantly and depend on factors such as the specific
supplier, the size of the order, contract terms and demand for each component at
a given time. If we underestimate our requirements, we and CMI may have
inadequate manufacturing capacity or inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenues. If
we overestimate our requirements, we could have excess inventory of parts as
well as over-capitalized manufacturing facilities. We also may experience
shortages of components from time to time, which also could delay the
manufacturing of our products and could cause us to lose orders or customers.
WE WILL NOT ATTRACT ORDERS AND CUSTOMERS OR WE MAY LOSE CURRENT ORDERS AND
CUSTOMERS AND WILL NOT BE SUCCESSFUL IN OUR INDUSTRY IF WE ARE UNABLE TO COMMIT
TO DELIVER SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SATISFY MAJOR CUSTOMERS'
NEEDS.
Communications service providers and optical systems manufacturers
typically require that suppliers commit to provide specified quantities of
products over a given period of time. If we are unable to commit to deliver
sufficient quantities of our products to satisfy a customer's anticipated needs,
we will lose the order and the opportunity for significant sales to that
customer for a lengthy period of time. We are just beginning to receive orders
for significant quantities of products while simultaneously increasing our
manufacturing capacity. We would be unable to pursue many large orders if we do
not have sufficient manufacturing capacity to enable us to commit to provide
customers with specified quantities of products.
OUR DEPENDENCE ON INDEPENDENT MANUFACTURERS MAY RESULT IN PRODUCT DELIVERY
DELAYS.
We purchase subcomponents that are incorporated into our products from CMI,
and we intend to enter into similar arrangements in the future with other
independent manufacturers. If these vendors fail to supply us with their
subcomponents on a timely basis, we could experience significant delays in
shipping our products. Any significant interruption in the supply or support of
any subcomponents could seriously harm our sales.
CMI has a limited history of manufacturing optical subcomponents. Any
interruption in the operations of CMI could harm our ability to meet our
scheduled product deliveries to our customers, which could cause the loss of
existing or potential customers. In addition, the products that CMI builds for
us may be insufficient in quality or in quantity to meet our needs. The
inability of CMI to provide us with adequate supplies of high-quality products
in the future could cause a delay in our ability to fulfill customer orders
while we obtain a replacement manufacturer and could seriously harm our
business.
To successfully meet our overall production goals, we will also have to
coordinate effectively our operations in California and CMI's operations in
China. We have very limited experience in coordinating and managing production
operations that are located on different continents or in the transfer of
manufacturing operations from one facility to another. The geographic distance
between our headquarters in California and CMI's manufacturing facility in China
will make it difficult for us to manage the relationship and oversee operations
there to assure product quality and timely delivery. Our failure to successfully
coordinate and manage multiple sites or to transfer our manufacturing operations
could seriously harm our overall production.
Because CMI's manufacturing facility is located in China, CMI will be
subject to the risk of political instability in China and the possible
imposition of restrictive trade regulations and tariffs. We will also be
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<PAGE> 20
exposed to risks of foreign currency exchange rate fluctuations and lack of
adequate protection of intellectual property under Chinese law.
UNDER OUR LICENSE AGREEMENT WITH CMI, CMI CAN MANUFACTURE AND SELL OPTICAL
SUBCOMPONENTS BASED ON OUR TECHNOLOGY TO OUR POTENTIAL COMPETITORS, WHICH COULD
HARM OUR MARKET POSITION IN THE FUTURE.
Under the agreement with CMI, we have granted licenses to CMI to make in
China and the United States, and to use and sell worldwide, the licensed
subcomponents. We also granted them a license to use some of our technical
information and manufacturing process know-how in China and the United States.
These licenses are exclusive in China and non-exclusive elsewhere. As a result,
CMI can manufacture and sell optical subcomponents based on our technology to
third parties, including our potential competitors. Furthermore, unless the
license is terminated, we cannot use an additional manufacturer to produce these
subcomponents in China.
IF WE FAIL TO EFFECTIVELY MANAGE OUR FINANCIAL AND MANAGERIAL CONTROLS,
REPORTING SYSTEMS AND PROCEDURES AS WELL AS EXPAND, TRAIN AND MANAGE OUR
WORKFORCE, OUR BUSINESS MAY NOT SUCCEED.
We continue to expand the scope of our operations domestically and
internationally and have increased the number of our employees substantially. We
have grown from no revenue in the quarter ended March 31, 1999, and $510,000 in
the fiscal year ended June 30, 1999, to $40.7 million in the fiscal year ended
June 30, 2000. At March 31, 1999, we had a total of 45 employees, at October 1,
1999, we had a total of 132 employees and at September 1, 2000, we had 834
employees. In addition, we plan to hire a significant number of employees over
the next several quarters. We currently operate facilities in Fremont,
California and in Richardson, Texas, and CMI manufactures subcomponents for us
in China. We also have a sales office with a regional sales director and sales
manager in Newtown, Pennsylvania. In addition, we recently acquired
substantially all of the assets and certain liabilities of Holographix, Inc., a
Delaware corporation located in Hudson Massachusetts, which is now our
wholly-owned subsidiary. As of September 1, 2000, this subsidiary had 8
employees. The growth in employees and in revenue, combined with the challenges
of managing geographically-dispersed operations, has placed, and our anticipated
growth in future operations will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and procedures,
and will need to continue to expand, train and manage our work force worldwide.
However, we may not be able to install adequate control systems in an efficient
and timely manner, and our current or planned operational systems, procedures
and controls may not be adequate to support our future operations. Delays in the
implementation of new systems or operational disruptions when we transition to
new systems would impair our ability to accurately forecast sales demand, manage
our product inventory and record and report financial and management information
on a timely and accurate basis.
IF WE DO NOT REDUCE COSTS, INTRODUCE NEW PRODUCTS OR INCREASE SALES VOLUME, OUR
GROSS MARGIN MAY DECLINE.
We anticipate that the average selling prices of our products will decrease
and fluctuate in the future due to a number of factors, including competitive
pricing pressures, rapid technological change and sales discounts. Therefore, to
maintain or increase our gross margin, we must develop and introduce new
products and product enhancements on a timely basis. We must also continually
reduce our costs of production. As our average selling prices decline, we must
increase our unit sales volume to maintain or increase our revenue. To date, we
have not experienced any erosion in the average selling prices of our products,
but we expect such price erosion in the future. We cannot be certain that the
expected erosion in the average selling prices will not affect our business in
the future. If our average selling prices decline more rapidly than our costs of
production, our gross margin will decline, which could seriously harm our
business, financial condition and results of operations.
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 executed a long-term contract
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with one of our customers and expect to enter into additional long-term
contracts with other customers in the future, 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.
OUR PRODUCTS MAY HAVE DEFECTS THAT ARE NOT DETECTED UNTIL FULL DEPLOYMENT OF A
CUSTOMER'S SYSTEM, WHICH COULD RESULT IN A LOSS OF CUSTOMERS, DAMAGE TO OUR
REPUTATION AND SUBSTANTIAL COSTS.
Our products are designed to be deployed in large and complex optical
networks and must be compatible with other components of the system, both
current and future. In addition, our products may not operate as expected or
guaranteed over long periods of time. Our products can only be fully tested for
reliability when deployed in networks for long periods of time. Our customers
may discover errors, defects or incompatibilities in our products after they
have been fully deployed and operated under peak stress conditions. They may
also have errors, defects or incompatibilities that we find only after a system
upgrade is installed. If we are unable to fix errors or other problems, we could
experience:
- Loss of customers;
- Loss of or delay in revenues;
- Loss of market share;
- Loss or damage to our brand and reputation;
- Inability to attract new customers or achieve market acceptance;
- Diversion of development resources;
- Increased service and warranty costs;
- Legal actions by our customers; and
- Increased insurance costs.
In some of our contracts and agreements, we have agreed to indemnify our
customers against certain liabilities arising from defects in our products.
While we carry insurance policies covering this type of liability, these
policies may not provide sufficient protection should a claim be asserted. To
date, product defects have not had a material negative affect on our results of
operations. However, we cannot be certain that product defects will not have a
material negative affect on our results of operations in the future. A material
product liability claim may have significant consequences on our ability to
compete effectively and generate positive cash flow and may seriously harm our
business, financial condition and results of operations.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS IN A COST-EFFECTIVE MANNER
OR ACHIEVE SUFFICIENT PRODUCT RELIABILITY, THIS COULD DELAY PRODUCT SHIPMENTS TO
OUR CUSTOMERS OR REQUIRE US TO DEVELOP NEW MANUFACTURING PROCESSES, WHICH WOULD
IMPAIR OUR OPERATING RESULTS.
Manufacturing our products involves complex and precise processes. Changes
in our manufacturing processes or those of our suppliers, or their inadvertent
use of defective materials, could significantly reduce our manufacturing yields
and product reliability. Because the majority of our manufacturing costs are
relatively fixed, manufacturing yields are critical to our results of
operations. Lower than expected production yields could delay product shipments
and impair our gross margins. We may not obtain acceptable yields in the future.
In some cases, existing manufacturing techniques, which involve substantial
manual labor, may not allow us to cost-effectively meet our production goals so
that we maintain acceptable gross margins while meeting the cost targets of our
customers. We will need to develop new manufacturing processes and techniques
that will involve higher levels of automation to increase our gross margins and
achieve the targeted cost levels of our customers. We may not achieve
manufacturing cost levels that will fully satisfy customer demands.
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Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our product
development department to our manufacturing group and coordinate our efforts
with those of our suppliers to rapidly achieve volume production. If we fail to
effectively manage this process or if we experience delays, disruptions or
quality control problems in our manufacturing operations, our shipments of
products to our customers could be delayed.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OUR ABILITY
TO SELL OUR PRODUCTS COULD BE HARMED.
Our future success depends, in large part, on our ability to attract and
retain highly skilled personnel. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers, sales personnel
and marketing personnel, may seriously harm our business, financial condition
and results of operations. In particular, our future success depends upon the
continued services of our executive officers, particularly Walter Alessandrini,
our Chief Executive Officer, and Xiaofan (Simon) Cao, our Senior Vice President
of Product Development, and other key engineering, sales, marketing,
manufacturing and support personnel. None of our officers or key employees is
bound by an employment agreement for any specific term and these personnel may
terminate their employment at any time. In addition, we do not have "key person"
life insurance policies covering any of our employees.
As of September 1, 2000, we had 834 employees, and we must hire a
significant number of additional employees in the near future, particularly
engineering, sales and manufacturing personnel. Our ability to continue to
attract and retain highly skilled personnel will be a critical factor in
determining whether we will be successful in the future. Competition for highly
skilled personnel is intense, especially in the San Francisco Bay Area. We may
not be successful in attracting, assimilating or retaining qualified personnel
to fulfill our current or future needs. Our planned growth will place a
significant demand on our management and operational resources. Many of the
members of our management team have only been with us for a relatively short
period of time. For example, our Chief Executive Officer joined us in March
1999, and six of our eleven current executive officers have joined us since
then. Failure of the new management team to work effectively together could
seriously harm our business.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, THESE CLAIMS COULD DIVERT THE
ATTENTION OF OUR MANAGEMENT AWAY FROM OUR OPERATIONS AND COULD CAUSE US TO INCUR
SUBSTANTIAL COSTS IN DEFENDING OURSELVES.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
For instance, in December 1999, E-Tek Dynamics, Inc. (E-Tek), now a subsidiary
of JDS Uniphase, filed a lawsuit against us. E-Tek's complaint alleges that we
have participated in the illegal recruiting of E-Tek employees. Despite the fact
that we believe this complaint is without merit, we will incur costs in
defending this lawsuit, including management time and attention. We cannot
assure you that we will not receive claims of this kind in the future as we seek
to hire qualified personnel or that those claims will not result in litigation.
We could incur substantial costs in defending ourselves against these claims,
regardless of their merits or outcomes. In addition, defending ourselves from
these claims could divert the attention of our management away from our
operations.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD PREVENT US
FROM SUCCESSFULLY MANUFACTURING, MARKETING AND DISTRIBUTING OUR PRODUCTS
INTERNATIONALLY.
In addition to our contract manufacturing relationship with CMI, we intend
to expand our international operations in the future, including increasing the
number of our subcomponents manufactured overseas. Further, we intend to
increase our international sales and the number of our international customers.
This expansion will require significant management attention and financial
resources to develop successfully direct and indirect international sales and
support channels and manufacturing. We may not be able to establish or maintain
international market demand for our products. We currently have little or no
experience in manufacturing, marketing and distributing our products
internationally.
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In addition, international operations are subject to inherent risks,
including:
- Greater difficulty in accounts receivable collection and longer
collection periods;
- Difficulties and costs of staffing and managing foreign operations with
personnel who have expertise in optical network technology;
- Unexpected changes in regulatory or certification requirements for
optical systems or networks;
- Reduced protection for intellectual property rights in some countries,
including China, where some of our subcomponents will be manufactured;
and
- Political and economic instability.
While we expect our international revenues and expenses to be denominated
predominantly in U.S. dollars, a portion of our international revenues and
expenses may be denominated in foreign currencies in the future. Accordingly, we
could experience the risks of fluctuating currencies and could choose to engage
in currency hedging activities. We do not currently engage in currency hedging
activities to limit the risks of exchange rate fluctuations. Therefore,
fluctuations in the value of foreign currencies could have a negative impact on
the profitability of our global operations, which would seriously harm our
business, financial condition and results of operations.
BECAUSE WE DEPEND ON SINGLE OR LIMITED SOURCES OF SUPPLY WITH LONG LEAD TIMES
FOR SOME OF THE KEY COMPONENTS IN OUR PRODUCTS AND SOME OF OUR EQUIPMENT, WE
COULD ENCOUNTER DIFFICULTIES IN MEETING SCHEDULED PRODUCT DELIVERIES TO OUR
CUSTOMERS, WHICH COULD CAUSE CUSTOMERS TO CANCEL ORDERS.
We currently purchase several key components used in our products and
equipment from single or limited sources of supply, including Nippon Sheet
Glass, Hoya USA, Inc., CMI, Sumitomo Corporation of America, Casix, Inc.,
Browave Corporation, Agilent Technologies, and New Focus, Inc. These key
components include filters, lenses, specialty glass and test and measurement
equipment. We have no guaranteed supply arrangements with any of these suppliers
and we typically purchase our components and equipment through purchase orders.
We have experienced shortages and delays in obtaining components and equipment
in the past, which adversely impacted delivery of our products, and we may fail
to obtain these supplies in a timely manner in the future. Any interruption or
delay in the supply of any of these components or equipment, or the inability to
obtain these components or equipment from alternate sources at acceptable
prices, at acceptable quality and within a reasonable amount of time, would
impair our ability to meet scheduled product deliveries to our customers and
could cause customers to cancel orders. Lead times for components and equipment
vary significantly and depend on numerous factors at any given time, including
the specific supplier, specifications for the component or item of equipment,
the size of the order, contract terms and market demand for a component or item
of equipment. For substantial increases in production levels, suppliers may need
longer-than-normal lead times and some may need at least six months.
Furthermore, financial or other difficulties faced by these suppliers, or
significant changes in demand for these components and equipment, could limit
the availability of these components and equipment. In addition, a third party
could acquire control of one or more of our suppliers and cut off our access to
raw materials, components or equipment. For example, JDS Uniphase recently
acquired Casix, Inc., one of our critical suppliers of specialty glass.
Obtaining components and equipment from alternate suppliers is difficult because
we must qualify each new supplier, and this process is time-consuming and
expensive. Further is we change suppliers, our customers may require that our
products be requalified by them, which is also time consuming and expensive.
Because lead times for materials, components and equipment used in the
assembly of our products are long and vary significantly, we may have excess or
inadequate inventory of some materials, components and equipment if orders do
not match forecasts. Furthermore, if we change suppliers, our customers may
require that our products be re-qualified by them, which is time consuming and
expensive.
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OUR FACILITIES ARE VULNERABLE TO DAMAGE FROM EARTHQUAKES AND OTHER NATURAL
DISASTERS.
Our assembly facilities are located on or near known earthquake fault zones
and are vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. If such a disaster occurs, our
ability to assemble, test and ship our products would be seriously, if not
completely, impaired, which would seriously harm our business, financial
condition and results of operations. We cannot be sure that the insurance we
maintain against fires, floods, earthquakes and general business interruptions
will be adequate to cover our losses in any particular case.
WE COULD INCUR COSTS AND EXPERIENCE DISRUPTIONS COMPLYING WITH ENVIRONMENTAL
REGULATIONS.
We handle small amounts of hazardous materials as part of our manufacturing
activities, especially at our Holographix, Inc. subsidiary in Hudson
Massachusetts. Although we believe that we have complied to date 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.
WE DEPEND ON A SINGLE APPLICATION SERVICE PROVIDER FOR INFORMATION SYSTEMS AND
SERVICES, AND IF THERE IS A SERVICE INTERRUPTION, WE MAY HAVE DIFFICULTY IN
ACCESSING DATA THAT IS CRITICAL TO THE MANAGEMENT OF OUR BUSINESS.
We rely on a single application service provider, Aristasoft Corporation,
to provide an Internet-based management information system and support for this
system. Aristasoft recently began providing information systems and services to
us on a regular basis and we are one of their few customers. All of our
financial records and ordering and data tracking information are stored on
Aristasoft's computer system and are only accessible over the Internet. The
Internet has suffered from delays and outages in the past, which could make it
difficult for us to access our data. From time to time, we have experienced
difficulties and delays in accessing our data. Lack of direct control over our
management information system and delays in obtaining information when needed
could harm our business.
We do not have an agreement with Aristasoft requiring it to provide
services to us for any specified period, and they could terminate their
relationship with us on short notice. If we needed to qualify a new application
service provider, we might be unable to do so on a timely basis, or at all. The
services are provided on application and database servers located at offsite
data facilities and accessed via communications links from our facility. We
cannot be certain that Aristasoft will be able to manage a scalable and reliable
information technology infrastructure to support the growth of our business. If
they stop providing services to us or if there is a service interruption, our
ability to process orders, manufacture products, ship products, prepare invoices
and manage our day-to-day financial transactions would be harmed, and our
results of operations would suffer.
SALES OF OUR POWERFILTER AND POWERMUX PRODUCTS CURRENTLY REPRESENT NEARLY ALL OF
OUR REVENUES AND IF WE ARE UNSUCCESSFUL IN COMMERCIALLY SELLING OUR POWERSHAPER
PRODUCT, OUR REVENUES WILL NOT GROW SIGNIFICANTLY.
We currently offer only two products, PowerFilter and PowerMux. Sales of
our PowerFilter product accounted for 95% of our net revenue in the fiscal year
ended June 30, 1999 and 81% of our net revenue in the fiscal year ended June 30,
2000. Sales of our PowerMux product accounted for 5% of our net revenue in the
fiscal year ended June 30, 1999 and 18% of our net revenue in the fiscal year
ended June 30, 2000. We substantially depend on PowerFilter and PowerMux for our
near-term revenue. Although we have recently begun to sell our PowerShaper
product for beta testing, sales of this product to date have not represented a
significant portion of our revenue. Our customers who have purchased PowerShaper
products from us to date may not choose to purchase any additional products for
commercial use. Any decline in the price of, or demand for, our PowerFilter or
PowerMux products, or their failure to achieve broad market acceptance, would
seriously harm our business. In addition, we believe that our future growth and
a significant portion of our future revenue will depend on the broad commercial
success of our PowerMux and PowerShaper products. If our target customers do not
widely adopt, purchase and successfully deploy our products, our revenues will
not grow significantly and our business will be seriously harmed.
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OUR INABILITY TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS COULD PREVENT
US FROM INCREASING REVENUE.
The successful operation of our business depends on our ability to
anticipate market needs and to develop and introduce new products and product
enhancements that respond to technological changes or evolving industry
standards on a timely and cost-effective basis. Our products are complex, and
new products may take longer to develop than originally anticipated. These
products may contain defects or have unacceptable manufacturing yields 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 products into their system
could instead purchase products 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. We cannot be certain
that we will successfully develop and market these types of products and product
enhancements. In addition, our products could quickly become obsolete as new
technologies are introduced and incorporated into new and improved products. In
particular, we anticipate that our PowerMux product, which incorporates our
PowerFilter product and additional functionality, will replace our PowerFilter
product in most applications. We must continue to develop state-of-the-art
products and introduce them in the commercial market quickly in order to be
successful. We introduced our PowerShaper product, which is currently in the
beta testing stage, during the quarter ended December 31, 1999. Our failure to
produce technologically competitive products in a cost-effective manner and on a
timely basis will seriously harm our business, financial condition and results
of operations. In particular, any failure of PowerMux, PowerShaper or our other
future products to achieve market acceptance could significantly harm our
business.
WE MAY EXPERIENCE INCREASED COMPETITION FROM COMPANIES IN THE PHOTONIC PROCESSOR
MARKET AND IN THE OPTICAL SYSTEMS AND COMPONENT INDUSTRY, WHICH COULD CAUSE
REDUCED SALES LEVELS AND RESULT IN PRICE REDUCTIONS, REDUCED GROSS MARGINS OR
LOSS OF MARKET SHARE.
The markets we are targeting are new and rapidly evolving, and we expect
these markets to become highly competitive in the future. While we do not have
any direct competitors in the photonic processor market today, we anticipate
that other companies will expand into our market in the future, and introduce
competitive products. We also face indirect competition from public and private
companies providing products that address the same optical network problems that
our products address. The development of alternative solutions to optical
transmission problems by competitors, particularly systems companies who also
manufacture components, could significantly limit our growth.
WE EXPECT COMPETITION TO INCREASE.
Some companies in the optical systems and component industry may compete
with us in the future, including Lucent Technologies, Nortel Networks, Alcatel,
Fujitsu, E-Tek and JDS Uniphase, and some compete with us now using different
technologies. These are large public companies that have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, our competitors that have large market capitalizations or
cash reserves are much better positioned than we are to acquire other companies
in order to gain new technologies or products that may displace our product
lines. Any of these acquisitions could give our competitors a strategic
advantage. Many of our competitors and potential competitors have significantly
more established sales and customer support organizations than we do. In
addition, many of our competitors have much greater name recognition and have
more extensive customer bases, better developed distribution channels and
broader product offerings than our company. These companies can use their
customer bases and broader product offerings and adopt aggressive pricing
policies to gain market share. We expect to encounter potential customers that,
due to existing relationships with our competitors, are committed to the
products offered by these competitors. As a result, these potential customers
may not consider purchasing our products.
Existing and potential customers are also our potential competitors. These
customers may develop or acquire additional competitive products or technologies
in the future, which may cause them to reduce or
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cease their purchases from us. In addition, customers who are also competitors
may unfairly disparage our products in order to gain a competitive advantage.
As a result of these factors, we expect that competitive pressures will
intensify and may result in price reductions, reduced margins and loss of market
share.
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, three of our competitors, JDS
Fitel, Uniphase and E-Tek Dynamics, Inc. have merged. This merged company has
announced its intention to offer more integrated products that could make our
products less competitive, and it has recently announced a planned acquisition
of SDL, Inc. Our customers may prefer to purchase products from certain of our
competitors who offer a broader product line, which would negatively affect our
sales and operating results.
WE RELY ON A LIMITED NUMBER OF CUSTOMERS, AND ANY DECREASE IN REVENUES FROM, OR
LOSS OF, ONE OR MORE OF THESE CUSTOMERS WITHOUT A CORRESPONDING INCREASE IN
REVENUES FROM OTHER CUSTOMERS WOULD HARM OUR OPERATING RESULTS.
Our customer base is limited and highly concentrated. We began recognizing
revenues from sales of our products in the quarter ended June 30, 1999. Three
customers accounted for an aggregate of 94% of our net revenue in the quarter
ended June 30, 1999 and an aggregate of 98% of our net revenue in the quarter
ended June 30, 2000. MCI Telecommunications and MCI WORLDCOM, now collectively
WorldCom, accounted for 85% of our net revenue in the quarter ended December 31,
1999, 90% of our revenue in the quarter ended March 31, 2000, and 97% in the
quarter ended June 30, 2000. We expect that the majority of our revenues will
continue to depend on sales of our products to a small number of customers.
If current customers do not continue to place significant orders, we may
not be able to replace these orders. In addition, any downturn in the business
of existing customers could result in significantly decreased sales to these
customers, which could seriously harm our revenues and results of operations.
Sales to any single customer may vary significantly from quarter to
quarter. Customers in the communications industry tend to order large quantities
of products on an irregular basis. They base these orders on a decision to
deploy their system in a particular geographic area and may not order additional
products until they make their next major deployment decision. This means that
customers who account for a significant portion of our net revenue in one
quarter may not place any orders in the succeeding quarter. These ordering
patterns can result in significant quarterly fluctuations in our operating
results.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR PRODUCTS MAY BE DROPPED FROM SUPPLY PROGRAMS AND OUR OPERATING RESULTS COULD
SUFFER.
Customers generally will not purchase any of our products, other than
limited numbers of evaluation units, before they qualify our products, approve
our manufacturing process and approve our quality system. Our existing
manufacturing line, as well as each new manufacturing line, must pass through
various levels of approval with our customers. Customers may require that we be
registered and maintain registration under international quality standards, such
as ISO 9001. We successfully passed the registration audit for registration to
the ISO 9001 Quality standard at our Fremont, California facilities in
September, 2000. We expect to receive final, formal registration within the
quarter ended December 31, 2000. Our products may also have to be qualified to
specific customer requirements. This customer approval process determines
whether the manufacturing line achieves the customers' quality, performance and
reliability standards. In order for CMI and other potential contract
manufacturers to manufacture products or discrete components for us in the
future, their manufacturing may also need to be qualified by our customers.
Delays in product qualification or losing ISO 9001 registration may cause a
product to be dropped from a long-term supply program and result in significant
lost revenue opportunity over the term of that program.
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OUR LENGTHY AND VARIABLE QUALIFICATION AND SALES CYCLE MAKES IT DIFFICULT TO
PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE, WHICH MAY CAUSE US
TO HAVE EXCESS MANUFACTURING CAPACITY OR INVENTORY AND NEGATIVELY IMPACT OUR
OPERATING RESULTS.
Customers typically expend significant efforts in evaluating and qualifying
our products and manufacturing process. This evaluation and qualification
process frequently results in a lengthy sales cycle, typically ranging from
three to nine months and sometimes longer. While our customers are evaluating
our products and before they place an order with us, we may incur substantial
sales and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long-lead-time
supplies prior to receiving an order. Even after this evaluation process, it is
possible that a potential customer will not purchase our products for
deployment. In addition, product purchases are frequently subject to unplanned
processing and other delays, particularly with respect to larger customers for
which our products represent a very small percentage of their overall purchase
activity.
If we increase capacity and order supplies in anticipation of an order that
does not materialize, our gross margins will decline and we will have to carry
or write off excess inventory. Even if we receive an order, the additional
manufacturing capacity that we add to service the customer's requirements may be
underutilized in a subsequent quarter. Either situation could cause our results
of operations to be below the expectations of investors and public market
analysts, which could, in turn, cause the price of our common stock to decline.
Our long sales cycles, as well as the practice of companies in the
communications industry to sporadically place large orders with short lead
times, may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
In addition, we cannot be certain that the sales cycle for our products
will not lengthen in the future. In addition, the emerging and evolving nature
of the photonic processor market may cause prospective customers to delay their
purchase decisions as they evaluate new technologies and develop and implement
new systems. As the average order size for our products grows, the process for
approving purchases is likely to become more complex, leading to potential
delays in receipt of these orders. As a result, our long and unpredictable sales
cycle contributes to the uncertainty of our future operating results.
WE WILL LOSE SIGNIFICANT CUSTOMER SALES AND OPPORTUNITIES AND MAY NOT BE
SUCCESSFUL IF OUR CUSTOMERS DO NOT QUALIFY OUR PRODUCTS TO BE DESIGNED INTO
THEIR PRODUCTS AND SYSTEMS.
In the communications industry, service providers and optical systems
manufacturers often undertake extensive qualification processes prior to placing
orders for large quantities of products such as ours, because these products
must function as part of a larger system or network. Once they decide to use a
particular supplier's product or component, these potential customers design the
product into their system, which is known as a design-in win. Suppliers whose
products or components are not designed in are unlikely to make sales to that
company until at least the adoption of a future redesigned system. Even then,
many companies may be reluctant to design entirely new products into their new
systems, as it could involve significant additional redesign efforts. If we fail
to achieve design-in wins in our potential customer's qualification process, we
will lose the opportunity for significant sales to that customer for a lengthy
period of time.
IF CARRIERS FOR NEW TELECOMMUNICATIONS SYSTEMS DEPLOYMENTS DO NOT SELECT OUR
SYSTEMS-LEVEL CUSTOMERS, OUR SHIPMENTS AND REVENUES WILL BE REDUCED.
Sales of our components depend on sales of fiber optic telecommunications
systems by our systems-level customers, which are shipped in quantity when
telecommunications service providers, or carriers, add capacity. Systems
manufacturers compete for sales in each capacity deployment. If systems
manufacturers that use our products in their systems do not win a contract,
their demand for our products will decline, reducing our future revenues.
Similarly, a delay in selecting systems manufacturers for a deployment could
delay our shipments and revenues.
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SALES IN THE FUTURE TO CUSTOMERS BASED OUTSIDE THE UNITED STATES MAY ACCOUNT FOR
AN INCREASED PORTION OF OUR REVENUE, WHICH EXPOSES US TO RISKS INHERENT IN
INTERNATIONAL OPERATIONS.
Our increased international operations are subject to a variety of risks
associated with conducting business internationally any of which could seriously
harm our business, financial condition and results of operations. These risks
include
- Greater difficulty in accounts receivable collections;
- Import or export licensing and product certification requirements;
- Tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries;
- Potential adverse tax consequences, including restrictions on
repatriation of earnings;
- Fluctuations in currency exchange rates;
- Seasonal reductions in business activity in some parts of the world;
- Unexpected changes in regulatory requirements;
- Burdens of complying with a wide variety of foreign laws, particularly
with respect to intellectual property and license requirements;
- Difficulties and costs of staffing and managing foreign operations;
- Political instability;
- The impact of recessions in economies outside of the United States; and
- Limited ability to enforce agreements, intellectual property and other
rights in some foreign countries.
IF WE DO NOT SUBSTANTIALLY EXPAND OUR DIRECT AND INDIRECT SALES OPERATIONS, WE
MAY NOT BE ABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND OUR
REVENUES WILL SUFFER.
Our products and services require a long, involved sales effort targeted at
several departments within our prospective customers' organizations. Therefore,
our sales effort requires the prolonged efforts of executive personnel and
specialized system and application engineers working together with dedicated
salespersons in making sales. Because we have a relatively small number of
dedicated salespersons, we need to hire additional qualified sales personnel and
system and application engineers. Competition for these individuals is intense,
and we might not be able to hire the type and number of sales personnel and
system and application engineers we need.
In addition, we believe that our future success depends significantly on
our ability to establish relationships successfully with a variety of
distribution partners, such as original equipment manufacturers, value-added
resellers and distributors, both domestically and internationally. To date, we
have entered into agreements with two distributors in Japan, and we have entered
into agreements with one sales representative in Italy and one sales
representative in Israel. These distributors also sell products that compete
with our products. We cannot be certain that we will be able to reach agreement
with additional distribution partners or representatives on a timely basis or at
all, or that our distribution partners and representatives will devote adequate
resources to selling our products. Even if we enter into agreements with
additional distribution partners or representatives, they may not result in
increased product sales.
If we are unable to expand our direct and indirect sales operations, we may
not be able to increase market awareness or sales of our products, which may
prevent us from increasing our revenues.
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<PAGE> 29
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AS A WIDESPREAD COMMUNICATION AND
COMMERCE MEDIUM, DEMAND FOR OUR PRODUCTS MAY DECLINE SIGNIFICANTLY.
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communication and the continuing demand for
increased bandwidth over communications networks. If the Internet does not
continue to expand as a widespread communication medium and commercial
marketplace, the need for significantly increased bandwidth across networks and
the market for optical transmission products may not develop. As a result, it
would be unlikely that our products would achieve commercial success.
IF THE COMMUNICATIONS INDUSTRY DOES NOT ACHIEVE A RAPID AND WIDESPREAD
TRANSITION TO OPTICAL NETWORKS, OUR BUSINESS WILL NOT SUCCEED.
The market for our products is relatively new and evolving. Future demand
for our products is uncertain and will depend to a great degree on the speed of
the widespread adoption of optical networks. If the transition occurs too
slowly, the market for our products and the growth of our business will be
significantly limited.
OUR MARKET IS NEW AND IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND
EVOLVING STANDARDS, AND IF WE DO NOT RESPOND IN A TIMELY MANNER, OUR PRODUCTS
WILL NOT ACHIEVE MARKET ACCEPTANCE.
The communications market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted
within our industry. If the standards that are actually adopted are different
from those that we have chosen to support, our products may not achieve
significant market acceptance.
OUR STOCK PRICE IS HIGHLY VOLATILE.
The trading price of our common stock has fluctuated significantly since
our initial public offering in February 2000. In addition, the trading price of
our common stock could be subject to wide fluctuations in response to many
events or factors, including the following:
- Quarterly variations in our operating results;
- Changes in financial estimates by securities analysts;
- Changes in market valuations of Internet-related companies;
- Announcements by us or our competitors of technology innovations, new
products or of significant acquisitions, strategic partnerships or joint
ventures;
- Any loss by us of a major customer;
- Additions or departures of key management or engineering personnel;
- Any deviations in our net revenues or in losses from levels expected by
securities analysts;
- Future sales of our common stock; and
- Volume fluctuations, which are particularly common among highly volatile
securities of Internet-related companies.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of our common stock.
Furthermore, if our stockholders sell substantial amounts of our common
stock, including shares issued upon exercise of outstanding options or warrants,
in the public market during a short period of time, our stock price may decline
significantly.
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<PAGE> 30
WE MAY IN THE FUTURE BE THE TARGET OF SECURITIES CLASS ACTION OR OTHER
LITIGATION, WHICH COULD BE COSTLY AND TIME CONSUMING TO DEFEND.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be targeted for similar litigation. Our
acquisition activity may involve us in disputes from time to time. Litigation
that may arise from these disputes may lead to volatility in our stock price
and/or may result in our being the target of securities class action litigation.
Securities litigation may result in substantial costs and divert management's
attention and resources, which may seriously harm our business, financial
condition and results of operations.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, THIS TECHNOLOGY COULD BE
MISAPPROPRIATED, WHICH WOULD MAKE IT DIFFICULT TO COMPETE IN OUR INDUSTRY.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We cannot assure you that the 45 U.S. patent applications and nine foreign
patent applications that we have filed as of September 1, 2000 and have not been
approved will be approved. In addition, we can not assure you that any patents
that have been issued or may issue will protect our intellectual property or
that any patents issued will not be challenged by third parties. Much of our
intellectual property is held has trade secrets, which requires much more
monitoring and control mechanisms to protect. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use our products or technology. Monitoring unauthorized use of our products
is difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology. Further, other parties may independently
develop similar or competing technology or design around any patents that may be
issued to us. We use various methods to attempt to protect our intellectual
property rights. However, we cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property, particularly in
foreign countries, such as China, where the laws may not protect our proprietary
rights as fully as in the United States.
OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES,
WHICH MAY RESULT IN LAWSUITS AND PROHIBIT US FROM SELLING OUR PRODUCTS.
We believe there is a risk that third parties have filed, or will file
applications for, or have received or will receive, patents or obtain additional
intellectual property rights relating to materials or processes that we use or
propose to use. As a result, from time to time, third parties may assert
exclusive patent, copyright, trademark and other intellectual property rights to
technologies that are important to us. In addition, third parties may assert
claims or initiate litigation against us or our manufacturers, suppliers or
customers with respect to existing or future products, trademarks or other
proprietary rights. Any claims against us or customers that we indemnify against
intellectual property claims, with or without merit, may be time-consuming,
result in costly litigation and diversion of technical and management personnel
or require us to develop non-infringing technology. If a claim is successful, we
may be required to obtain a license or royalty agreement under the intellectual
property rights of those parties claiming the infringement. If we are unable to
obtain the license, we may be unable to market our products. Limitations on our
ability to market our products and delays and costs associated with monetary
damages and redesigns in compliance with an adverse judgment or settlement could
harm our business, financial condition and results of operations.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY BECOME UNAVAILABLE TO US OR
BECOME VERY EXPENSIVE, WE MAY BECOME UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT
ENHANCEMENTS, WHICH WOULD PREVENT US FROM OPERATING OUR CURRENT BUSINESS.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could prevent us from operating our business.
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<PAGE> 31
We license technology from Fujitsu Limited that is critical to our
PowerShaper product. The license agreement is subject to termination upon the
acquisition of more than a 50% interest in us by certain major communications
system suppliers. Thus, if we are acquired by any of these specified companies,
we will lose this license. The existence of this license termination provision
may have an anti-takeover effect in that it would discourage those specified
companies from acquiring us.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD DIVERT MANAGEMENT ATTENTION, CAUSE US TO INCUR SIGNIFICANT COSTS AND
PREVENT US FROM SELLING OR USING THE CHALLENGED TECHNOLOGY.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. As a result of the
proliferation of the Internet and other networking technologies, there has been,
and we expect that there will continue to be, an increasing amount of this
litigation in our industry. Many companies in the high-technology industry
aggressively use their patent portfolios to bring infringement claims against
their competitors. As a result, it is possible that we may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property, or we may be subject
to litigation to defend our intellectual property against infringement claims of
others. These claims and any resulting lawsuit, if successful, could subject us
to significant liability for damages and invalidation of our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or more
of the following:
- Stop selling, incorporating or using our products that use the challenged
intellectual property;
- Obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- Redesign the products that use the technology.
If we are forced to take any of these actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
IF WE ARE UNABLE TO RAISE ANY NEEDED ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO
GROW OUR BUSINESS, WHICH COULD LOWER THE VALUE OF YOUR INVESTMENT.
We may need to raise additional funds, and additional financing may not be
available on favorable terms, if at all. We may also require additional capital
to acquire or invest in complementary businesses or products or obtain the right
to use complementary technologies. The development and marketing of new products
and the expansion of our manufacturing facilities and associated support
personnel will require a significant commitment of resources. In addition, if
the market for photonic processors develops at a slower pace than we anticipate
or if we fail to establish significant market share and achieve a significantly
increased level of revenue, we may continue to incur significant operating
losses and utilize significant amounts of capital. If cash from available
sources is insufficient, or if cash is used for acquisitions or other
unanticipated uses, we may need to raise additional capital. We cannot be
certain that additional debt or equity capital will be available to us at all,
or that, if it is available, it will be on terms favorable to us. Any inability
to raise additional capital when we require it would seriously harm our
business. Any additional issuance of equity or equity-related securities will
dilute our existing stockholders' percentage ownership in us. In addition, if
our stockholders sell substantial amounts of our common stock, including shares
issued upon exercise of outstanding options or warrants, in the public market
during a short period of time, our stock price may decline significantly, which
would make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
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<PAGE> 32
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. For
example, in July 2000, we acquired substantially all of the assets of
Holographix Inc. 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.
OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS, DELAWARE LAW AND A LICENSE WE HAVE
WITH A THIRD PARTY CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE OF
CONTROL OF US.
Certain provisions of our certificate of incorporation and bylaws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
- Authorizing the board of directors to issue additional preferred stock;
- Prohibiting cumulative voting in the election of directors;
- Limiting the persons who may call special meetings of stockholders;
- Prohibiting stockholder action by written consent;
- Establishing advance notice requirements for nominations for election of
the board of directors, or for proposing matters that can be acted on by
stockholders at stockholder meetings; and
- Providing a staggered board of directors with staggered three-year terms
for each of three groups.
We are also subject certain provisions of Delaware law which could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met.
In addition, our license agreement with Fujitsu Limited could discourage
certain companies from making a bid to acquire us because it terminates if
certain major communications systems suppliers acquire us.
INSIDERS HAVE SUBSTANTIAL CONTROL OVER AND COULD DELAY OR PREVENT A CHANGE IN
OUR CORPORATE CONTROL, WHICH MAY NEGATIVELY AFFECT YOUR INVESTMENT.
As of September 1, 2000, our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned almost 50% of our
outstanding common stock. These stockholders, if acting together, would be able
to influence significantly all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions.
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<PAGE> 33
WE MAY NEVER PAY DIVIDENDS ON OUR CAPITAL STOCK.
We have never declared or paid any cash dividends on our capital stock, and
do not expect to pay any dividends in the foreseeable future.
ITEM 2. PROPERTIES
We occupy approximately 145,000 square feet of office, R&D and
Manufacturing space in Fremont, California. Building One, our Corporate
Headquarters and R&D building, is 54,000 square feet. Building Two, our
Manufacturing facility, is 91,000 square feet. The terms of the leases, recently
signed in 1999 and 2000, are for 10 years.
In addition to our principal facilities in Fremont, California, we also
lease space in Richardson, Texas and Hudson, Massachusetts. The current
Richardson facility is 7,000 square feet where we house our Photonic Center and
sales; shortly we will move these operations into a newly leased facility in the
Richardson area where we will occupy approximately 22,000 square feet. The
Hudson facility is approximately 10,000 square feet.
We believe that existing facilities are adequate for our needs through
February 2001 and are currently in the process of locating additional space to
meet our expected requirements thereafter. If we require additional space, we
believe that we will be able to secure such space on commercially reasonable
terms without undue operational disruption.
ITEM 3. LEGAL PROCEEDINGS
On December 7, 1999, before the effective date of our initial public
offering, E-Tek Dynamics, Inc. (E-Tek), now a subsidiary of JDS Uniphase, filed
a complaint with the Superior Court of California, County of Santa Clara. E-Tek
initially named us and Ma Li, a third party individual not associated with
Avanex Corporation, as defendants in the complaint. E-Tek has recently amended
its complaint to add Edward Ning, an employee of ours, as an additional named
defendant.
E-Tek's complaint alleges that we, through Ma Li and Edward Ning, have
participated in illegal recruitment of E-Tek employees. Specifically and without
limitation, E-Tek alleges that we worked through Edward Ning, who then worked
through Ma Li, to recruit and hire E-Tek employees in violation of Ma Li's
agreement with E-Tek. Ma Li has agreed to a permanent injunction, and E-Tek has
subsequently dismissed its case against Ma Li. E-Tek seeks a permanent
injunction, damages to be determined at trial, and costs and attorney's fees. We
believe that this allegation is without merit and intend to vigorously defend
against it. We believe that this complaint will not have a material effect on
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securityholders during the
fourth quarter of our 2000 fiscal year.
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<PAGE> 34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"AVNX." Public trading of our common stock commenced on February 4, 2000. Prior
to that time, there was no public market for our common stock. The following
table shows, for the periods indicated, the high and low per share closing
prices of common stock, as reported by the Nasdaq National Market:
FISCAL YEAR 2000
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Third Quarter (since February 4, 2000)................... $261.00 $145.00
Fourth Quarter........................................... $135.80 $ 54.13
</TABLE>
On September 1, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $152.00 per share. As of September 1, 2000, there
were approximately 41,450 stockholders of record of our common stock. We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings to fund the development and growth of our
business and do not anticipate paying any cash dividends in the foreseeable
future.
Our Registration Statement on Form S-1 (File No. 333-92097) was declared
effective on February 3, 2000 and we commenced our initial public offering
("IPO") on February 4, 2000. In the IPO, we sold an aggregate of 6,900,000
shares of common stock (including 900,000 shares sold in connection with the
exercise of the underwriters' over-allotment option) at $36.00 per share. The
sale of the shares of common stock generated aggregate gross proceeds of
approximately $248.4 million for the company. The aggregate net proceeds were
approximately $228.2 million, after deducting underwriting discounts and
commissions of approximately $17.4 million and directly paying expenses of the
offering of approximately $2.8 million. Concurrently with the completion of this
offering, we sold to Microsoft Corporation and MCI WorldCom Venture Fund, an
affiliate of WorldCom, an aggregate of 769,230 shares of our common stock for
$13.00 per share. The proceeds from the sales of these shares were approximately
$10 million. See "Recent Sales of Unregistered Securities" below.
Of the net proceeds, as of June 30, 2000, we used approximately $9.5
million for general corporate purposes, including working capital and capital
expenditures. Additionally, approximately $0.9 million of the proceeds were used
to repay debt and capital lease obligations.
In the future, we expect to use the net proceeds from the sale of the
common stock for general corporate purposes, including working capital and
capital expenditures. The amounts actually expended for such purposes may vary
significantly and will depend on a number of factors, including our future
revenues and cash generated by operations and the other factors described under
"Factors That May Affect Future Results." Accordingly, we retain broad
discretion in the allocation of the net proceeds of the offering. A portion of
the net proceeds may also be used to acquire or invest in complementary
businesses, technologies or product offerings; however, there are no current
material agreements or commitments with respect to any such activities.
RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1999 through June 30, 2000, we have issued unregistered
securities to a limited number of persons, as described below. None of these
transactions involved any underwriters, underwriting discounts or commissions,
or any public offering, and we believe that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated there under or Rule 701 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
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<PAGE> 35
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
(1) From inception through June 30, 2000 we granted stock options and
restricted stock purchase rights to acquire an aggregate of 25,271,310
shares of our common stock at prices ranging from $0.001 to $96.125 per
share to employees, consultants and directors pursuant to our 1998 Stock
Plan, as amended.
(2) From inception through June 30, 2000, we issued an aggregate of
20,889,241 shares of our common stock to employees, consultants and
directors pursuant to the exercise of options and restricted stock purchase
rights granted under our 1998 Stock Plan, as amended, for aggregate
consideration of approximately $5.9 million, which includes notes
receivables from stockholders.
(3) On July 8, 1999, in connection with a Revolving Credit and
Security Agreement, we issued a warrant to purchase 19,565 shares of Series
D preferred stock at an exercise price of $5.75 to Comerica Incorporated.
This warrant was net exercised on July 19, 2000 for 28,673 shares.*
(4) On September 14 and October 15, 1999, we sold 3,487,097 shares of
Series D preferred stock for $5.75 per share to a group of private
investors for an aggregate purchase price of $20,050,807.*
(5) On October 8, 1999, we granted under our 1998 Stock Plan, as
amended, a right to purchase an aggregate of 4,000 shares of common stock
to a consultant in consideration of past services rendered for an aggregate
value of $2,320.
(6) On December 10, 1999, we granted under our 1998 Stock Plan, as
amended, rights to purchase an aggregate of 60,000 shares of common stock
to consultants in consideration of past services rendered for an aggregate
value of $300,000.
(7) On January 14, 2000 we agreed to sell 769,230 shares of common
stock to corporate investors for an aggregate purchase price of
$10,000,000.
-------------------------
* Upon our initial public offering, the preferred shares and warrants in (3) and
(4) above were converted into common shares and warrants. Upon conversion,
they were affected by the 3-for-2 stock split effected in connection with the
company's re-incorporation into Delaware.
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<PAGE> 36
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24,
1997
(INCEPTION)
YEARS ENDED JUNE 30, TO
----------------------- JUNE 30,
2000 1999 1998
---------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $ 40,743 $ 510 $ --
Cost of revenue............................................ 26,343 (531) --
-------- ------- -------
Gross profit (loss)...................................... 14,400 (21) --
Operating expenses:
Research and development................................. 15,587 4,086 515
Sales and marketing...................................... 6,047 956 125
General and administrative............................... 5,702 723 131
Stock compensation....................................... 31,420 3,464 362
-------- ------- -------
Total operating expenses......................... 58,756 9,229 1,133
-------- ------- -------
Loss from operations....................................... (44,356) (9,250) (1,133)
Other income (expense), net................................ 5,671 29 (4)
-------- ------- -------
Net loss................................................... (38,685) (9,221) (1,137)
Stock accretion............................................ (37,743) -- --
-------- ------- -------
Net loss attributable to common stockholders............... $(76,428) $(9,221) $(1,137)
======== ======= =======
Basic and diluted net loss per common share................ $ (3.07) $ (4.97) $ (7.20)
======== ======= =======
Weighted-average shares used in computing basic and diluted
net loss per common share................................ 24,936 1,857 158
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
2000 1999 1998
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $184,321 $ 3,724 $2,874
Working capital............................................. 185,534 2,660 2,637
Total assets................................................ 278,141 6,816 3,339
Long-term obligations, excluding current portion............ 2,067 563 341
Redeemable convertible preferred stock...................... -- 10,357 3,529
Total other stockholders' equity (deficit).................. $257,157 $(6,534) $ (805)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our consolidated financial statements and related notes appearing elsewhere in
this Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those presented under "Factors That May Affect Future Results" and
elsewhere in this Annual Report on Form 10-K.
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<PAGE> 37
OVERVIEW
Avanex designs, manufactures and markets fiber optic-based products, known
as photonic processors, which are designed to increase the performance of
optical networks. We were founded in October 1997, and through April 1999, we
were primarily engaged in research and development activities and in hiring
additional employees. A substantial portion of our operating expenses during
this period was related to the design and development of our photonic processors
and the testing of prototype designs. We began making volume shipments of
certain of our products during the quarter ended October 1, 1999.
The revenues currently recognized are primarily derived from sales of two
products, PowerFilter and PowerMux. We commenced shipments of our PowerFilter in
April 1999. To date, we have generated most of our product revenues from sales
of PowerFilter to a limited number of customers. Sales of PowerFilter accounted
for 81% and 95% of our net revenue in the years ended June 30, 2000 and 1999,
respectively. We first shipped PowerMux in April 1999. In December 1999, we
began shipping beta test units of our PowerShaper product.
To date, we have generated a substantial portion of our revenues from a
limited number of customers. We have focused our initial sales and marketing
efforts primarily on large communications service providers and optical systems
manufacturers. Sales to WorldCom (formerly MCI Telecommunications and MCI
WORLDCOM, Inc.) accounted for 92% of our total net revenue for fiscal 2000. In
the fiscal year ended June 30, 1999, Osicom accounted for 33% of our net
revenue, WorldCom accounted for 32% of net revenue and Hitachi accounted for 29%
of net revenue. While we are seeking to diversify our customer base, we
anticipate that our operating results for any given period will continue to
depend on a small number of customers.
The market for photonic processors is new and evolving and the volume and
timing of orders are difficult to predict. A customer's decision to purchase our
products typically involves a commitment of its resources and a lengthy
evaluation and product qualification process. This initial evaluation and
product qualification process typically takes several months and includes
technical evaluation, integration, testing, planning and implementation into the
equipment design. Long sales and implementation cycles for our products, as well
as the practice of customers in the communications industry to sporadically
place large orders with short lead times, may cause our revenues, gross margins
and operating results to vary significantly and unexpectedly from quarter to
quarter.
We market and sell our products primarily through our direct sales and
marketing organization. For fiscal 2000, 95% of our direct sales have been in
North America. We also have sales and marketing efforts internationally through
two independent sales representatives in Italy and Israel and two distributors
in Japan.
We are engaged in continuing efforts to expand our manufacturing
capabilities. On June 30, 1999, we occupied an approximately 14,000 square foot
facility in Fremont, California. On June 30, 2000, we occupied approximately
145,000 square feet of Research and Development/Manufacturing space in Fremont,
California. Building One, our Corporate Headquarters and Research and
Development building, is 54,000 square feet. Building Two, our Manufacturing
facility, is 91,000 square feet. In addition to our principal office space in
Fremont, California, we also lease space in Richardson, Texas and Newtown,
Pennsylvania. The Richardson facility is 7,000 square feet where we house our
Photonic Center and main sales office and the Newtown office is our Eastern
Regional Sales office. In addition, we have entered into a contract
manufacturing relationship with CMI to manufacture optical subcomponents for us
in limited quantities at a facility in Tianjin, China. Currently we perform
manufacturing, final assembly, testing, quality assurance, manufacturing
engineering, documentation control and repairs of our products at our Fremont
facility.
We generally recognize revenue when we ship products to our customers,
title has transferred and there are no uncertainties with respect to customer
acceptance. For evaluation units where the customer has the right of return
through the end of the evaluation period, the company recognizes revenue on
these shipments at the end of the evaluation period, if not returned. We accrue
for estimated warranty costs and estimated returns at the time related revenue
is recognized. Currently, all of our product sales provide for pricing and
payment in U.S. dollars.
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Our cost of revenue consists of components and raw materials, direct labor,
warranty, royalty and manufacturing overhead. In addition, we rely on a single
or limited source of suppliers to manufacture some key components and raw
materials used in our products and, in the past, we relied on the outsourcing of
some subassemblies.
Our gross margins will primarily be affected by the following factors:
- Changes in manufacturing volume;
- Costs incurred in establishing additional manufacturing lines and
facilities;
- Mix of products sold;
- Changes in our pricing policies and those of our competitors;
- Mix of sales channels through which our products are sold; and
- Mix of domestic and international sales.
We expect cost of revenue, as a percentage of revenue, to fluctuate from
period to period.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
non-recurring engineering charges and prototype costs related to the design,
development, testing, pre-manufacturing and enhancement of our products. We
expense our research and development costs as they are incurred. We believe that
research and development is critical to our strategic product development
objectives. We further believe that, in order to meet the changing requirements
of our customers, we will need to fund investments in several development
projects in parallel. As a result, we expect our research and development
expenses to increase in dollar amount in the future.
Sales and marketing expenses consist primarily of marketing, sales,
customer service and application engineering support, as well as costs
associated with promotional and other marketing expenses. We intend to expand
our direct and indirect sales operations substantially, both domestically and
internationally. We expect that sales and marketing expenses will increase
substantially in dollar amount over the next year as we hire additional sales
and marketing personnel, initiate additional marketing programs to support our
products and establish sales offices in additional domestic and international
locations. We also expect to significantly expand our customer service and
support organization.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, legal and human resources
personnel, allocated facilities, recruiting expenses, professional fees and
other corporate expenses. We expect general and administrative expenses to
increase in dollar amount as we add personnel and incur additional costs related
to the growth of our business and our operation as a public company.
Stock compensation expense is a result of us selling restricted common
stock or granting stock options to our employees or consultants with purchase or
exercise prices per share determined to be below the deemed fair values per
share of our common stock for accounting purposes at the dates of purchase or
grant. We are amortizing deferred stock compensation over the period in which
our right to repurchase restricted stock lapses or the vesting period of the
applicable options, which, in each case, is generally a maximum of four years.
In connection with the sale of Series D preferred stock in September and
October 1999 to existing preferred stockholders, we recorded a non-cash charge
of $15.0 million in the quarter ended October 1, 1999 and recorded an additional
$5.1 million in the quarter ended December 31, 1999 to accrete the value of the
Series D preferred stock to its fair value under applicable accounting rules. A
$17.7 million charge was incurred in February 2000, in connection with the sale
of 769,230 shares of common stock to Microsoft Corporation and MCI WorldCom
Venture Fund, an affiliate of WorldCom, for $13.00 per share. The charge is
equal to the difference between the price of stock sold in the initial public
offering and $13, multiplied by the number of shares issued.
36
<PAGE> 39
Despite growing revenue, we have not been profitable for any quarter since
October 24, 1997 (inception). As of June 30, 2000, we had an accumulated deficit
of $86.8 million. These losses have resulted primarily from developing our
products, increasing manufacturing capacity, promoting brand recognition,
developing our sales channels, establishing our management team and amortizing
deferred stock compensation. As of June 30, 2000, we had net operating loss
carry-forwards for federal income tax purposes of approximately $16.6 million,
which expire in years 2013 through 2019.
Because of continuing and substantial capital expenditures and increasing
research and development, sales and marketing and general and administrative
expenses, we will need to generate significant revenue growth to achieve
profitability and positive operating cash flow. Even if we do achieve
profitability and positive cash flow, we may not be able to sustain or increase
profitability or positive operating cash flow on a quarterly or annual basis.
RESULTS OF OPERATIONS
For ease of reference, we refer to the fiscal years ended June 30, 2000 and
June 30, 1999 as fiscal 2000 and fiscal 1999, respectively. We refer to the
period from October 24, 1997 (inception) through June 30, 1998 as fiscal 1998.
COMPARISON OF FISCAL 2000 AND 1999
Net Revenue
Net revenue for fiscal 2000 was $40.7 million. One customer, WorldCom,
accounted for 92% of net revenue in fiscal 2000. Net revenue for fiscal 1999 was
$510,000. In fiscal 1999, Osicom accounted for 33% of net revenue, WorldCom
accounted for 32% of net revenue and Hitachi accounted for 29% of net revenue.
The increase in net revenues was primarily due to the fact that fiscal 2000 was
our first full year of product sales, during which we established acceptance of
our products with customers and we began volume shipments.
Cost of Revenue
Our cost of revenue increased to $26.3 million in fiscal 2000 from $531,000
in fiscal 1999. Gross profit (loss) percentages also increased on a
year-over-year basis, from gross loss of 4.1% for the year ended June 30, 1999
to gross profit of 35.3% for the year ended June 30, 2000. The increase in gross
profit (loss) was primarily the result of an increase in net revenue for the
period.
Research and Development
Research and development expense increased to $15.6 million in fiscal 2000
from $4.1 million in fiscal 1999. The absolute dollar increases in research and
development expenses from year to year were primarily attributable to increases
in the number of research and development personnel and related costs, pilot run
expense for PowerMux and PowerShaper and cost of other development projects. The
decrease in research and development expense as a percentage of net revenue,
from 801% in fiscal 1999 to 38% in fiscal 2000, was primarily the result of an
increase in our net revenue in fiscal 2000.
Sales and Marketing
Sales and marketing expenses increased to $6.0 million in fiscal 2000 from
$1.0 million in fiscal 1999. The absolute dollar increase in sales and marketing
expenses for fiscal 2000 as compared to fiscal 1999 was primarily the result of
an increase in personnel expenses for sales and marketing staff, increased
expenses related to customer support, increased sales commissions associated
with higher net revenue and increased promotional and product marketing
expenses. The decrease in sales and marketing expense as a percentage of net
revenue, from 187% in fiscal 1999 to 15% in fiscal 2000, was primarily the
result of an increase in our net revenue in fiscal 2000.
37
<PAGE> 40
General and Administrative
Our general and administrative expenses increased to $5.7 million in fiscal
2000 from $723,000 in fiscal 1999. This increase was primarily the result of
increased staffing for finance, management information systems, and human
resources, and growth in recruiting and facility related expenses. The decrease
in general and administrative expenses as a percentage of net revenue, from 142%
in fiscal 1999 to 14% in fiscal 2000, was primarily the result of an increase in
our net revenue in fiscal 2000.
Stock Compensation
Stock compensation expense increased to $31.4 million in fiscal 2000 from
$3.5 million in fiscal 1999. Through fiscal 2000, we have recorded a total of
$35.2 million of stock compensation expense, with an unamortized balance of
$36.1 million on our June 30, 2000 balance sheet. This increase was due to
granting of stock options and stock purchase rights to additional employees.
Other Income (Expense), Net
Other income (expense) increased to $5.7 million in fiscal 2000 from
$29,000 in fiscal 1999. This increase reflects an increase in interest income
generated from higher average cash and cash equivalents balances and investments
in short-term and long-term securities in fiscal 2000, which included the
proceeds from our initial public offering completed in February 2000. This
income is offset by interest expense associated with borrowings under our line
of credit.
COMPARISON OF FISCAL 1999 AND 1998
Net Revenue
We did not recognize any revenue until the quarter ended June 30, 1999. Net
revenue for fiscal 1999 was $510,000. In fiscal 1999, Osicom accounted for 33%
of net revenue, WorldCom accounted for 32% of net revenue and Hitachi accounted
for 29% of net revenue.
Cost of Revenue
Cost of revenue for fiscal 1999 was $531,000. Cost of revenue for fiscal
1999 included higher component and manufacturing costs associated with the lower
initial production volume, as well as overhead costs that were spread over a
relatively low number of units produced. As a percentage of revenue, cost of
revenue for fiscal 1999 was 104% of net revenue.
Research and Development
Research and development expenses increased to $4.1 million for fiscal
1999, from $515,000 in fiscal 1998. The increase in dollar amount in fiscal 1999
over fiscal 1998 was primarily due to the significant increase in personnel and
related costs, prototype expenses for PowerMux, PowerShaper and a network
testing model, and process development for PowerFilter.
Sales and Marketing
Sales and marketing expenses increased to $956,000 for fiscal 1999, from
$125,000 in fiscal 1998. This increase in dollar amount was primarily due to an
increase in the number of sales and marketing personnel, sales commissions,
increased marketing expenses and other customer-related costs.
General and Administrative
General and administrative expenses increased to $723,000 for fiscal 1999
from $131,000 in fiscal 1998. This increase was primarily due to an increase in
the number of general and administrative personnel and increased legal,
accounting, recruiting and facility cost incurred in connection with our growing
business activities.
38
<PAGE> 41
Stock Compensation
Stock compensation expense for fiscal 1999 was $3.5 million. Stock
compensation expense for fiscal 1998 was $362,000. This increase was due to
additional employees and additional grants to stock options and stock purchase
rights.
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest on our cash
investments and interest expense related to our financing obligations. Other
income (expense) for fiscal 1998 was $(4,000), for fiscal 1999 was $29,000. This
change was caused by an increase in interest income due to larger cash balances
resulting from the proceeds from the sale of our preferred stock in private
financings, which was partially offset by interest charges on capital lease
obligations and bank debt.
Quarterly Results of Operations. The following table presents our unaudited
quarterly operating results for the eight quarters ended June 30, 2000:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, OCTOBER 1, DECEMBER 31,
1998 1998 1999 1999 1999 1999
------------- ------------ --------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.................... $ -- $ -- $ -- $ 510 $ 4,417 $ 6,499
Cost of revenue................ -- -- -- 531 3,431 4,763
------- ------- ------- ------- -------- --------
Gross profit (loss).......... -- -- -- (21) 986 1,736
Operating expenses:
Research and development..... 473 954 1,432 1,227 950 2,038
Sales and marketing.......... 116 149 203 488 714 962
General and administrative... 132 112 150 329 614 1,515
Stock compensation........... 323 350 746 2,045 6,107 9,590
------- ------- ------- ------- -------- --------
Total operating
expenses............. 1,044 1,565 2,531 4,089 8,385 14,105
------- ------- ------- ------- -------- --------
Loss from operations........... (1,044) (1,565) (2,531) (4,110) (7,399) (12,369)
------- ------- ------- ------- -------- --------
Other income (expense), net.... 7 (5) 21 6 (71) 45
Net loss..................... (1,037) (1,570) (2,510) (4,104) (7,470) (12,324)
------- ------- ------- ------- -------- --------
Stock accretion................ -- -- -- -- (14,961) (5,090)
------- ------- ------- ------- -------- --------
Net loss attributable to common
stockholders................. $(1,037) $(1,570) $(2,510) $(4,104) $(22,431) $(17,414)
======= ======= ======= ======= ======== ========
<CAPTION>
QUARTER ENDED
--------------------
MARCH 31, JUNE 30,
2000 2000
--------- --------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.................... $ 10,505 $ 19,322
Cost of revenue................ 6,781 11,368
-------- --------
Gross profit (loss).......... 3,724 7,954
Operating expenses:
Research and development..... 5,018 7,581
Sales and marketing.......... 2,054 2,317
General and administrative... 1,482 2,091
Stock compensation........... 8,585 7,138
-------- --------
Total operating
expenses............. 17,139 19,127
-------- --------
Loss from operations........... (13,415) (11,173)
-------- --------
Other income (expense), net.... 1,950 3,747
Net loss..................... (11,465) (7,426)
-------- --------
Stock accretion................ (17,692) --
-------- --------
Net loss attributable to common
stockholders................. $(29,157) $ (7,426)
======== ========
</TABLE>
We believe this information reflects all adjustments (consisting only of
normal recurring adjustments) that we consider necessary for a fair presentation
of such information in accordance with generally accepted accounting principles.
The results for any quarter are not necessarily indicative of results for any
future period.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- Fluctuations in demand for and sales of our products;
- Cancellations of orders and shipment rescheduling;
- Our ability to significantly expand our manufacturing capacity at our new
facility in Fremont, California, which commenced operations in November
1999;
- The ability of CMI to timely produce and deliver subcomponents from its
facility in China in the quantity and of the quality we require;
- The practice of companies in the communications industry to sporadically
place large orders with short lead times;
- Competitive factors, including introductions of new products and product
enhancements by potential competitors, entry of new competitors into our
market and pricing pressures;
39
<PAGE> 42
- Our ability to develop, introduce, manufacture and ship new and enhanced
products in a timely manner without defects;
- Our ability to control expenses;
- Availability of components for our products and increases in the price of
these components;
- Mix of our products sold;
- Costs related to acquisitions of technology or businesses; and
- General economic conditions, as well as those specific to the
communications and related industries.
A high percentage of our expenses, including those related to
manufacturing, engineering, sales and marketing, research and development and
general and administrative functions, are essentially fixed in the short term.
As a result, if we experience delays in generating and recognizing revenue, our
quarterly operating results are likely to be seriously harmed. As we expand our
manufacturing capacity, we will incur expenses in one quarter relating to the
expansion and related yield issues that may not result in off-setting revenue
until a subsequent quarter. New product introductions can also result in a
mismatching of research and development expenses and sales and marketing
expenses that are incurred in one quarter with revenues that are not recognized
until a subsequent quarter when the new product is introduced. If growth in our
revenues does not outpace the increase in our expenses, our results of
operations could be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not rely
on our results for one quarter as any indication of our future performance.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations primarily
through private sales of approximately $30.4 million for convertible preferred
stock. We have also financed our operations through bank borrowings as well as
through equipment lease financing. In February 2000, we received proceeds of
approximately $238 million from the initial public offering of our common stock
and a concurrent sale of stock to corporate investors.
As of June 30, 2000, we had cash and cash equivalents and short-term
investments of $184.3 million and our long-term investment holdings of $56.9
million.
Cash used in operating activities was $10.1 million in fiscal 2000, $5.4
million in fiscal 1999 and $590,000 in fiscal 1998. The increase was primarily
due to the increase in our net loss to $38.7 million in fiscal 2000, which is up
from $9.2 million in fiscal 1999 and $1.1 million in fiscal 1998, and to a
lesser extent, inventory purchases and increased accounts receivable. This was
offset in part by increased accounts payable, accrued expenses and non-cash
charges.
Cash used in investing activities was $161.3 million in fiscal 2000, $2.8
million in fiscal 1999 and $301,000 in fiscal 1998. For fiscal 2000, cash used
in investing activities was primarily used for the investment of the initial
public offering proceeds in held-to-maturity securities. Additionally, cash was
used for the investment in production equipment, research and development
equipment, computers and facilities to support the expansion of our operations.
For fiscal 1999 and 1998, cash used in investing activities was primarily for
the investment in production equipment, research and development equipment,
computers and facilities to support the expansion of our operations.
We generated $260.6 million in cash from financing activities in fiscal
2000, $7.1 million in fiscal 1999 and $3.8 million in fiscal 1998. For fiscal
2000, cash provided by financing activities was attributable primarily to net
proceeds from the issuance of common stock principally through our initial
public offering and through the proceeds from the issuance of preferred stock.
For fiscal 1999 and 1998, cash provided by financing activities was attributable
to the proceeds from the issuance of preferred stock.
40
<PAGE> 43
We financed capital purchases through cash, leases or equipment credit
lines. We had capitalized lease obligations outstanding of $2.9 million at June
30, 2000 and $768,000 at June 30, 1999. In July 1999, we obtained a revolving
credit line from a financial institution, which allows for maximum borrowings up
to $3.8 million at an interest rate equal to the prime rate plus 0.75%. During
fiscal 2000, we drew down $2.2 million under this facility to pay off a previous
$735,000 outstanding bank debt in full and for working capital needs. This line
of credit requires that we comply with specified covenants.
In July 2000, the Company secured a revolving line of credit from a
financial institution, which allows maximum borrowings up to $10 million. The
revolving credit agreement terminates July 10, 2001, at which time all
outstanding principal and interest are due. The line bears interest at the prime
rate.
In connection with our expansion into a new manufacturing facility adjacent
to our headquarters in Fremont, California we have spent approximately $4.6
million for equipment and leasehold improvements in fiscal 2000. We signed a
lease for this new building in March 2000. As a result of our expansion into
this new building, our capital spending will continue to increase in future
periods.
Our capital requirements depend on market acceptance of our products, the
timing and extent of new product introductions and delivery, and the need for us
to develop, market, sell and support our products on a worldwide basis. From
time to time, we may also consider the acquisition of, or evaluate investments
in, products and businesses complementary to our business. Any acquisition or
investment may require additional capital. Although we believe that our current
cash and cash equivalents, short-term and long-term investment balance will be
sufficient to fund our operations for at least the next 12 months, we cannot
assure you that we will not seek additional funds through public or private
equity or debt financing or from other sources within this time frame or that
additional funding, if needed, will be available on terms acceptable to us, or
at all.
On July 25, 2000, the Company completed its acquisition of Holographix,
Inc. ("Holographix"), in a transaction accounted for using the purchase method
of accounting. The Company issued 501,880 Avanex common shares and 287,952
Avanex stock options for substantially all of the assets and certain liabilities
of Holographix as of July 25, 2000. The total estimated purchase cost of
Holographix is as follows (in thousands):
<TABLE>
<S> <C>
Value of securities issued................................. $40,287
Assumption of Holographix options.......................... $23,112
-------
$63,399
Estimated transaction costs and expenses................... 2,924
-------
$66,323
=======
</TABLE>
The Company will record a charge for in-process research and development in
the quarter ended September 30, 2000 estimated at $4.7 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which provides for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for our next fiscal year, beginning
July 1, 2000, and is not anticipated to have an impact on our results of
operations or financial position when adopted as we hold no derivative financial
instruments and do not currently engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This summarizes some of the commission's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
Due to the complex nature of the implementation of SAB 101, the SEC has deferred
the implementation. SAB 101 will be effective in the fourth quarter of fiscal
2001 with retroactive application to the beginning of the fiscal year. The SEC
intends to issue further guidance on the implementation of SAB 101. Although we
cannot fully assess the impact, we currently believe that our current revenue
recognition principles comply with the SAB 101.
41
<PAGE> 44
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44 is
effective on July 1, 2000. FIN 44 provides guidance for certain issues arising
in the application of APB 25 "Accounting for Stock Issued to Employees." The
Company believes that its accounting policy for stock issued to employees is in
compliance with FIN 44 as of June 30, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We place our investments with high credit issuers
in short-term and long-term securities with maturities ranging from overnight up
to 24 months. The average maturity of the portfolio does not exceed 18 months.
The portfolio includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity. We have no investments denominated
in foreign country currencies and therefore our investments are not subject to
foreign exchange risk.
The following table summarizes the expected maturity, average interest rate
and fair market value of the short-term and long-term securities held by the
Company as of June 30, 2000 (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
--------------- TOTAL FAIR
AMORTIZED MARKET
2001 2002 COST VALUE
------ ------ --------- -------
<S> <C> <C> <C> <C>
Held-to-maturity securities................ 93,357 56,943 150,300 148,277
Average interest rate...................... 6.6% 7.1%
</TABLE>
42
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors...... 44
Consolidated Balance Sheets............................ 45
Consolidated Statements of Operations.................. 46
Consolidated Statements of Other Stockholders'
Equity................................................ 47
Consolidated Statements of Cash Flows.................. 48
Notes to Consolidated Financial Statements.................. 49
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts..... 64
</TABLE>
43
<PAGE> 46
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Avanex Corporation
We have audited the accompanying consolidated balance sheets of Avanex
Corporation and its subsidiaries (the "Company") as of June 30, 2000 and 1999,
and the related consolidated statements of operations, other stockholders'
equity (deficit), and cash flows for the years ended June 30, 2000 and 1999 and
for the period from October 24, 1997 (inception) to June 30, 1998. Our audits
also include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Avanex
Corporation and its subsidiaries at June 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for the years ended June 30, 2000
and 1999 and for the period from October 24, 1997 (inception) to June 30, 1998,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
July 25, 2000
44
<PAGE> 47
AVANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 90,964 $ 1,756
Short-term investments.................................... 93,357 1,968
Accounts receivable (net of allowance for doubtful
accounts of $452 at June 30, 2000 and $30 at June 30,
1999).................................................. 9,942 272
Inventories............................................... 8,266 626
Other current assets...................................... 1,922 468
-------- --------
Total current assets................................... 204,451 5,090
Property and equipment, net................................. 14,990 1,671
Long-term investments....................................... 56,943 --
Other assets................................................ 1,757 55
-------- --------
Total assets........................................... $278,141 $ 6,816
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings..................................... $ 1,525 $ 735
Accounts payable.......................................... 7,668 990
Accrued compensation and related expenses................. 2,999 242
Warranty provision........................................ 1,941 51
Other accrued expenses.................................... 2,045 207
Deferred revenue.......................................... 1,953 --
Current portion of capital lease obligations.............. 786 205
-------- --------
Total current liabilities.............................. 18,917 2,430
-------- --------
Capital lease obligations................................... 2,067 563
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value,
none and 38,100,000 shares authorized at June 30, 2000 and
1999; respectively; none and 29,788,489 shares issued and
outstanding at June 30, 2000 and 1999, respectively,
(stated at liquidation preference)........................ -- 10,357
Other stockholders' equity (deficit):
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding at June
30, 2000 and 1999...................................... -- --
Common stock, $0.001 par value, 300,000,000 and 75,000,000
shares authorized at June 30, 2000 and 1999,
respectively; 64,261,593 and 18,141,290 shares issued
and outstanding at June 30, 2000 and 1999,
respectively........................................... 64 18
Additional paid-in capital................................ 385,198 14,483
Notes receivable from stockholders........................ (5,173) (326)
Deferred compensation..................................... (36,146) (10,351)
Accumulated deficit....................................... (86,786) (10,358)
-------- --------
Total other stockholders' equity (deficit)............. 257,157 (6,534)
-------- --------
Total liabilities and stockholders' equity (deficit)... $278,141 $ 6,816
======== ========
</TABLE>
See accompanying notes.
45
<PAGE> 48
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24,
1997
(INCEPTION)
YEARS ENDED JUNE 30, TO
------------------------- JUNE 30,
2000 1999 1998
----------- ---------- -----------
<S> <C> <C> <C>
Net revenue........................................... $ 40,743 $ 510 $ --
Cost of revenue....................................... 26,343 531 --
----------- ---------- -------
Gross profit (loss)................................... 14,400 (21) --
Operating expenses:
Research and development............................ 15,587 4,086 515
Sales and marketing................................. 6,047 956 125
General and administrative.......................... 5,702 723 131
Stock compensation.................................. 31,420 3,464 362
----------- ---------- -------
Total operating expenses.................... 58,756 9,229 1,133
----------- ---------- -------
Loss from operations.................................. (44,356) (9,250) (1,133)
Interest income....................................... 6,366 148 --
Interest expense...................................... (695) (119) (4)
----------- ---------- -------
Net loss.............................................. (38,685) (9,221) (1,137)
Stock accretion....................................... (37,743) -- --
----------- ---------- -------
Net loss attributable to common stockholders.......... $ (76,428) $ (9,221) $(1,137)
=========== ========== =======
Basic and diluted net loss per common share........... $ (3.07) $ (4.97) $ (7.20)
=========== ========== =======
Weighted-average shares used in computing basic and
diluted net loss per common share................... 24,935,690 1,856,688 157,831
=========== ========== =======
</TABLE>
See accompanying notes.
46
<PAGE> 49
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF OTHER STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES TOTAL OTHER
ADDITIONAL RECEIVABLE STOCKHOLDERS'
COMMON PAID-IN FROM DEFERRED ACCUMULATED EQUITY
STOCK CAPITAL STOCKHOLDERS COMPENSATION DEFICIT (DEFICIT)
------ ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 2,700,000 shares of common stock to
founder...................................... $ 3 $ (1) $ -- $ -- $ -- $ 2
Issuance of 4,050,000 shares of common stock
upon exercise of share purchase rights....... 4 5 (6) -- -- 3
Issuance of 300,000 shares of common stock..... -- 1 -- -- -- 1
Issuance costs associated with issuance of
preferred shares............................. -- (36) -- -- -- (36)
Deferred compensation.......................... -- 2,136 -- (2,136) -- --
Amortization of deferred compensation.......... -- -- -- 362 -- 362
Net loss....................................... -- -- -- -- (1,137) (1,137)
--- -------- ------- -------- -------- --------
Balance at June 30, 1998................... 7 2,105 (6) (1,774) (1,137) (805)
Issuance of 11,129,190 shares of common stock
upon exercise of stock options and share
purchase rights.............................. 11 350 (342) -- -- 19
Repurchase of 37,899 shares of common stock.... -- -- -- -- -- --
Issuance of common stock options to
consultants.................................. -- 539 -- -- -- 539
Deferred compensation.......................... -- 11,502 -- (11,502) -- --
Amortization of deferred compensation.......... -- -- -- 2,925 -- 2,925
Net loss....................................... -- -- -- -- (9,221) (9,221)
Other.......................................... -- (13) 22 -- -- 9
--- -------- ------- -------- -------- --------
Balance at June 30, 1999................... 18 14,483 (326) (10,351) (10,358) (6,534)
Issuance of 35,019,134 shares of common stock
to preferred stockholders upon conversion.... 35 30,373 -- -- -- 30,408
Sale of 6,900,000 shares of common stock upon
the completion of initial public offering,
net of issuance costs of $2,812.............. 7 228,200 -- -- -- 228,207
Sale of 769,230 shares of common stock to
corporate investors, concurrent with the
initial public offering...................... 1 9,999 -- -- -- 10,000
Issuance of 5,710,062 shares of common stock
upon exercise of stock options and share
purchase rights.............................. 6 5,489 (4,880) -- -- 615
Repurchase of 2,615,624 shares of common
stock........................................ (3) (32) 33 -- -- (2)
Issuance of warrants........................... -- 118 -- -- -- 118
Issuance of 337,500 shares of common stock upon
the exercise of warrants..................... -- 1,349 -- -- -- 1,349
Issuance of common stock options to
consultants.................................. -- 3,707 -- -- -- 3,707
Stock accretion................................ -- 37,743 -- -- (37,743) --
Deferred compensation.......................... -- 53,508 -- (53,508) -- --
Amortization of deferred compensation.......... -- -- -- 27,713 -- 27,713
Net loss....................................... -- -- -- -- (38,685) (38,685)
Other.......................................... -- 261 -- -- -- 261
--- -------- ------- -------- -------- --------
Balance at June 30, 2000................... $64 $385,198 $(5,173) $(36,146) $(86,786) $257,157
=== ======== ======= ======== ======== ========
</TABLE>
See accompanying notes.
47
<PAGE> 50
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24,
1997
(INCEPTION)
YEARS ENDED JUNE 30, TO
-------------------- JUNE 30,
2000 1999 1998
--------- ------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (38,685) $(9,221) $(1,137)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 1,869 102 21
Amortization.............................................. 676 278 12
Stock compensation expense................................ 31,420 3,464 364
Other..................................................... -- 22 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (9,670) (272) --
Inventories............................................ (7,640) (626) --
Other current assets................................... (1,454) (431) (37)
Other assets........................................... (1,702) (35) (20)
Accounts payable....................................... 6,678 893 97
Accrued compensation and related expenses.............. 2,757 176 66
Warranty provision..................................... 1,890 51 --
Other accrued expenses and deferred revenue............ 3,791 163 44
--------- ------- -------
Net cash used in operating activities............. (10,070) (5,436) (590)
INVESTING ACTIVITIES
Purchases of available-for-sale securities.................. -- (3,968) --
Maturities of available-for-sale securities................. 1,968 2,000 --
Purchases of held-to-maturity securities.................... (167,538) -- --
Maturities of held-to-maturity securities................... 17,238 -- --
Purchases of property and equipment......................... (12,985) (863) (301)
--------- ------- -------
Net cash used for investing activities............ (161,317) (2,831) (301)
FINANCING ACTIVITIES
Payments on debt and capital lease obligations.............. (2,036) (135) (17)
Proceeds from issuance of convertible notes payable......... -- -- 50
Proceeds from short-term and long-term debt................. 2,150 450 285
Proceeds from issuance of common stock...................... 240,169 19 4
Other....................................................... 285 -- --
Net proceeds from issuance of preferred stock............... 20,027 6,815 3,443
--------- ------- -------
Net cash provided by financing activities......... 260,595 7,149 3,765
--------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 89,208 (1,118) 2,874
Cash and cash equivalents at beginning of period............ 1,756 2,874 --
--------- ------- -------
Cash and cash equivalents at end of period.................. $ 90,964 $ 1,756 $ 2,874
========= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Equipment acquired under capital leases..................... $ 2,761 $ 780 $ 140
========= ======= =======
Conversion of notes payable to convertible preferred
stock..................................................... $ 30,408 $ -- $ 50
========= ======= =======
Common stock issued for notes receivable.................... $ 4,880 $ 342 $ 6
========= ======= =======
Stock accretion............................................. $ 37,743 $ -- $ --
========= ======= =======
Warrants issued in connection with securing a line of
credit.................................................... $ 118 $ -- $ --
========= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid............................................... $ 533 $ 117 $ 2
========= ======= =======
</TABLE>
See accompanying notes
48
<PAGE> 51
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Avanex Corporation (the "Company") was incorporated on October 24, 1997.
The Company manufactures and markets fiber optic-based products, known as
photonic processors, which are designed to increase the performance of optical
networks.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value. The
Company generally invests its excess cash in debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any significant losses on its cash and cash equivalents.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, employee receivables,
accounts payable, accrued expenses and short-term borrowings approximates fair
value.
Investments
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. As of June
30, 2000, the Company has designated all of its investments as held-to-maturity.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
based upon quoted market prices of the securities, with the unrealized gains and
losses reported in a separate component of other stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and interest on the securities
are included in interest income. The cost of securities sold is based on the
specific identification method.
Gross unrealized gains and losses and realized gains and losses on
securities have not been significant to date. There have been no sales of
short-term or long-term investments to date.
49
<PAGE> 52
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
Financial instruments, which subject the Company to potential credit risk,
consist of demand deposit accounts, money market accounts, short-term and
long-term investments, employee receivables and accounts receivable. The Company
maintains its demand deposit accounts, money market accounts and short-term and
long-term investments primarily with two financial institutions. The Company
invests its excess cash principally in debt securities.
The Company sells primarily to large communication vendors. The Company
extends reasonably short collection terms but does not require collateral. The
Company provides reserves for potential credit losses. The Company has not
experienced significant losses to date. Management believes the financial risks
associated with these financial instruments are minimal.
For the year ended June 30, 2000, one customer individually accounted for
92% of net revenue. International revenue was not significant for the year ended
June 30, 2000. Outstanding receivables from this customer approximated 87% of
total gross accounts receivable at June 30, 2000. For the year ended June 30,
1999, three customers each individually accounted for over 10% of net revenue,
for an aggregate of approximately 94% of net revenue. One customer, representing
29% of revenue for the year ended June 30, 1999 is located in Japan. Outstanding
receivables from these customers approximated 98% of total gross receivables at
June 30, 1999.
Revenue Recognition
The Company generally recognizes product revenue when the product has been
shipped, title has been transferred and there are no uncertainties with respect
to customer acceptance. For evaluation units where the customer has the right of
return through the end of the evaluation period, the Company recognizes revenue
on these shipments at the end of the evaluation period, if not returned. The
Company accrues for warranty costs and estimated sales returns at the time
revenue is recognized.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the useful lives of the assets, generally two to five
years.
Equipment under Capital Leases
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of the
assets under lease. Assets under capital leases are amortized over the shorter
of the lease term or useful life of the assets.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-Based Compensation
As permitted by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and related interpretations in accounting for
its stock option grants and share purchase rights to employees. Accordingly,
deferred compensation is recognized for the difference between the option price
or share purchase right at the date of grant and the deemed fair value of the
Company's common shares at that date when the option or share
50
<PAGE> 53
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchase right exercise price is less than the fair value of the common shares.
Such deferred compensation is amortized over the vesting period, generally a
maximum of four years. Option grants to all others are accounted for under the
fair value method prescribed by FAS 123.
Inventories
Inventories consist of raw materials, work-in-process and finished goods
and are stated at the lower of cost or market. Cost is computed on a currently
adjusted standard basis (which approximates actual costs on a first-in,
first-out basis).
Income Taxes
The Company uses the liability method to account for income taxes as
required by Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Comprehensive Income
The Company reports comprehensive income (loss) in accordance with the
FASB's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the years ended June 30,
2000 and 1999 and for the period ended June 30, 1998 does not differ from the
reported net loss.
Concentrations of Supply
The Company currently purchases several key parts and components used to
manufacture its products from limited sources of supply.
Concentrations of Sales
The Company's PowerFilter product accounted for 81% and 95% of net revenue
for the year ended June 30, 2000 and 1999.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended June 30, 2000 and 1999 and the period ended June 30, 1998
were $919,000, $76,000 and none, respectively, and are included in sales and
marketing expenses.
Segment Information
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews the Company's financial
information presented on a consolidated basis substantially similar to the
accompanying consolidated financial statements. Therefore, the Company has
concluded that it operates in one segment, to manufacture and market photonic
processors, and accordingly has provided only the required enterprise wide
disclosures.
Reincorporation
In January 2000, Avanex Corporation, a California Corporation, merged with
and into its wholly owned subsidiary, Avanex Corporation, a Delaware
Corporation, for the purpose of changing its state of incorporation
51
<PAGE> 54
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from California to Delaware (the "Reincorporation"). As part of the
Reincorporation, the shareholders of Avanex-California converted two shares of
common stock (or two shares of preferred stock) in Avanex-California for three
shares of Avanex-Delaware's common stock (or three shares of preferred stock) of
the Company, respectively. Avanex-Delaware succeeded to all of the rights,
powers and property of Avanex-California, including Avanex-California's 1998
Stock Plan, 1999 Director Plan and its 1999 Employee Stock Purchase Plan (the
"Benefit Plans"). The authorized shares under the Benefit Plans also increased
by one and a half times their previously authorized amounts. All references in
the financial statements and notes to number of shares and per share data, for
all prior periods presented, have been restated to reflect this event.
The Restated Certificate of Incorporation of Avanex-Delaware authorized 300
million shares of common stock ($0.001 par value) and 10 million shares of
preferred stock ($0.001 par value). Under the restated certificate, the
Company's board of directors has the authority, without further action by
stockholders, to issue some or all of the shares of preferred stock in one or
more series and to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon such preferred stock. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes new standards for recording derivatives in interim and
annual financial statements. This statement requires recording all derivative
instruments as assets or liabilities, measured at fair value. SFAS 133 is
effective for the Company's fiscal year beginning July 1, 2000. The Company
believes the adoption of SFAS 133 will not have an impact on the consolidated
financial position, results of operations, or cash flows as the Company has not
entered into any derivative contracts.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The bulletin summarizes some of the commission's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Due to the complex nature of the implementation of SAB 101, the SEC
has deferred the implementation of SAB 101 which, for the Company, will be
effective in the fourth quarter of fiscal 2001 with retroactive application to
the beginning of the fiscal year. The SEC intends to issue further definitive
guidance on the implementation of SAB 101. Although the Company cannot fully
assess the impact of SAB 101 until such guidance is issued, the Company's
preliminary assessment is that the adoption of SAB 101 will not have a
significant impact on the consolidated financial position, results of
operations, or cash flows.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44 is
effective on July 1, 2000. FIN 44 provides guidance for certain issues arising
in the application of APB 25. The Company believes that its accounting policy
for stock issued to employees is in compliance with FIN 44 as of June 30, 2000.
2. COMPLETION OF INITIAL PUBLIC OFFERING
On February 9, 2000, the Company completed its initial public offering in
which it sold 6,900,000 shares of Common Stock, including 900,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$36.00 per share. Concurrently with the completion of the offering, the Company
sold to Microsoft Corporation and MCI WorldCom Venture Fund, an affiliate of
WorldCom, Inc., an aggregate of 769,230 shares of common stock for $13.00 per
share.
Upon the closing of the offering, all the Company's outstanding preferred
stock automatically converted into an aggregate of 35,019,134 shares of Common
Stock.
52
<PAGE> 55
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NET LOSS PER SHARE
Basic and diluted net loss per common share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less the weighted-average number of shares of common stock that are subject to
repurchase. To date, the Company has not had any issuances of shares or option
grants for nominal consideration as that term is used in the Securities and
Exchange Commission's Staff Accounting Bulletin No. 98.
The following table presents the calculation of basic and diluted net loss
per common share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24, 1997
(INCEPTION)
YEARS ENDED JUNE 30, TO
---------------------------- JUNE 30,
2000 1999 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Net loss attributable to common
stockholders.................. $ (76,428) $ (9,221) $ (1,137)
============ ============ ===========
Basic and diluted:
Weighted-average shares of
common stock outstanding... 37,396,308 12,850,622 4,327,109
Less: weighted-average shares
subject to repurchase...... (12,460,618) (10,993,934) (4,169,278)
------------ ------------ -----------
Weighted-average shares used in
computing basic and diluted
net loss per common share..... 24,935,690 1,856,688 157,831
============ ============ ===========
Basic and diluted net loss per
common share.................. $ (3.07) $ (4.97) $ (7.20)
============ ============ ===========
Common stock equivalents related
to potentially dilutive
securities excluded from
computations because they are
anti-dilutive................. 23,765,376 24,447,193 9,948,553
============ ============ ===========
</TABLE>
53
<PAGE> 56
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CONSOLIDATED BALANCE SHEET DETAILS
Cash equivalents, Short-Term and Long-Term Investments
Cash equivalents, short-term and long-term investments consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money market funds................. $ 11,343 $-- $ -- $ 11,343
Commercial paper................... 99,940 -- (31) 99,909
Certificates of deposit............ 6,078 2 -- 6,080
Government securities.............. 7,079 -- (191) 6,888
Corporate debt securities.......... 68,262 -- (1,179) 67,083
U.S. government agencies and asset-
backed securities................ 49,133 1 (650) 48,484
-------- --- ------- --------
$241,835 $ 3 $(2,051) $239,787
======== === ======= ========
Due within one year................ $184,892 $-- $ (956) $183,936
Due between one year and two
years............................ 56,943 3 (1,095) 55,851
-------- --- ------- --------
$241,835 $ 3 $(2,051) $239,787
======== === ======= ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money market funds................. $ 1,756 $-- $ -- $ 1,756
Commercial paper................... 1,968 -- -- 1,968
-------- --- ------- --------
Total due within one year.......... $ 3,724 $-- $ -- $ 3,724
======== === ======= ========
</TABLE>
Estimated fair value is based upon market prices quoted on the last day of
the fiscal year.
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
2000 1999
------ ----
<S> <C> <C>
Raw materials............................................... $2,815 $364
Work-in-process............................................. 4,676 219
Finished goods.............................................. 775 43
------ ----
$8,266 $626
====== ====
</TABLE>
54
<PAGE> 57
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
2000 1999
------- ------
<S> <C> <C>
Computer hardware and software............................ $ 619 $ 211
Production and engineering equipment...................... 11,588 1,713
Office equipment, furniture and fixtures.................. 646 160
Leasehold improvements.................................... 391 --
Construction in progress.................................. 4,586 --
------- ------
17,830 2,084
Accumulated depreciation.................................. (2,840) (413)
------- ------
$14,990 $1,671
======= ======
</TABLE>
Construction in progress primarily consists of leasehold improvements
constructed and equipment received before June 30, 2000, but not placed into
service until the completion of the Company's new facility in Fremont in July
2000. No depreciation was taken as of June 30, 2000 on these assets.
5. RELATED PARTY TRANSACTIONS
In April 1999, the Company loaned $300,000 to an officer for the purchase
of a home. The promissory note bore interest at 4.9% per annum. The note and
accrued interest was repaid in full in June 2000.
On November 1999, the Company loaned $125,000 to an officer. The promissory
note, which bears interest at 5.57% per annum, and accrued interest are payable
in full to the Company on the earliest of (i) May 19, 2001, (ii) six months from
the date on which the employee can sell shares of the Company's common stock for
an amount equal to the principal and interest on the note, or (iii) the
termination of employment with the Company.
In connection with the exercise of certain stock options and share purchase
rights granted under the Company's stock option plan, the Company has received
promissory notes equal to the total exercise price of these stock options and
share purchase rights. These full recourse promissory notes, which bear interest
at 4.99% - 6.20% per annum, and accrued interest are payable in full to the
Company, generally four to five years from the date each of the promissory notes
was issued. Promissory notes for the exercise of certain stock options and share
purchase rights totaling $5,173,000, $326,000 and $6,000 were outstanding as of
June 30, 2000, 1999 and 1998. These notes are classified as a reduction of other
stockholders' equity (deficit).
One of the Company's directors is a senior vice president of WorldCom, Inc.
WorldCom, Inc. accounted for 92% and 32% of the Company's net revenue for the
years ended June 30, 2000 and 1999.
6. COMMITMENTS AND CONTINGENCIES
In September 1999, the Company entered into an operating lease for a new
corporate headquarters and manufacturing facility. Upon the expiration of the
lease in October 2009, the Company has an option to extend the lease term for an
additional five year period. In March 2000, the Company entered into another
operating lease for a building adjacent to its corporate headquarters. Upon the
expiration of the lease in April 2010, the Company has an option to extend the
lease term for an additional five-year period.
The Company leases equipment under capital leases. Such leases include a
lease facility entered into during May 1999, which made available to the Company
up to $3,000,000 to finance equipment purchases at
55
<PAGE> 58
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
an interest rate of 14.9% per annum. As of June 30, 2000, the Company has
$2,760,000 drawn on the lease facility.
Payments due under capital leases and future minimum lease payments under
noncancelable operating leases having initial terms in excess of one year as of
June 30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending June 30,
2001..................................................... $1,179 $ 2,495
2002..................................................... 1,228 2,419
2003..................................................... 955 2,490
2004..................................................... -- 2,579
2005..................................................... -- 2,507
Remaining Years.......................................... -- 12,761
------ -------
Total minimum lease payments..................... 3,362 $25,251
=======
Amount representing interest............................... (509)
------
Present value of net minimum lease payments................ 2,853
Less current portion....................................... 786
------
Long-term portion.......................................... $2,067
======
</TABLE>
At June 30, 2000 and 1999, equipment amounting to approximately $3,681,000
and $920,000, respectively, was capitalized under capital leases. Related
accumulated amortization at June 30, 2000 and 1999 amounted to approximately
$848,000 and $290,000, respectively. The lease agreements are payable in monthly
installments through February 2003, bearing interest at rates between 14.9% and
19.5% per annum, and are fully secured by the related equipment.
The Company's rental expense under operating leases was approximately
$1,799,000 and $346,000 for the years ended June 30, 2000 and 1999, respectively
and $97,000 for the period from inception (October 24, 1997) through June 30,
1998.
From time to time, the Company may be subject to claims which arise in the
normal course of business. Although the amount of any liability with respect to
such litigation cannot be determined, in the opinion of management, the ultimate
disposition of these claims will not have a material adverse effect on the
Company's financial position, cash flows or results of operations. However,
depending on the amount and timing, an unfavorable resolution of a matter could
materially affect the Company's future results of operations or cash flows in a
particular period.
7. FINANCING ARRANGEMENTS
In July 1999, the Company secured a revolving line of credit from a
financial institution, which allows maximum borrowings up to $3,750,000. The
revolving credit agreement terminates October 1, 2000, at which time all
outstanding principal and interest are due. The line bears interest at the prime
rate plus 0.75%. The Company has pledged all of its assets as collateral for
this line. At June 30, 2000, the Company had borrowings of $1,525,000 against
this line. This line of credit requires the Company to comply with specified
covenants.
In connection with this line of credit, the Company issued a warrant
agreement to the financial institution, which entitles the holder to purchase
29,347 shares of the Company's common stock with an aggregate purchase price
equal to $112,000, or approximately $3.83 per share. The warrants are
exercisable at anytime, and will expire upon the earlier of (i) the closing of
any acquisition of the Company or (ii) their
56
<PAGE> 59
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expiration on July 8, 2004. The value of the warrants was estimated using the
Black-Scholes option pricing model with the following assumptions:
weighted-average risk-free interest rate of 5.5%, contractual life of 5 years,
volatility of 0.75 and no dividend yield. The Company calculated a value of
$118,000 and this amount is recorded as an other asset and is being amortized to
interest expense over the term of the agreement. This line of credit replaced a
previous line of credit with another financial institution under which the
Company had borrowings outstanding as of June 30, 1999 of $735,000.
In July 2000, the Company secured a revolving line of credit from a
financial institution, which allows maximum borrowings up to $10,000,000. The
revolving credit agreement terminates July 10, 2001, at which time all
outstanding principal and interest are due. The line bears interest at the prime
rate. The Company has pledged all of its assets as collateral for this line.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable Convertible Preferred Stock at June 30, 1999 was as follows (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING NON-CUMULATIVE
AUTHORIZED ----------------------- DIVIDENDS LIQUIDATION
SERIES SHARES SHARES AMOUNT RATE PREFERENCE
------ ---------- ------------ -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
A.............................. 6,900,000 6,795,120 1,010 0.011 0.149
B.............................. 9,525,000 9,445,116 2,519 0.021 0.267
C.............................. 16,275,000 13,548,253 6,828 0.040 0.504
D.............................. 5,400,000 -- -- 0.192 3.833
---------- ---------- ------
Total redeemable convertible
preferred stock.............. 38,100,000 29,788,489 10,357
========== ========== ======
</TABLE>
In September and October 1999, the Company issued 5,230,645 shares of
Series D redeemable convertible preferred stock ("Series D stock") at $3.83 per
share resulting in gross proceeds of approximately $20.0 million. The
liquidation preference is $3.83 per share and the non-cumulative dividend rate
is $0.192 per share, per annum, when and if declared by the Board of Directors.
In connection with the issuance of the Series D preferred stock, the Company
recorded a non-cash charge of $20,051,000 to accrete the value of the preferred
stock to its fair value in accordance with EITF D-60 "Accounting for the
Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature" and EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios."
The non-cash charge was recorded as an increase in accumulated deficit with a
corresponding credit to additional paid-in capital and was recognized at the
date of issuance that was the period in which the shares became eligible for
conversion.
Prior to the Company's initial public offering in February 2000, the
Company had 38,100,000 shares of redeemable convertible preferred stock
authorized. All issued and outstanding shares of preferred stock were converted
into 35,019,134 shares of common stock upon the closing of the initial public
offering. There was no redeemable convertible preferred stock authorized, issued
or outstanding at June 30, 2000.
9. OTHER STOCKHOLDERS' EQUITY
Shares issued to Founder
In January 1998, the Company issued 2,700,000 shares of stock to one of its
founders pursuant to a restricted stock purchase agreement that permits the
Company to repurchase the shares at the original sales price. These rights
expire at a rate of 25% after one year and 1/48 per month thereafter. At June
30, 2000, 1,012,500 shares remained subject to repurchase under these
agreements.
57
<PAGE> 60
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock issued to Corporate Investors
In conjunction with the initial public offering, the Company sold shares of
common stock in a private placement with two separate corporate investors. Each
corporate investor acquired 384,615 shares of common stock at $13.00 per share.
The Company recorded an accretion charge equal to the difference between the
initial public offering price of $36 per share and $13 per share. The non-cash
charge was recorded as an increase in accumulated deficit with a corresponding
credit to additional paid-in capital and was recognized on the date of issuance.
Stock Option/Rights Plans
The Company adopted the 1998 Stock Plan (the "Option Plan"), under which
officers, employees, directors, and consultants may be granted Incentive Stock
Options ("ISOs") and Nonstatutory Stock Options ("NSOs") to purchase shares of
the Company's common stock.
The Option Plan permits ISOs and NSOs to be granted at an exercise price of
not less than 100% of the fair value on the date of grant as determined by the
Board of Directors. Options that expire (generally ten years from the grant
date) or are canceled are returned to the Option Plan. The term of the Option
Plan is ten years. Options may be granted with different vesting terms as
determined by the Board of Directors. The options generally vest 25% upon
completion of one year of service and 1/48 per month thereafter.
In January 2000, the Company adopted the 1999 Director Option Plan (the
"Director Plan"). Non-employee directors are entitled to participate in the
Director Plan. A total of 300,000 shares of the Company's common stock have been
reserved for issuance under the Director Plan, plus automatic annual increases
beginning on July 1, 2000 equal to the least of (i) 150,000 shares, (ii) 0.25%
of the outstanding shares on that date, and (iii) a lesser amount determined by
the Company's Board of Directors. The Director Plan generally provides for an
automatic initial grant of an option to purchase 40,000 shares of our common
stock to each non-employee director on the date which the later of the following
events occur: the effective date of the Director Plan; or the date when a person
first becomes a non-employee director. After the initial grant, each
non-employee director will automatically be granted subsequent options to
purchase 10,000 shares of our common stock each year on the date of the
Company's annual stockholders' meeting. Grants generally shall have a term of 10
years. Each initial option grant will vest as to 25% of the shares subject to
the option on each anniversary of its date of grant. Each subsequent option
grant will fully vest on the anniversary of its date of grant. The exercise
price of all options will be 100% of the fair market value per share of our
common stock on the date of grant. As of June 30, 2000, no options have been
granted pursuant to the Director Plan.
Stock option activity under the Option Plan and Director Plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------- EXERCISABLE
WEIGHTED- ---------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OF SHARES REMAINING AVERAGE OF SHARES AVERAGE
EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES JUNE 30, 2000 LIFE (IN YEARS) PRICE JUNE 30, 2000 PRICE
--------------- ------------- --------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.001 - 0.72.. 1,311,758 8.91 $ 0.220 60,948 $0.100
1.00 - 4.67.. 1,738,450 9.44 3.270 91,250 3.720
13.00 - 55.06.. 658,048 9.61 22.630 -- --
65.50 - 96.13.. 280,750 9.89 74.200 -- --
--------------- --------- ---- ------- ------- ------
$ 0.001 - 96.13.. 3,989,006 9.33 $10.450 152,198 $2.270
</TABLE>
58
<PAGE> 61
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at inception (October 24, 1997)................ -- $ --
Options granted...................................... 348,602 0.01
---------
Balance at June 30, 1998............................... 348,602 0.01
Options granted...................................... 1,297,050 0.03
Options exercised.................................... (618,602) 0.02
Options canceled..................................... (38,250) 0.05
---------
Balance at June 30, 1999............................... 988,800 0.05
---------
Options granted...................................... 4,109,654 10.71
Options exercised.................................... (753,897) 0.82
Options canceled..................................... (355,551) 4.82
---------
Balance at June 30, 2000............................... 3,989,006 $10.45
=========
</TABLE>
Under the Option Plan, the Company may also grant share purchase rights
either alone, in addition to, or in tandem with other awards granted under the
Option Plan and/or cash awards granted outside the Option Plan. Exercise of
these share purchase rights are made pursuant to restricted stock purchase
agreements containing provisions established by the Board of Directors. These
provisions give the Company the right to repurchase the shares at the original
sales price. This right expires at a rate determined by the Board of Directors,
generally at a rate of 25% after one year and 1/48 per month thereafter. During
the years ended June 30, 2000 and 1999 and for the period from inception
(October 24, 1997) to June 30, 1998, the Company issued 4,956,165 shares,
10,510,589 shares, and 4,050,000 shares under the Option Plan. Shares subject to
repurchase were 11,929,780 shares as of June 30, 2000, 11,730,902 shares as of
June 30, 1999, and 4,050,000 shares as of June 30, 1998. For the year ended June
30, 2000 and 1999, the Company repurchased 2,615,625 and 37,899 shares,
respectively, under the Option Plan.
The weighted-average deemed fair value of stock options and share purchase
rights granted during fiscal 2000 and 1999 and for the period ended June 30,
1998 was $10.44, $1.51 and $0.19, respectively.
For the years ended June 30, 2000 and 1999 and for the period October 24,
1997 to June 30, 1998, the Company recorded deferred stock compensation of
$53,508,000, $11,502,000 and $2,136,000, respectively, representing the
difference between the exercise price and the deemed fair value for accounting
purposes of the Company's common stock on the date such stock options and share
purchase rights were granted. The deemed fair value was based on the Company's
retrospective review of the primary business factors underlying the value of its
common stock on the dates such grants were made, viewed in light of the
Company's initial public offering and the expected initial public offering price
per share. For the years ended June 30, 2000 and 1999 and for the period
inception (October 24, 1997) to June 30, 1998, the Company recorded amortization
of deferred stock compensation of $27,713,000, $2,925,000 and $362,000,
respectively. At June 30, 2000, the Company had $36,146,000 of remaining
unamortized deferred compensation. Such amount is included as a reduction of
other stockholders' equity (deficit) and is being amortized over the vesting
period.
For the years ended June 30, 2000 and 1999, the Company recorded stock
compensation cost of $3,707,000 and $539,000, respectively related to common
stock options granted to consultants. The value of the options was estimated
using the Black-Scholes option pricing model with the following assumptions:
weighted-average risk free interest rate of 5.5%, contractual life of ten years,
volatility of 0.75 and no dividend yield.
59
<PAGE> 62
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding net loss and net loss per common share is
required by FAS 123 as if the Company had accounted for its employee stock
options and share purchase rights under the fair value method of FAS 123. The
fair value of these options and share repurchase rights granted prior to the
Company's initial public offering was estimated at the date of grant using the
minimum value method. The fair value of stock options and share purchase rights
granted subsequent to the initial public offering were valued using Black-
Scholes valuation model based on the actual stock closing price on the day
previous to the date of grant. The option valuation models were developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions. Because the Company's
stock-based awards have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards. The fair value of these options was estimated at the
date of grant using the following weighted-average assumptions:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.5% 5.5% 5.5%
Dividend yield.................................. -- -- --
Weighted-average expected life.................. 5 years 5 years 5 years
Volatility...................................... 90% -- --
</TABLE>
For options granted after February 3, 2000, the volatility of 0.9 was used
to determine its value under the Black-Scholes method with the other assumptions
being the same as for the minimum value method.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER
24, 1997
(INCEPTION)
YEARS ENDED JUNE 30, TO
--------------------- JUNE 30,
2000 1999 1998
--------- -------- -----------
<S> <C> <C> <C>
Net loss:
As reported................................ (76,428) (9,221) (1,137)
Pro forma.................................. (79,772) (9,313) (1,147)
Basic and diluted net loss per common share:
As reported................................ (3.07) (4.97) (7.20)
Pro forma.................................. (3.20) (5.02) (7.27)
</TABLE>
The pro forma impact of options on the consolidated net loss attributable
to common stockholders for the years ended June 30, 2000 and 1999 and for the
period from October 24, 1997 (inception) to June 30, 1998 is not representative
of the effects on consolidated net income (loss) attributable to common
stockholders for future years, as future years will include the effects of
additional stock option grants.
1999 Employee Stock Purchase Plan
In January 2000, the Company adopted the 1999 Employee Stock Purchase Plan
(the "Stock Purchase Plan") for its employees. A total of 525,000 shares of the
Company's common stock has been reserved for issuance under the Stock Purchase
Plan, plus automatic annual increases beginning on July 1, 2000 equal to
60
<PAGE> 63
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the least of (i) 750,000 shares, (ii) 1% of the outstanding shares on that date,
and (iii) a lesser amount determined by the Company's Board of Directors. The
Stock Purchase Plan permits participants to purchase the Company's common stock
through payroll deductions of up to 10% of the participant's compensation. The
maximum number of shares a participant may purchase during each offering period
is 3,000 shares. The price of common stock purchases will be 85% of the lower of
the fair market value at the beginning of the offering period and the ending of
the offering period. As of June 30, 2000, no shares have been issued under the
Stock Purchase Plan.
Warrants
In December 1998, the Company issued warrants to three individuals in
connection with founding the Company. Each warrant agreement entitles the holder
to purchase 112,500 shares of the Company's common stock with an aggregate
purchase price equal to $1,350,000. These warrants were exercised upon the
closing of the initial public offering.
Shares Reserved
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000
-----------
<S> <C>
Stock Plans................................................. 12,139,283
Reserved for warrants....................................... 29,347
-----------
Total common stock reserved for future issuance........... 12,168,630
===========
</TABLE>
The amount above of 12,139,283 shares includes 300,000 shares related to
the 1999 Director Option Plan and 525,000 shares related to the 1999 Employee
Stock Purchase Plan. In addition, annual increases will be added to the 1998
Stock Plan, beginning on July 1, 2000, equal to the least of (i) 6,000,000
shares, (ii) 4.9% of the Company's outstanding shares, and (iii) a lesser amount
determined by the Company's Board of Directors.
10. 401(K) PLAN
The Company maintains a savings and retirement plan under Section 401(k) of
the Internal Revenue Code. All employees are eligible to participate on the
first day of the month following their hire date with the Company. Under the
plan, employees may contribute up to 15% of their pretax salaries per year but
not more than the statutory limits. The Company has not contributed to the plan.
11. INCOME TAXES
There has been no provision for U.S. federal, U.S. state or foreign income
taxes for any period as the Company has incurred operating losses since
inception for all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
61
<PAGE> 64
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 7,655 $ 2,330
Stock option compensation............................... 5,640 988
Other................................................... 3,709 480
-------- -------
Total deferred tax assets............................... 17,004 3,798
Valuation allowance..................................... (17,004) (3,798)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
</TABLE>
Realization of the deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $13.2 million, $3.5 million and $0.3 million in
the years ended June 30, 2000 and 1999 and for the period from October 24, 1997
(inception) to June 30, 1998, respectively.
As of June 30, 2000, the Company has net operating loss carry-forwards for
federal income tax purposes of approximately $16.6 million, which expire in
years 2013 through 2019. The Company also had net operating loss carry-forwards
for state income tax purposes of approximately $19.0 million expiring in the
year 2006. Utilization of the Company's net operating loss may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
12. SUBSEQUENT EVENT
On July 25, 2000, the Company completed its acquisition of Holographix,
Inc. ("Holographix"), in a transaction accounted for using the purchase method
of accounting. The Company issued 501,880 Avanex common shares and 287,952
Avanex stock options for substantially all of the assets and certain liabilities
of Holographix as of July 25, 2000. The total estimated purchase cost of
Holographix is as follows (in thousands):
<TABLE>
<S> <C>
Value of securities issued.................................. $40,287
Assumption of Holographix options........................... $23,112
-------
$63,399
Estimated transaction costs and expenses.................... 2,924
-------
$66,323
=======
</TABLE>
The Company will record a charge for in-process research and development in
the quarter ended September 30, 2000 estimated at $4.7 million.
62
<PAGE> 65
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
There have been none.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this Item 10 is incorporated by reference to
our Proxy Statement with respect to our 2000 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is incorporated by reference in
our Proxy Statement with respect to our 2000 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 is incorporated by reference to
our Proxy Statement with respect to our 2000 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 is incorporated by reference to
our Proxy Statement with respect to our 2000 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year.
63
<PAGE> 66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS
(1) INDEX TO FINANCIAL STATEMENTS
The Financial Statements required by this Item are submitted in Part II,
Item 8 of this Report.
(2) FINANCIAL STATEMENTS SCHEDULE
The following financial statement schedule of Avanex Corporation for the
period from inception (October 24, 1997) to June 30, 1998 and for the
years ended June 30, 1999 and 2000 should be read in conjunction with
the Consolidated Financial Statements of Avanex Corporation.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS- END OF
PERIOD EXPENSES WRITE-OFFS PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Period ended June 30, 1998.................... $ -- $ -- $-- $ --
Year ended June 30, 1999...................... -- 30,000 -- 30,000
Year ended June 30, 2000...................... $30,000 $422,000 $-- $452,000
</TABLE>
All other schedules have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
64
<PAGE> 67
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
---------- -----------------------
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant filed February 9, 2000
3.2++ Amended and Restated Bylaws of the Registrant
4.1++ Specimen Common Stock Certificate
10.1++ Form of Indemnification Agreement between Registrant and
each of its directors and officers
10.2++ 1998 Stock Plan, as amended, and forms of agreement
thereunder
10.3++ 1999 Employee Stock Purchase Plan
10.4++ 1999 Director Option Plan
10.5++ Founder's Stock Purchase Agreement between the Registrant
and Simon Xiaofan Cao dated January 13, 1998
10.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Walter Alessandrini dated October 8, 1999
10.7++
10.8.1++ Stock Purchase Agreement, including Security Agreement and
Promissory Note, between the Registrant and Paul Shi-Qi
Jiang dated July 22, 1999
10.8.2++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated August 4, 1999
10.8.3++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Peter Maguire dated August 4, 1999
10.8.4++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
James Pickering dated September 10, 1999
10.8.5++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Margaret Quinn dated October 8, 1999
10.8.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated October 12, 1999
10.8.7++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Anthony Florence dated November 19, 1999
10.8.8++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Jessy Chao dated November 26, 1999
10.8.9++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Paul Shi-Qi Jiang dated November 26, 1999
10.8.10++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Jessy Chao dated February 3, 1998
10.8.11++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Paul Shi-Qi Jiang dated February 3, 1998
10.8.12++ Form of Stock Option Agreements between the Registrant and
certain directors
10.8.13++ Schedule of directors receiving stock options of the
Registrant
10.8.15 Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Brian Kinard dated October 22, 1999
10.8.16 Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Brett Casebolt dated January 31, 2000
10.9++ Second Amended and Restated Shareholder Rights Agreement
dated September 14, 1999
10.10++ Senior Loan and Security Agreement No. 053-6193 between
Phoenix Leasing Incorporated and the Registrant dated
November 5, 1998
10.11++ Master Lease No. S7280 dated June 2, 1999, between Finova
Capital Corporation and the Registrant
10.12++ Employment Letter between the Registrant and Walter
Alessandrini dated March 2, 1999
10.13++ Secured Promissory Note held by the Registrant for Walter
Alessandrini dated May 20, 1999 and amendment to the Secured
Promissory Note dated December 1, 1999
</TABLE>
65
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
---------- -----------------------
<C> <S>
10.14++ Employment Letter between the Registrant and Simon Cao dated
January 2, 1998
10.15++ Employment Letter between the Registrant and Paul Jiang
dated January 2, 1998
10.16++ Employment Letter between the Registrant and Peter Maguire
dated June 18, 1999
10.17*++ Patent License Agreement between Fujitsu Limited and the
Registrant dated July 15, 1998
10.17.1*++ Letter clarifying the Patent License Agreement between
Fujitsu Limited and the Registrant dated July 1, 1998
10.18++ Lease between the Registrant and Stevenson Business Park LLC
for Building B of 40919 Encyclopedia Circle, Fremont,
California dated September 8, 1999
10.19++ Assignment of Sublease between Registrant and Pathnet, Inc.
for 405 International Parkway, Richardson, Texas dated
September 17, 1998
10.19.1++ Sublease between KLA-Tencor Corporation and Pathnet, Inc.
for 405 International Parkway, Richardson, Texas dated
October 16, 1997
10.20++ Amendment to Sublease for 405 International Parkway,
Richardson, Texas dated January 1998
10.21++ Master Lease for 405 International Parkway, Richardson,
Texas dated January 1, 1990
10.22*++ License and Supply Agreement between Registrant and Concord
Micro-Optics, Inc. dated May 24, 1999
10.23*++ International Distributor Agreement between the Registrant
and Hakuto Co., Ltd. dated November 1999
10.24++ Professional Services Agreement between the Registrant and
AristaSoft Corporation dated July 7, 1999
10.25++ Cost Sharing Agreement between the Registrant and Avanex
Cayman dated December, 1999
10.26*++ International Distributor Agreement between the Registrant
and Sun Instruments dated December 20, 1999
10.27++ Subscription Agreement between the Registrant and Microsoft
Corporation dated January 14, 2000
10.28++ Subscription Agreement between the Registrant and MCI
Worldcom Venture Fund dated January 14, 2000
10.29++ Third Amended and Restated Shareholder Rights Agreement
dated January 14, 2000
10.30+ Lease Agreement between Stevenson Business Park, LLC and the
Registrant for Building C of 40919 Encyclopedia Circle,
Fremont, California dated March 1, 2000
10.31 Revolving Credit and Security Agreement between Comerica
Bank-California and the Registrant dated July 10, 2000
10.32+++ Asset Purchase Agreement by and among the Registrant, Aspen
Acquisition Corporation and Holographix, Inc. dated May 22,
2000
21.1 List of subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1++ Power of Attorney (See page II-[X])
27.1 Financial Data Schedule for the year ended June 30, 2000
27.2++ Financial Data Schedule for six months ended December 31,
1999
27.3++ Financial Data Schedule for the year ended June 30, 1999
27.4++ Financial Data Schedule for the period from October 24, 1997
(inception) to June 30, 1998
</TABLE>
---------------
* Confidential treatment requested.
+ Incorporated herein by reference to Registrant's Form 10-Q/A file May 16,
2000
++ Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 No. 333-92097
66
<PAGE> 69
+++ Incorporated herein by reference to Registrant's Form 8-K filed June 6,
2000
(b) REPORTS ON FORM 8-K
On June 6, 2000, the Registrant filed a Current Report on Form 8-K
disclosing that the Registrant had executed an Asset Purchase Agreement dated
May 22, 2000 with Aspen Acquisition Corporation and Holographix Inc. No
financial statements were filed with this Current Report.
67
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Fremont, County of Alameda, State of California, on September 21,
2000.
AVANEX CORPORATION
By /s/ JESSY CHAO
------------------------------------
Jessy Chao
Vice President Finance and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jessy Chao and Brian Kinard, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WALTER ALESSANDRINI Director, President and September 21, 2000
----------------------------------------------------- Chief Executive Officer
Walter Alessandrini (principal executive
officer)
/s/ JESSY CHAO Vice President, Finance and September 21, 2000
----------------------------------------------------- Chief Financial Officer
Jessy Chao (principal financial
officer)
/s/ SIMON CAO Director, Senior VP and September 21, 2000
----------------------------------------------------- Founder
Simon Cao
/s/ TODD BROOKS Director September 21, 2000
-----------------------------------------------------
Todd Brooks
/s/ VINT CERF Director September 21, 2000
-----------------------------------------------------
Vint Cerf
/s/ FEDERICO FAGGIN Director September 21, 2000
-----------------------------------------------------
Federico Faggin
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL GOGUEN Director September 21, 2000
-----------------------------------------------------
Michael Goguen
/s/ SETH NEIMAN Director September 21, 2000
-----------------------------------------------------
Seth Neiman
/s/ GREGORY REYES Director September 21, 2000
-----------------------------------------------------
Gregory Reyes
/s/ JOEL A. SMITH III Director September 21, 2000
-----------------------------------------------------
Joel A. Smith III
</TABLE>
69
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant filed February 9, 2000
3.2++ Amended and Restated Bylaws of the Registrant
4.1++ Specimen Common Stock Certificate
10.1++ Form of Indemnification Agreement between Registrant and
each of its directors and officers
10.2++ 1998 Stock Plan, as amended, and forms of agreement
thereunder
10.3++ 1999 Employee Stock Purchase Plan
10.4++ 1999 Director Option Plan
10.5++ Founder's Stock Purchase Agreement between the Registrant
and Simon Xiaofan Cao dated January 13, 1998
10.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Walter Alessandrini dated October 8, 1999
10.7++
10.8.1++ Stock Purchase Agreement, including Security Agreement and
Promissory Note, between the Registrant and Paul Shi-Qi
Jiang dated July 22, 1999
10.8.2++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated August 4, 1999
10.8.3++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Peter Maguire dated August 4, 1999
10.8.4++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
James Pickering dated September 10, 1999
10.8.5++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Margaret Quinn dated October 8, 1999
10.8.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated October 12, 1999
10.8.7++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Anthony Florence dated November 19, 1999
10.8.8++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Jessy Chao dated November 26, 1999
10.8.9++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Paul Shi-Qi Jiang dated November 26, 1999
10.8.10++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Jessy Chao dated February 3, 1998
10.8.11++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Paul Shi-Qi Jiang dated February 3, 1998
10.8.12++ Form of Stock Option Agreements between the Registrant and
certain directors
10.8.13++ Schedule of directors receiving stock options of the
Registrant
10.8.15 Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Brian Kinard dated October 22, 1999
10.8.16 Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Brett Casebolt dated January 31, 2000
10.9++ Second Amended and Restated Shareholder Rights Agreement
dated September 14, 1999
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.10++ Senior Loan and Security Agreement No. 053-6193 between
Phoenix Leasing Incorporated and the Registrant dated
November 5, 1998
10.11++ Master Lease No. S7280 dated June 2, 1999, between Finova
Capital Corporation and the Registrant
10.12++ Employment Letter between the Registrant and Walter
Alessandrini dated March 2, 1999
10.13++ Secured Promissory Note held by the Registrant for Walter
Alessandrini dated May 20, 1999 and amendment to the Secured
Promissory Note dated December 1, 1999
10.14++ Employment Letter between the Registrant and Simon Cao dated
January 2, 1998
10.15++ Employment Letter between the Registrant and Paul Jiang
dated January 2, 1998
10.16++ Employment Letter between the Registrant and Peter Maguire
dated June 18, 1999
10.17*++ Patent License Agreement between Fujitsu Limited and the
Registrant dated July 15, 1998
10.17.1*++ Letter clarifying the Patent License Agreement between
Fujitsu Limited and the Registrant dated July 1, 1998
10.18++ Lease between the Registrant and Stevenson Business Park LLC
for Building B of 40919 Encyclopedia Circle, Fremont,
California dated September 8, 1999
10.19++ Assignment of Sublease between Registrant and Pathnet, Inc.
for 405 International Parkway, Richardson, Texas dated
September 17, 1998
10.19.1++ Sublease between KLA-Tencor Corporation and Pathnet, Inc.
for 405 International Parkway, Richardson, Texas dated
October 16, 1997
10.20++ Amendment to Sublease for 405 International Parkway,
Richardson, Texas dated January 1998
10.21++ Master Lease for 405 International Parkway, Richardson,
Texas dated January 1, 1990
10.22*++ License and Supply Agreement between Registrant and Concord
Micro-Optics, Inc. dated May 24, 1999
10.23*++ International Distributor Agreement between the Registrant
and Hakuto Co., Ltd. dated November 1999
10.24++ Professional Services Agreement between the Registrant and
AristaSoft Corporation dated July 7, 1999
10.25++ Cost Sharing Agreement between the Registrant and Avanex
Cayman dated December, 1999
10.26*++ International Distributor Agreement between the Registrant
and Sun Instruments dated December 20, 1999
10.27++ Subscription Agreement between the Registrant and Microsoft
Corporation dated January 14, 2000
10.28++ Subscription Agreement between the Registrant and MCI
Worldcom Venture Fund dated January 14, 2000
10.29++ Third Amended and Restated Shareholder Rights Agreement
dated January 14, 2000
10.30+ Lease Agreement between Stevenson Business Park, LLC and the
Registrant for Building C of 40919 Encyclopedia Circle,
Fremont, California dated March 1, 2000
10.31 Revolving Credit and Security Agreement between Comerica
Bank-California and the Registrant dated July 10, 2000
10.32+++ Asset Purchase Agreement by and among the Registrant, Aspen
Acquisition Corporation and Holographix, Inc. dated May 22,
2000
21.1 List of subsidiaries of the Registrant
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1++ Power of Attorney (See page II-[X])
27.1 Financial Data Schedule for the year ended June 30, 2000
27.2++ Financial Data Schedule for six months ended December 31,
1999
27.3++ Financial Data Schedule for the year ended June 30, 1999
27.4++ Financial Data Schedule for the period from October 24, 1997
(inception) to June 30, 1998
</TABLE>
---------------
* Confidential treatment requested.
+ Incorporated herein by reference to Registrant's Form 10-Q/A file May 16,
2000
++ Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 No. 333-92097
+++ Incorporated herein by reference to Registrant's Form 8-K filed June 6,
2000
