<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 1, 2000
Commission File Number 0-29811
NEW FOCUS, INC.
(Exact Name of Registrant as Specified in its Charter)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 33-0404910
2630 Walsh Avenue, Santa Clara, California 95051-0905
Telephone: (408) 980-8088
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ].
On October 1, 2000, 63,912,095 shares of the Registrant's common stock, $0.001
par value, were issued and outstanding.
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INDEX
NEW FOCUS, INC.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheets--October 1, 2000
and December 31, 1999 .......................................... 3
Consolidated statements of operations--Three- and nine-
months ended October 1, 2000 and September 30, 1999 ............ 4
Consolidated statements of cash flows--Nine months
ended October 1, 2000 and September 30, 1999 ................... 5
Notes to consolidated financial statements--
October 1, 2000 ................................................ 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. 12-36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 37
Item 2. Changes in Securities and Use of Proceeds. ..................... 37-38
Item 3. Defaults Upon Senior Securities ................................ 38
Item 4. Submission of Matters to a Vote of Security Holders. ........... 38
Item 5. Other Information .............................................. 38
Item 6. Exhibits and Reports on Form 8-K ............................... 39
SIGNATURES .................................................................. 40
</TABLE>
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NEW FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Oct 1 Dec 31
2000 1999
---------- ----------
ASSETS (unaudited) (see note)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 504,453 $ 28,067
Trade accounts receivable, less allowances of
$862 in 2000 and $160 in 1999 11,082 3,102
Inventories:
Raw materials 9,089 3,247
Work in progress 8,710 1,283
Finished goods 3,129 1,687
--------- ---------
Total Inventories 20,928 6,217
Prepaid expenses and other current assets 5,383 364
--------- ---------
Total current assets 541,846 37,750
Property, Plant and Equipment:
Building 3,734 --
Manufacturing and development equipment 15,967 6,404
Computer software and equipment 3,602 1,787
Office equipment 966 259
Leasehold improvements 3,639 1,120
Construction in progress 8,249 91
--------- ---------
36,157 9,661
Less allowances for depreciation and amortization (5,299) (2,766)
--------- ---------
Net Property, Plant and Equipment 30,858 6,895
Other assets, net of accumulated amortization
of $152 in 2000 and $56 in 1999 10,335 207
--------- ---------
Total assets $ 583,039 $ 44,852
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,654 $ 5,658
Accrued expenses 6,501 2,540
Deferred research and development funding 343 250
Current portion of long-term debt 269 276
--------- ---------
Total current liabilities 17,767 8,724
Long-term debt, less current portion 172 368
Deferred rent 1,064 747
Commitments and contingencies
Stockholders' equity:
Preferred stock -- 42
Common stock 64 2
Additional paid-in capital 651,747 51,168
Notes receivable from stockholders (7,281) --
Deferred compensation (31,265) (689)
Accumulated deficit (49,229) (15,510)
--------- ---------
Total stockholders' equity 564,036 35,013
--------- ---------
Total liabilities and stockholders' equity $ 583,039 $ 44,852
========= =========
</TABLE>
Note) The December 31, 1999 consolidated balance sheet has been derived from the
audited financial statements.
See notes to consolidated financial statements.
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NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Oct 1 Sep 30 Oct 1 Sep 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 22,250 $ 6,675 $ 46,483 $ 15,997
Cost of net revenues (1) 17,248 4,367 41,090 9,788
-------- -------- -------- --------
GROSS PROFIT 5,002 2,308 5,393 6,209
Operating Expenses:
Research and development (2) 7,306 2,616 16,523 7,238
Less funding received from research
and development contracts (36) (357) (752) (1,258)
-------- -------- -------- --------
Net research and development 7,270 2,259 15,771 5,980
Sales and marketing (3) 1,526 930 4,091 2,730
General and administrative (4) 2,538 940 6,330 2,181
Deferred compensation 5,879 29 18,935 38
-------- -------- -------- --------
Total operating expenses 17,213 4,158 45,127 10,929
-------- -------- -------- --------
OPERATING LOSS (12,211) (1,850) (39,734) (4,720)
Interest income 5,100 75 6,119 78
Interest expense (36) (46) (179) (248)
Other income, net 18 4 77 12
-------- -------- -------- --------
Loss before provision for income taxes (7,129) (1,817) (33,717) (4,878)
Provision for income taxes 2 -- 2 2
-------- -------- -------- --------
NET LOSS $ (7,131) $ (1,817) $(33,719) $ (4,880)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.12) $ (0.74) $ (1.06) $ (2.01)
======== ======== ======== ========
Shares used to compute basic and
diluted net loss per share 58,140 2,455 31,783 2,428
======== ======== ======== ========
</TABLE>
----------
(1) Excluding $956 and $3,419 in amortization of deferred stock compensation
for the three- and nine-month periods ended October 1, 2000,
respectively.
(2) Excluding $1,877 and $5,173 in amortization of deferred stock
compensation for the three- and nine-month periods ended October 1,
2000, respectively.
(3) Excluding $458 and $1,213 in amortization of deferred stock compensation
for the three- and nine-month periods ended October 1, 2000,
respectively.
(4) Excluding $2,588 and $9,130 in amortization of deferred stock
compensation for the three- and nine-month periods ended October 1,
2000, respectively.
See notes to consolidated financial statements.
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NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Oct 1 Sep 30
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (33,719) $ (4,880)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property, plant and equipment 2,561 726
Amortization of intangibles 96 21
Amortization of deferred compensation 18,935 38
Deferred rent 317 (27)
Changes in operating assets and liabilities:
Trade accounts receivable (7,980) (729)
Inventories (14,711) (801)
Prepaid expenses and other current assets (5,019) 9
Accounts payable 4,996 921
Accrued expenses 3,961 955
Deferred research and development funding 93 --
--------- ---------
Net cash used in operating activities (30,470) (3,767)
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (26,529) (2,776)
Increase in other assets (9,734) (64)
--------- ---------
Net cash used in investing activities (36,263) (2,840)
FINANCING ACTIVITIES
Proceeds from initial and follow-on public offerings
of common stock, net of issuance costs 542,407 --
Proceeds from issuance of preferred stock -- 12,536
Payments on notes payable -- (2,305)
Proceeds from bank loan -- 2,300
Payments on bank loan -- (3,900)
Proceeds from equipment loan -- 800
Payments on equipment loan (203) (178)
Payments under capital lease obligations -- (9)
Proceeds from payment of notes receivable with shareholders 97 --
Proceeds from exercise of stock options and warrants 818 42
--------- ---------
Net cash provided by financing activities 543,119 9,286
--------- ---------
Increase in cash and cash equivalents 476,386 2,679
Cash and cash equivalents at beginning of period 28,067 164
--------- ---------
Cash and cash equivalents at end of period $ 504,453 $ 2,843
========= =========
</TABLE>
See notes to consolidated financial statements.
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NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 1, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three- and nine-month periods ended October 1, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Registration Statement on Form
S-1 filed on August 10, 2000.
During 1999, the Company changed its year-end to December 31, 1999, from
March 31, 1999. Beginning in 2000, the Company maintains a fifty-two/fifty-three
week fiscal year cycle ending on the Sunday closest to December 31. The
three-month period ended September 30, 1999, and October 1, 2000, contained 92
days and 91 days, respectively. The nine-month periods ended September 30, 1999,
and October 1, 2000, contained 273 and 275 days, respectively.
NOTE 2 - COMPREHENSIVE LOSS
Comprehensive loss for the three- and nine-month periods ended October
1, 2000, and September 30, 1999, in the accompanying Consolidated Statements of
Operations is the same as the Company's net loss.
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NOTE 3 - LOSS PER SHARE
The following table sets forth the computation of net loss per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Oct 1 Sep 30 Oct 1 Sep 30
(in thousands, except per share amounts) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss (numerator) $ (7,131) $ (1,817) $(33,719) $ (4,880)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share (denominator):
Weighted average common shares outstanding 62,110 2,455 35,607 2,428
Less shares subject to repurchase (3,970) -- (3,824) --
-------- -------- -------- --------
Denominator for basic and diluted net loss
per share 58,140 2,455 31,783 2,428
======== ======== ======== ========
Basic and diluted net loss per share $ (0.12) $ (0.74) $ (1.06) $ (2.01)
======== ======== ======== ========
</TABLE>
The Company has excluded the impact of all convertible preferred stock,
common shares subject to repurchase, warrants for convertible preferred stock
and common stock, and outstanding stock options from the calculation of diluted
loss per common share because all such securities are antidilutive for all
periods presented. The total number of shares, including options and warrants to
purchase shares, excluded from the calculations of diluted net loss per share
was 40,995,000 for both the three- and nine-month periods ended September 30,
1999, and 5,528,000 for both the three- and nine-month periods ended October 1,
2000, respectively.
NOTE 4 - PUBLIC OFFERINGS
On May 18, 2000, the Company completed its initial public offering in
which it sold 5,650,000 shares of Common Stock, including 650,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$20.00 per share. Upon the closing of the initial public offering, all of the
Company's outstanding preferred stock automatically converted into an aggregate
of 42,060,284 shares of Common Stock. After the offering, the Company's
authorized capital consisted of 250,000,000 shares of Common Stock and
10,000,000 shares of preferred stock.
On August 11, 2000, the Company completed a secondary public offering in
which it sold 4,025,000 shares of Common Stock, including 525,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$115.00 per share.
As of October 1, 2000, 63,912,095 shares of Common Stock and no shares
of preferred stock were outstanding.
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Note 5 - SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The company operates two reportable segments: Telecom and Photonic
Tools. The telecom segment performs research and development, manufacturing,
marketing and sales of fiber amplified products, wavelength management products,
high-speed opto-electronics and tunable laser modules, which are primarily sold
to manufacturers of networking and test equipment in the optical
telecommunications markets. The photonic tools segment performs research and
development, manufacturing, marketing and sales of photonic tools, which are
primarily used for commercial and research applications.
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes, excluding gains and losses
on the Company's investment portfolio. All intercompany sales or transfers were
eliminated.
The Company does not segregate assets or interest expense by segment.
<TABLE>
<CAPTION>
Three Months Ended October 1, 2000
--------------------------------------
Telecom Photonic Tools Total
-------- -------------- ----------
<S> <C> <C> <C>
Revenues from external customers $ 14,919 $ 7,331 $ 22,250
Depreciation expense $ 963 $ 184 $ 1,147
Operating segment profit (loss) $ (9,018) $ 2,686 $ (6,332)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
---------------------------------------
Telecom Photonic Tools Total
-------- -------------- ----------
<S> <C> <C> <C>
Revenues from external customers $ 2,018 $ 4,657 $ 6,675
Depreciation expense $ 150 $ 236 $ 386
Operating segment profit (loss) $(2,038) $ 217 $(1,821)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended October 1, 2000
--------------------------------------
Telecom Photonic Tools Total
-------- -------------- ----------
<S> <C> <C> <C>
Revenues from external customers $ 28,269 $ 18,214 $ 46,483
Depreciation expense $ 1,941 $ 620 $ 2,561
Operating segment profit (loss) $(25,582) $ 4,783 $(20,799)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------
Telecom Photonic Tools Total
--------- -------------- ---------
<S> <C> <C> <C>
Revenues from external customers $ 2,513 $ 13,484 $ 15,997
Depreciation expense $ 239 $ 487 $ 726
Operating segment profit (loss) $ (5,948) $ 1,266 $ (4,682)
</TABLE>
Operating segment profit and loss excludes amortization of deferred
stock compensation.
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Oct 1 Sep 30 Oct 1 Sep 30
(in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
LOSS
Total loss for reportable segments $ (6,332) $ (1,821) $(20,799) $ (4,682)
Other income (expense), net 5,082 33 6,017 (158)
Amortization of deferred compensation (5,879) (29) (18,935) (38)
-------- -------- -------- --------
Loss before income taxes $ (7,129) $ (1,817) $(33,717) $ (4,878)
======== ======== ======== ========
GEOGRAPHIC INFORMATION
REVENUES
United States $ 15,890 $ 5,244 $ 32,776 $ 11,707
Asia 597 496 1,671 1,918
Europe 5,763 935 12,036 2,372
-------- -------- -------- --------
Consolidated total $ 22,250 $ 6,675 $ 46,483 $ 15,997
======== ======== ======== ========
</TABLE>
NOTE 6 - SIGNIFICANT CUSTOMERS
In the three-month period ended October 1, 2000, Corvis Corporation,
Agilent Technologies, and Corning Incorporated accounted for 22.1%, 12.6%, and
12.0% of our net revenues, respectively. We anticipate that our operating
results will continue to depend on sales to a relatively small number of
customers. The loss of any of these customers or a significant reduction in
sales to these customers could adversely affect our revenues.
NOTE 7 - CONTINGENCIES
On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, acquired
in August 1999 by E-Tek Dynamics, Inc., which was recently acquired by JDS
Uniphase Corporation, filed a complaint against the Company for patent
infringement in the United States District Court, Northern District of
California. On December 30, 1999, Kaifa filed a first amended complaint adding
state law claims against the Company and adding as defendants ten individuals
currently employed by the Company. In addition to maintaining its original claim
of patent infringement against the Company, Kaifa asserted claims of intentional
and negligent interference with contract against the Company, trade secret
misappropriation against all of the defendants, unfair competition against all
of the defendants, and breach of contract against several of the individual
defendants. Kaifa seeks a declaratory judgment, damages, preliminary and
permanent injunctive relief, and specific enforcement of the individual
defendants' alleged contractual obligations. Kaifa alleges that the Company's
infringement is willful and seeks enhanced damages and attorneys fees. On April
28, 2000, Kaifa voluntarily dismissed its claims against two of
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the individual defendants. On May 3, 2000, the court dismissed Kaifa's claim of
negligent interference with contract against the Company and both of Kaifa's
claims for trade secret misappropriation and unfair competition against an
individual defendant. On June 2, 2000, the Company answered the complaint,
denying any liability, asserting various affirmative defenses and seeking a
declaration that the patent is not infringed by the Company, is invalid and/or
is unenforceable. Currently, the parties are engaged in fact discovery.
The Company intends to defend the action vigorously. A claim
construction hearing regarding the asserted patent claims is scheduled for
January 2001, and trial is scheduled for October 2001. If the Company is
unsuccessful in defending this action, any remedies awarded to Kaifa may harm
its business. Furthermore, defending this action has been and will continue to
be costly and divert management's attention regardless of whether the Company
successfully defends the action.
A former employee filed a lawsuit against the Company in Santa Clara
Superior Court on March 10, 2000 alleging three causes of action of wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing, and fraud. The former employee's claims stem from the
termination of his employment with the Company in February 2000. The former
employee seeks unspecified general and special damages, punitive damages,
attorneys' fees and costs in the form of cash and shares of the Company's common
stock. The Company plans to vigorously defend against these claims.
NOTE 8 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 9 - SUBSEQUENT EVENTS
On October 25, 2000, the Company announced that it had entered into a
definitive agreement to acquire JCA Technology, Inc. ("JCA"), a developer and
manufacturer of fiber optic products for OC-48 and OC-192 modulators, in a
transaction valued at approximately $600 million. The merger consideration is
composed of $575 million of the Company's common stock and $25 million in cash.
The transaction is expected to close in the fourth quarter of 2000, and will be
accounted for as a purchase transaction.
On October 25, 2000, the Company announced that it had entered into a
definitive agreement to acquire Globe Y. Technology, Inc. ("Globe Y"), a
manufacturer of fused
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<PAGE> 11
fiber coupling machines, in a transaction valued at approximately $50 million in
the Company's common stock. The transaction is expected to close early in the
first quarter of 2001, and will be accounted for as a purchase transaction.
Each of these transactions is expected to result in significant
intangible assets based on the underlying book value of the assets of JCA and
Globe Y.
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NEW FOCUS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following discussion contains predictions, estimates and other
forward-looking statements regarding improvements in our gross margins in the
fourth quarter of 2000 and in 2001, the accretive nature of the JCA and Globe Y
acquisition, and expectations regarding our capital expenditures in FY 2000 and
2001 and our cash requirements through 2001. These forward-looking statements
are subject to a number of risks that could cause our actual results to differ
materially from any future performance suggested herein. Our ability to achieve
better gross margin and financial performance is subject to our ability to
achieve improved manufacturing efficiencies, particularly in the manufacture of
our fiber optic products, which in turn depends on our ability to obtain higher
manufacturing yields, improved labor productivity and better material
utilization. Our fiber optic products should continue to account for a larger
proportionate share of our total revenue due to the high customer demand for
such products. As a result, we expect our overall gross margin performance will
become increasingly dependent on the rate of improvement in our manufacturing
efficiencies for these products. The accretive nature of the JCA and Globe Y
acquisitions and the future financial performance of these companies after the
closing of the acquisitions are subject to our ability to rapidly integrate
Globe Y and JCA into our operations, our ability to retain key employees, and
our ability to rapidly hire and train additional employees. Forward-looking
statements regarding our cash requirements through 2001 are subject to our
ability to successfully execute on aggressive manufacturing ramps, particularly
in our new facilities in the People's Republic of China, which in turn depends
on our ability to timely fit up manufacturing facilities, rapidly hire and train
large numbers of people and successfully complete customer qualifications of new
production sites. Other risk factors that may affect our financial performance
are listed elsewhere in this document.
Net Revenues:
Net revenues increased from $6.7 million for the three-month period
ended September 30, 1999, to $22.2 million for the three-month period ended
October 1, 2000, of which $14.9 million, or 67.1% of total net revenues, were
from sales of our telecom products. Sales of our telecom products accounted for
$2.0 million, or 29.9% of total net revenues, for the three-month period ended
September 30, 1999. Net revenues increased from $16.0 million for the nine-month
period ended September 30, 1999, to $46.5 million for the nine-month period
ended October 1, 2000, of which $28.3 million, or 60.9% of total net revenues,
were from sales of our telecom products. Sales of our telecom products accounted
for $2.5 million, or 15.6 % of total net revenues, for the nine-month
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<PAGE> 13
period ended September 30, 1999. The increases in net revenues between the
three- and nine-month periods ended September 30, 1999, and the three- and
nine-month periods ended October 1, 2000, were primarily a result of increased
sales of our telecom products.
Gross Margin:
Gross margin, including amortization of deferred stock compensation,
decreased from 34.4% in the three-month period ended September 30, 1999, to
18.2% in the three-month period ended October 1, 2000. Excluding $1.0 million of
amortization of deferred stock compensation for the three-month period ended
October 1, 2000, gross margin decreased from 34.6% in the three-month period
ended September 30, 1999, to 22.5% in the three-month period ended October 1,
2000. This decrease in the gross margin was primarily a result of increased
manufacturing overhead costs of approximately $4.6 million associated with the
expansion of our telecom manufacturing operations domestically and
internationally. Increased U.S. manufacturing overhead costs included increases
in payroll and related costs for additional manufacturing personnel of
approximately $1.7 million and higher equipment and facility costs of
approximately $0.7 million. Manufacturing overhead costs for our China
operations, which began limited production in June 2000 and progressively ramped
production throughout the third quarter of 2000 accounted for approximately $1.5
million of the increase in manufacturing overhead in the three-month period
ended October 1, 2000.
Gross margin, including amortization of deferred stock compensation,
decreased from 38.7% in the nine-month period ended September 30, 1999, to 4.2%
in the nine-month period ended October 1, 2000. Excluding $3.4 million of
amortization of deferred stock compensation for the nine-month period ended
October 1, 2000, gross margin decreased from 38.8% in the nine-month period
ended September 30, 1999, to 11.6% in the nine-month period ended October 1,
2000. This decrease in the gross margin was primarily a result of increased
manufacturing overhead costs of approximately $10.0 million associated with the
expansion of our telecom manufacturing operations domestically and
internationally. Increased U.S. manufacturing overhead costs included increases
in payroll and related costs for additional manufacturing personnel of
approximately $3.8 million, higher equipment and facility costs of approximately
$1.4 million and higher costs for supporting manufacturing processes of
approximately $1.1 million. Start-up manufacturing costs for our China
operations accounted for approximately $3.4 million of the increase in
manufacturing overhead in the nine-month period ended October 1, 2000.
Our gross margin percentage, excluding amortization of deferred stock
compensation charges, increased sequentially from 9.7% in the second quarter of
2000 to 22.5% in the third quarter of 2000, and we expect further improvement in
the fourth quarter of 2000. However, we expect the rate of improvement to slow
in the first quarter of 2001 because the anticipated increase in unit volumes
during this particular quarter may not fully absorb the additional charges
associated with our second manufacturing
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<PAGE> 14
facility in China and new facility in California. As we utilize our second China
facility more fully in the second quarter of 2001, we expect our gross margin
percentage to improve. We are currently targeting our gross margin performance
at 40-45% in the fourth quarter of 2001. These forward-looking expectations
relate to our current business and exclude the impact of our pending
acquisitions of JCA Technology, Inc. and Globe Y. Technology, Inc. See further
discussion of these acquisitions in "Pending Acquisitions."
Net Research and Development Expenses:
Net research and development expenses, including amortization of
deferred stock compensation, increased from 34.0% of net revenues, or $2.3
million, in the three-month period ended September 30, 1999, to 41.1%, or $9.1
million in the three-month period ended October 1, 2000. Excluding the $1.9
million of amortization of deferred stock compensation for the three-month
period ended October 1, 2000, net research and development expenses decreased
from 33.8% of net revenues, or $2.3 million in the three-month period ended
September 30, 1999, to 32.7% of net revenues, or $7.3 million, in the
three-month period ended October 1, 2000. Net research and development expenses,
including amortization of deferred stock compensation, increased from 37.5% of
net revenues, or $6.0 million, in the nine-month period ended September 30,
1999, to 45.1%, or $20.9 million in the nine-month period ended October 1, 2000.
Excluding the $5.2 million of amortization of deferred stock compensation for
the nine-month period ended October 1, 2000, net research and development
expenses decreased from 37.4% of net revenues, or $6.0 million in the nine-month
period ended September 30, 1999, to 33.9% of net revenues, or $15.8 million, in
the nine-month period ended October 1, 2000. Net research and development
expenses, excluding amortization of deferred stock compensation, decreased as a
percentage of net revenues for both the three- and nine-month periods ended
October 1, 2000 compared to the respective three- and nine-month periods ended
September 30, 1999, but increased in absolute dollars as a result of increased
research and development efforts for our telecom products.
Sales and Marketing Expenses:
Sales and marketing expenses, including amortization of deferred stock
compensation, decreased from 14.0% of net revenues, or $932,000, in the
three-month period ended September 30, 1999, to 8.9% of net revenues, or $2.0
million, in the three-month period ended October 1, 2000. Excluding $458,000 of
amortization of deferred compensation for the three-month period ended October
1, 2000, sales and marketing expenses decreased as a percentage of net revenues
from 13.9%, or $930,000, in the three-month period ended September 30, 1999, to
6.9% of net revenues, or $1.5 million, in the three-month period ended October
1, 2000. Sales and marketing expenses, including amortization of deferred stock
compensation, decreased from 17.1% of net revenues, or $2.7 million, in the
nine-month period ended September 30, 1999, to 11.4% of net revenues, or $5.3
million, in the nine-month period ended October 1, 2000. Excluding $1.2 million
of amortization of deferred compensation for the nine-month
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<PAGE> 15
period ended October 1, 2000, sales and marketing expenses decreased as a
percentage of net revenues from 17.1%, or $2.7 million, in the nine-month period
ended September 30, 1999 to 8.8% of net revenues, or $4.1 million, in the
nine-month period ended October 1, 2000. Excluding the non-cash charges for
deferred stock compensation for both the three- and nine-month periods ended
October 1, 2000, the increases in dollar spending for sales and marketing in
both the three- and nine-month periods were primarily due to the hiring of
additional sales and marketing personnel and to the expansion of our sales and
marketing efforts.
General and Administrative Expenses:
General and administrative expenses, including amortization of deferred
stock compensation, increased from 14.1% of net revenues, or $941,000, in the
three-month period ended September 30, 1999, to 23.0% of net revenues, or $5.1
million, in the three-month period ended October 1, 2000. Excluding $2.6 million
of amortization of deferred stock compensation for the three-month period ended
October 1, 2000, general and administrative expenses decreased from 14.1% of net
revenues, or $940,000, in the three-month period ended September 30, 1999, to
11.4% of net revenues, or $2.5 million, in the three-month period ended October
1, 2000. General and administrative expenses, including amortization of deferred
stock compensation, increased from 13.6% of net revenues, or $2.2 million, in
the nine-month period ended September 30, 1999, to 33.3% of net revenues, or
$15.5 million, in the nine-month period ended October 1, 2000. Excluding $9.1
million of amortization of deferred stock compensation for the nine-month period
ended October 1, 2000, general and administrative expenses as a percentage of
net revenue were 13.6% for both the nine-month periods ended September 30, 1999,
and October 1, 2000. General and administrative expenses increased from $2.2
million, in the nine-month period ended September 30, 1999, to $6.3 million, in
the nine-month period ended October 1, 2000. Excluding the non-cash charges for
deferred stock compensation for both the three- and nine-month periods ended
October 1, 2000, the increases in absolute dollar spending for general and
administrative expenses were primarily due to increased staffing and associated
expenses necessary to manage and support our increased scale of operations and
infrastructure required as a publicly-traded company.
Interest and Other Income, net:
Interest and other income totaled a net income of $33,000 for the
three-month period ended September 30, 1999, compared to a net interest and
other income of $5.1 million for the three-month period ended October 1, 2000.
Interest income totaled $75,000 and $5.1 million for the three-month periods
ended September 30, 1999, and October 1, 2000, respectively. Interest expense
totaled $46,000 and $36,000 for the three-month periods ended September 30,
1999, and October 1, 2000, respectively.
Interest and other income totaled a net expense of $158,000 for the
nine-month period ended September 30, 1999, compared to net interest and other
income of $6.0
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million for the nine-month period ended October 1, 2000. Interest expense
totaled $248,000 and $179,000 in the nine-month period ended September 30, 1999,
and the nine-month period ended October 1, 2000, respectively. Interest income
totaled $78,000 and $6.1 million in the nine-month period ended September 30,
1999, and October 1, 2000, respectively. The increases in interest income for
the three- and nine-month periods ended October 1, 2000, compared to the three-
and nine-month periods ended September 30, 1999, were primarily due to interest
earned on the $542.4 million in proceeds from the combination of our May 2000
initial public offering and August 2000 follow-on public offering.
Income Taxes:
The provision for income taxes of approximately $2,000 for the
nine-month period ended September 30, 1999, consists of current state minimum
taxes. The provision for income taxes of approximately $2,000 for the nine-month
period ended October 1, 2000, consists of foreign taxes paid on certain
transactions excluded from our tax holiday in China.
Pending Acquisitions:
In October 2000, we announced the signing of a definitive agreement with
JCA Technology, Inc. ("JCA") pursuant to which we intend to acquire JCA in a
transaction valued at approximately $600 million. The merger consideration is
composed of $575 million of New Focus common stock and $25 million in cash. The
merger will be accounted for as a purchase transaction and will result in
significant intangible assets based on the underlying book value of JCA's
assets. Based on unaudited results, JCA operated profitably during the first
nine months of 2000 with revenues of approximately $13.9 million. The unaudited
gross and operating margin percentages at JCA for the first nine months of 2000
were higher than our actual third quarter margins and targeted margins for 2001.
We expect to close this transaction during the fourth quarter of 2000. We also
expect this transaction to be immediately accretive to our revenue and margin
lines, measured on a pro forma per share basis and excluding acquisition-related
charges such as goodwill and compensation expenses. We cannot assure you that,
assuming completion of the acquisition, JCA will continue to operate at these
margin levels.
In October 2000, we also announced the signing of a definitive agreement
with Globe Y. Technology, Inc. ("Globe Y") pursuant to which we intend to
acquire Globe Y for $50 million of our common stock. The merger will be
accounted for as a purchase transaction and will result in our recording
significant intangible assets on our balance sheet based on the underlying book
value of Globe Y's assets. Based on unaudited results, Globe Y operated
profitably during the first nine months of 2000 on revenues of approximately
$4.8 million. We expect to close this transaction early in the first quarter of
2001. We also expect this transaction to be immediately accretive to our revenue
and margin lines, measured on a pro forma per share basis and excluding
acquisition-related charges such as goodwill and compensation expenses. We
cannot assure you that,
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assuming completion of the acquisition, Globe Y will continue to operate at
these margin levels.
LIQUIDITY AND CAPITAL RESOURCES:
From our inception in 1990 to our initial public offering in May 2000,
we have financed our operations primarily through private sales of convertible
preferred stock, bank debt and loans from Dr. Milton Chang, one of our founders
and a member of our board of directors. On May 18, 2000, we sold 5,650,000
shares of common stock (including exercise of the underwriters' over-allotment
option) at a price of $20.00 per share in our initial public offering.
Additionally, on August 11, 2000, we sold 4,025,000 shares of common stock
(including exercise of the underwriters' over-allotment option) at a price of
$115.00 per share in a follow-on public offering. Proceeds to us from these
transactions, net of issuance costs, were approximately $542.4 million. Our cash
and cash equivalents totaled $504.5 million as of October 1, 2000. Net working
capital increased by $495.1 million for the nine-month period ended October 1,
2000.
Cash used in operating activities was $3.8 million for the nine-month
period ended September 30, 1999, and $30.5 million for the nine-month period
ended October 1, 2000. Cash used in operating activities for the nine-month
period ended October 1, 2000 was primarily due to our net loss of $33.7 million,
increases in inventories of $14.7 million, increases in accounts receivable of
$8.0 million and increases in prepaid expenses and other current assets of $5.0
million, partially offset by non-cash charges of $21.9 million and increases in
accounts payable and accrued expenses of $9.0 million. The increases in
inventories and accounts payable were primarily due to the production ramp in
both the U.S. and China for our Telecom products. The increase in accounts
receivable was primarily a result of our higher sales volumes. Prepaid expenses
and other current assets increased primarily due to $2.9 million of interest
receivable on our higher cash balance.
Cash used in investing activities was $2.8 million for the nine-month
period ended September 30, 1999, and $36.3 million for the nine-month period
ended October 1, 2000. In each period cash was primarily used to acquire
property, plant and equipment. In the nine-month period ended October 1, 2000,
advances to suppliers and increases in other assets accounted for $9.7 million
of the total cash used in investing activities. The majority of the $26.5
million spent for property, plant and equipment was used to expand our
manufacturing facilities in both the U.S. and China.
Cash generated by financing activities was $9.3 million in the
nine-month period ended September 30, 1999, and $543.1 million in the nine-month
period ended October 1, 2000. Cash generated by financing activities in the
nine-month period ended September 30, 1999, was primarily due to proceeds of
$12.5 million from the sale of convertible
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preferred stock partially offset by net repayments of $3.3 million on our bank
lending facilities, an equipment loan, capital lease obligations and promissory
notes. Cash generated by financing activities in the nine-month period ended
October 1, 2000, was primarily due to net proceeds of $542.4 million from the
sale of 5,650,000 shares of our common stock in our initial public offering and
the sale of 4,025,000 shares of our common stock in a follow-on offering.
We currently expect to incur approximately $50 to $55 million of capital
expenditures in fiscal year 2000 and $70 to $80 million in fiscal year 2001 to
purchase equipment and expand our operations and manufacturing capacity in the
United States and China. In October 2000, we announced the signing of a
definitive agreement with JCA Technology, Inc., pursuant to which we will
acquire JCA in a transaction valued at approximately $600 million. The merger
consideration is composed of $575 million of our common stock and $25 million in
cash. The transaction is expected to close in the fourth quarter of 2000.
Additionally, in October 2000, we announced the signing of a definitive
agreement with Globe Y. Technology, Inc. pursuant to which we will acquire Globe
Y in a transaction valued at approximately $50 million. This transaction is
expected to close early in the first quarter of 2001. We plan to expand the
manufacturing capacities for both JCA and Globe Y and are currently evaluating
the capital expenditures required for this expansion.
We have entered into supply agreements with certain vendors to supply us
with yttrium vanadate crystals and have advanced a total of $8.0 million to
these vendors against future orders. We may have to make further advance
payments to these or other suppliers in order to secure sources of supply for
key components. Such advances, if any, will reduce our working capital.
Based on current plans and business conditions, we believe that our
existing cash and cash equivalents will be sufficient to satisfy our projected
cash requirements for both our existing business and our recently announced
acquisitions of JCA and Globe Y through at least 2001. We believe that our cash
and cash equivalents are likely to decline during the next twelve months as we
continue to expand our manufacturing facilities, fund research and development
efforts and make strategic investments.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK:
Interest Rate Sensitivity:
We currently maintain our cash and cash equivalents primarily in money
market funds. We do not have any derivative financial instruments. As of October
1, 2000, all of our investments mature in less than three months. Accordingly,
we do not believe that our investments have significant exposure to interest
rate risk.
Exchange Rate Sensitivity:
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We operate primarily in the United States, and all sales to date have
been made in U.S. dollars. Accordingly, we currently have no material exposure
to foreign currency rate fluctuations.
While we expect our international revenues and expenses to be
denominated predominately in U.S. dollars, a portion of our international
revenues and expenses may be denominated in foreign currencies in the future. We
expect that certain expenses incurred by our China operations will be
denominated in the Chinese Renminbi. As our China operations account for a
larger portion of our worldwide manufacturing, we will experience the risks of
fluctuating currencies and may choose to engage in currency hedging activities
to reduce these risks.
RISK FACTORS:
You should carefully consider the risks described below and all of the
information contained in this Form 10-Q. If any of the following risks actually
occur, our business, financial condition and results of operations could be
harmed, the trading price of our common stock could decline, and you may lose
all or part of your investment in our common stock.
RISKS RELATED TO OUR FINANCIAL RESULTS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We incurred net losses of $33.7 million for the nine-month period ended
October 1, 2000, $7.7 million for the nine-month period ended December 31, 1999,
$5.0 million for our fiscal year ended March 31, 1999, and $286,000 for our
fiscal year ended March 31, 1998. As of October 1, 2000, we had an accumulated
deficit of $49.2 million. We may not be able to sustain the recent growth in our
revenues, and we may not realize sufficient revenues to achieve or maintain
profitability. We also expect to incur significant product development, sales
and marketing and administrative expenses, and, as a result, we will need to
generate increased revenues to achieve profitability. Additionally, the Company
has announced the signing of definitive agreements to acquire two companies.
Assuming completion of the acquisitions, the Company will recognize significant
intangible assets based on the underlying book value of the assets of the two
companies acquired. Amortization of these intangible assets and other
acquisition-related charges will reduce the Company's profitability. Even if we
achieve profitability, given the competition in, and the evolving nature of, the
optical networking market, we may not be able to sustain or increase
profitability on a quarterly or annual basis. As a result, we will need to
generate significantly higher revenues while containing costs and operating
expenses if we are to achieve profitability.
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WE HAVE ONLY RECENTLY BEGUN SELLING FIBER OPTIC PRODUCTS TO THE
TELECOMMUNICATIONS INDUSTRY, AND WE MAY NOT ACCURATELY PREDICT OUR REVENUES FROM
THESE PRODUCTS, WHICH COULD CAUSE QUARTERLY FLUCTUATIONS IN OUR NET REVENUES AND
RESULTS OF OPERATIONS AND MAY RESULT IN VOLATILITY OR DECLINES IN OUR STOCK
PRICE.
We have only recently begun selling our fiber optic products to the
telecommunications industry, and we have only generated revenues from the sale
of these products since March 1999. Because we have only recently begun to sell
these products, we may be unable to accurately forecast our revenues from sales
of these products, and we have limited meaningful historical financial data upon
which to plan future operating expenses. Many of our expenses are fixed in the
short term, and we may not be able to quickly reduce spending if our revenue is
lower than we project. Major new product introductions will also result in
increased operating expenses in advance of generating revenues, if any.
Therefore, net losses in a given quarter could be greater than expected. We may
not be able to address the risks associated with our limited operating history
in an emerging market and our business strategy may not be sustainable. Failure
to accurately forecast our revenues and future operating expenses could cause
quarterly fluctuations in our net revenues and may result in volatility or a
decline in our stock price.
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF THESE CUSTOMERS OR A
SIGNIFICANT REDUCTION IN SALES TO THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR
REVENUES.
In the three-month period ended October 1, 2000, Corvis Corporation,
Agilent Technologies, and Corning Incorporated accounted for 22.1%, 12.6%, and
12.0% of our net revenues, respectively. In the nine-month period ended December
31, 1999, none of our customers accounted for more than 10% of our net revenues.
We anticipate that our operating results will continue to depend on sales to a
relatively small number of customers. The loss of any of these customers or a
significant reduction in sales to these customers could adversely affect our
revenues.
SALES TO ANY SINGLE CUSTOMER MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER,
WHICH MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Customers in our industry tend to order large quantities of products on
an irregular basis. 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 may result in significant quarterly
fluctuations in our revenues and operating results.
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If current customers do not continue to place significant orders, we may
not be able to replace these orders with orders from new customers. None of our
current customers have any minimum purchase obligations, and they may stop
placing orders with us at any time, regardless of any forecast they may have
previously provided. For example, any downturn in our customers' business could
significantly decrease sales of our products to these customers. The loss of any
of our key customers or a significant reduction in sales to these customers
could significantly reduce our net revenues.
RISKS RELATED TO THE OPTICAL NETWORKING INDUSTRY
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AND OPTICAL NETWORKS ARE NOT
DEPLOYED TO SATISFY THE INCREASED BANDWIDTH REQUIREMENTS AS WE ANTICIPATE, SALES
OF OUR PRODUCTS MAY DECLINE, AND OUR NET REVENUES MAY BE ADVERSELY AFFECTED.
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communications, the continuing increase in
the amount of data transmitted over communications networks, or bandwidth, and
the growth of optical networks to meet the increased demand for bandwidth. If
the Internet does not continue to expand as a widespread communications medium
and commercial marketplace, the need for significantly increased bandwidth
across networks and the market for optical networking products may not continue
to develop. Future demand for our products is uncertain and will depend to a
great degree on the continued growth and upgrading of optical networks. If the
growth and upgrading of optical networks does not continue, sales of our
products may decline, which would adversely affect our revenues.
THE OPTICAL NETWORKING MARKET IS NEW AND UNPREDICTABLE AND CHARACTERIZED BY
RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES NOT
DEVELOP AND EXPAND AS WE ANTICIPATE, DEMAND FOR OUR PRODUCTS MAY DECLINE, WHICH
WOULD ADVERSELY IMPACT OUR REVENUES.
The optical networking market is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is new, it is
difficult to predict its potential size or future growth rate. Widespread
adoption of optical networks is critical to our future success. Potential
end-user customers who have invested substantial resources in their existing
copper lines or other systems may be reluctant or slow to adopt a new approach,
like optical networks. Our success in generating revenues in this emerging
market will depend on:
- maintaining and enhancing our relationships with our customers;
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- the education of potential end-user customers and network service
providers about the benefits of optical networks; and
- our ability to accurately predict and develop our products to meet
industry standards.
If we fail to address changing market conditions, the sales of our
products may decline, which would adversely impact our revenues.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICE OF
OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.
We have experienced decreases in the average selling prices of some of
our products. We anticipate that as products in the optical networking market
become more commoditized, the average selling price of our products may decrease
in response to competitive pricing pressures, new product introductions by us or
our competitors or other factors. If we are unable to offset the anticipated
decrease in our average selling prices by increasing our sales volumes or
product mix, our net revenues and gross margins will decline. In addition, to
maintain or improve our gross margins, we must continue to reduce the
manufacturing cost of our products, and we must develop and introduce new
products and product enhancements with higher margins. If we cannot maintain or
improve our gross margins, our financial position may be harmed and our stock
price may decline.
RISKS RELATED TO OUR BUSINESS
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY NOT SUCCEED.
Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We continue to expand the scope of our operations
domestically and internationally and have increased the number of our employees
substantially in the past year. At September 30, 1999, we had a total of 229
employees and at October 1, 2000, we had a total of 1,160 employees. We plan to
continue hiring a significant number of employees over the next few quarters. We
currently operate facilities in Santa Clara, California, San Jose, California,
Madison, Wisconsin, Middleton, Wisconsin and Shenzhen, China and are in the
process of establishing additional manufacturing facilities in San Jose,
California and Shenzhen, China. In May 2000, we entered into a lease for 130,000
square feet in San Jose, California to facilitate our anticipated growth over
the next twelve months. If we outgrow our current facilities in Northern
California, we will need to locate and obtain
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additional space. The commercial real estate market in Northern California is
extremely competitive, and we may not be able to obtain additional needed space
on reasonable terms, or at all. Our failure to obtain additional space could
adversely impact our ability to expand our business and operations and increase
our revenues. The increase in employees and the growth in our operations,
combined with the challenges of managing geographically-dispersed operations,
has placed, and 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 continue
to expand, train and manage our work force worldwide. The failure to effectively
manage our growth could adversely impact our ability to manufacture and sell our
products, which could reduce our revenues.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS IN A TIMELY
MANNER.
Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively transfer
production processes from research and development to manufacturing and
coordinate our efforts with the efforts of our suppliers to rapidly achieve
volume production. If we fail to effectively transfer production processes,
develop product enhancements or introduce new products that meet the needs of
our customers as scheduled, our net revenues may decline.
COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS, OR
CAUSE US TO LOSE MARKET SHARE.
Competition in the optical networking market in which we compete is
intense. We face competition from public companies, including JDS Uniphase
Corporation, Lucent Technologies and Nortel Networks Corporation. Many of our
competitors 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
than we can to the development, promotion, sale and support of their products.
In addition, the market capitalization and cash reserves of several of our
competitors are much larger than ours, and, as a result, these competitors 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. For example,
JDS Uniphase Corporation recently acquired E-Tek Dynamics and announced the
acquisition of SDL, Inc. Any of these acquisitions could give our competitors a
strategic advantage. For example, if our competitors acquire any of our
significant customers, these customers may reduce the amount of products they
purchase from us. Alternatively, some of our competitors may spin-out new
companies in the optical networking components market. For example, Lucent
Technologies recently announced that it will spin-off its
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microelectronics business, including Lucent's optoelectronics components and
integrated circuits division. These companies may compete more aggressively than
their former parent companies due to their greater dependence on our markets. In
addition, many of our potential competitors have significantly more established
sales and customer support organizations, much greater name recognition, more
extensive customer bases, more developed distribution channels and broader
product offerings than we have. These companies can leverage their customer
bases and broader product offerings and adopt aggressive pricing policies to
gain market share. Additional competitors may enter the market, and we are
likely to compete with new companies in the future. 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 of the
foregoing factors, we expect that competitive pressures may result in price
reductions, reduced margins and loss of market share.
WE HAVE LIMITED PRODUCT OFFERINGS, AND IF DEMAND FOR THESE PRODUCTS DECLINES OR
FAILS TO DEVELOP AS WE EXPECT, OUR NET REVENUES WILL DECLINE.
We derive a substantial portion of our net revenues from a limited
number of products. Specifically, in the nine-month period ended October 1,
2000, we derived approximately 36% and 12%, respectively, of our net revenues
from our circulators and tunable laser modules (for test and measurement). We
expect that net revenues from a limited number of products will continue to
account for a substantial portion of our total net revenues. Continued and
widespread market acceptance of these products is critical to our future
success. We cannot assure you that our current products will achieve market
acceptance at the rate at which we expect, or at all, which could reduce our net
revenues.
WE MUST EXPAND SUBSTANTIALLY OUR SALES ORGANIZATION IN ORDER TO INCREASE MARKET
AWARENESS AND SALES OF OUR PRODUCTS OR OUR REVENUES MAY NOT INCREASE.
The sale of our products requires long and involved efforts targeted at
several key departments within our prospective customers' organizations. Sales
of our products require the prolonged efforts of executive personnel and
specialized systems and applications engineers working together with a small
number of dedicated salespersons. Currently, our sales organization is limited.
We will need to grow our sales force in order to increase market awareness and
sales of our products. Competition for these individuals is intense, and we
might not be able to hire the kind and number of sales personnel and
applications engineers we need. If we are unable to expand our sales operations,
we may not be able to increase market awareness or sales of our products, which
would prevent us from increasing our revenues.
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OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND MAY CONTAIN DEFECTS
THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED, WHICH COULD
DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS.
Some of our products are designed to be deployed in large and complex
optical networks. Because of the nature of these products, they can only be
fully tested for reliability when deployed in networks for long periods of time.
Our fiber optic products may contain undetected defects when first introduced or
as new versions are released, and our customers may discover defects in our
products only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things:
- loss of customers;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
The occurrence of any one or more of the foregoing factors could cause
our net revenues to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUE AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
The timing of our revenue is difficult to predict because of the length
and variability of the sales and implementation cycles for our products. We do
not recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of up to one year or more. In addition, some of
our customers require that our products be subjected to Telcordia qualification
testing, which can take up to nine months or more. While our customers are
evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and
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<PAGE> 26
research and development expenses to customize our products to the customer's
needs. We may also expend significant management efforts, increase manufacturing
capacity and order long lead time components or materials prior to receiving an
order. Even after this evaluation process, a potential customer may not purchase
our products. Because of the evolving nature of the optical networking market,
we cannot predict the length of these sales and development cycles. As a result,
these long sales cycles may cause our revenues and operating results to vary
significantly and unexpectedly from quarter to quarter, which could cause
volatility in our stock price.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL OR
RETAIN EXISTING PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel. None of our officers or key employees are bound by an employment
agreement for any specific term and these individuals may terminate their
employment at any time. In addition, we do not have "key person" life insurance
policies covering any of our employees.
In order to implement our business plan, we must hire a significant
number of additional employees in 2001, 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. 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, which
could adversely impact our ability to manufacture and sell our products.
WE HAVE RECENTLY SIGNED AGREEMENTS TO ACQUIRE TWO BUSINESSES. IF WE EXPERIENCE
DIFFICULTY IN INTEGRATING THESE NEW ACQUISITIONS, OUR BUSINESS MAY BE ADVERSELY
AFFECTED. ANY ACQUISITIONS WE MIGHT MAKE IN THE FUTURE COULD DISRUPT OUR
BUSINESS AND HARM OUR FINANCIAL CONDITION.
We have recently announced the signing of definitive agreements to
acquire JCA Technology, Inc. ("JCA") and Globe Y. Technology, Inc. ("Globe Y").
Assuming the completion of these acquisitions, the efficient integration of
these businesses into our organization will be important to our success. If our
integration efforts are unsuccessful, our business will suffer. We expect to
spend significant resources to integrate these businesses into our organization.
Both JCA and Globe Y are privately held and may require substantial investments
in operational and financial infrastructure to ensure that their systems and
processes adequately support operating as a publicly held organization.
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Each of these organizations will also need additional investments in
manufacturing infrastructure in order to ramp production volumes. A key employee
of JCA owns substantially all of the stock of JCA, and a key employee of Globe Y
owns all the stock of Globe Y. Although each of these individuals has executed
employment agreements with the Company, we cannot assure you that we can retain
either or both of these individuals once these transactions are completed. We
have limited experience with integrating acquired businesses into our
organization. Our integration efforts may not be successful, and may result in
unanticipated operations problems, expenses and liabilities and the diversion of
management attention. If we are unable to integrate these companies into our
organization in a timely and effective manner, our business and our operating
results will be adversely affected.
We anticipate that in the future, as part of our business strategy, we
will continue to make strategic acquisitions of complementary companies,
products or technologies. In the event of any further future acquisitions, we
could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities; or
- incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These acquisitions also involve numerous risks, including:
- problems combining the acquired operations, technologies or products;
- unanticipated costs or liabilities;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.
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WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the nine-month period ended October 1, 2000, 29.5% of our net
revenues were from international sales. We plan to increase our international
sales activities. Our international sales will be limited if we cannot establish
relationships with international distributors, establish additional foreign
operations, expand international sales channel management, hire additional
personnel and develop relationships with international service providers. Even
if we are able to successfully continue international operations, we may not be
able to maintain or increase international market demand for our products. Our
international operations are subject to the following risks:
- greater difficulty in accounts receivable collection and longer
collection periods;
- difficulties and costs of staffing and managing foreign operations;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- sudden and unexpected reductions in demand in particular countries in
response to exchange rate fluctuations;
- certification requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; 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 may
choose to engage in currency hedging activities to reduce these risks.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES AND LITIGATION, WHICH
COULD SUBJECT US TO SIGNIFICANT LIABILITY, DIVERT THE TIME AND ATTENTION OF OUR
MANAGEMENT AND PREVENT US FROM SELLING OUR PRODUCTS.
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We anticipate, based on the size and sophistication of our competitors
and the history of rapid technological advances in our industry, that several
competitors may have patent applications in progress in the United States or in
foreign countries that, if issued, could relate to our product. If such patents
were to be issued, the patent holders or licensees may assert infringement
claims against us or claim that we have violated other intellectual property
rights. These claims and any resulting lawsuits, if successful, could subject us
to significant liability for damages and invalidate our proprietary rights. The
lawsuits, regardless of their merits, could be time-consuming and expensive to
resolve and would divert management time and attention. Any potential
intellectual property litigation could also force us to do one or more of the
following, any of which could harm our business:
- stop selling, incorporating or using our products that use the
disputed intellectual property;
- obtain from third parties a license to sell or use the disputed
technology, which license may not be available on reasonable terms, or
at all; or
-redesign our products that use the disputed intellectual property.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT MAY
SUBSTANTIALLY INCREASE OUR COSTS AND HARM OUR BUSINESS.
We may from time to time become involved in various lawsuits and legal
proceedings. For example, in March 2000, a former employee filed a complaint
against us. We have not accrued for the possible unfavorable outcome of this
litigation. However, litigation is subject to inherent uncertainties, and an
adverse result in this or other matters that may arise from time to time may
adversely impact our operating results or financial condition. Any litigation to
which we are subject could require significant involvement of our senior
management and may divert management's attention from our business and
operations. For more information about current legal proceedings, see "Part II -
Other Information, Item 1 Legal Proceedings."
RISKS RELATED TO MANUFACTURING OUR PRODUCTS
WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We typically purchase our components and materials through purchase
orders, and in general we have no guaranteed supply arrangements with any of
these suppliers. We
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currently purchase several key components and materials used in the manufacture
of our products from single or limited source suppliers. For example, we
purchase a specialized type of garnet crystal from Mitsubishi International
Corporation, the world's only commercial supplier of this type of garnet
crystal. In addition, Fujian Casix Laser, Inc., or Casix, has supplied
substantial quantities of our yttrium vanadate crystals to date. JDS Uniphase
Corporation, one of our competitors, acquired Casix in May 2000. We have no
agreements with Casix to continue to supply us with yttrium vanadate crystals
other than purchase orders which have been accepted by Casix. In May 2000, we
entered into a three-year supply agreement with Fuzhou Koncent Communication,
Inc., or Koncent, formerly Fuzhou Conet Communication, Inc., to supply us with
yttrium vanadate crystals. Koncent has only recently begun production of these
crystals, and we cannot assure you that Koncent will be able to manufacture
crystals that meet our specifications or will be able to meet our anticipated
supply requirements. If our relationship with Casix or Koncent, or both,
terminates, we may not be able to find another manufacturer that can meet our
specifications and anticipated supply requirements, in which case, we may
experience difficulty identifying alternative sources of supply for certain
components used in our products. In addition, we may need to make advance
payments against future orders in order to secure supply. For example, we
advanced Koncent RMB 58 million or approximately U.S.$7.0 million in conjunction
with our supply agreement with Koncent. If we have to advance further payments
to Koncent or to other suppliers, this will reduce our working capital. We may
fail to obtain required components in a timely manner in the future. We would
experience further delays from evaluating and testing the products of these
potential alternative suppliers. Furthermore, financial or other difficulties
faced by these suppliers or significant changes in demand for these components
or materials could limit the availability. Any interruption or delay in the
supply of any of these components or materials, or the inability to obtain these
components and materials from alternate sources at acceptable prices 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.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to
determine our component requirements. It is very important that we accurately
predict both the demand for our products and the lead times required to obtain
the necessary components and materials. Lead times for components and materials
that we order vary significantly and depend on factors such as specific supplier
requirements, the size of the order, contract terms and current market demand
for the components or materials at a given time. For substantial increases in
production levels, some suppliers may need six months or more lead time. If we
overestimate our component and material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
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and material requirements, we may have inadequate inventory, which could
interrupt our manufacturing and delay delivery of our products to our customers.
Any of these occurrences would negatively impact our revenues.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED AND
OUR REVENUES MAY SUFFER.
The manufacture of our products involves complex and precise processes.
Our manufacturing costs are relatively fixed, and, thus, manufacturing yields
are critical to our results of operations. Changes in our manufacturing
processes or those of our suppliers, or the use of defective components or
materials, could significantly reduce our manufacturing yields and product
reliability. In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our manufacturing lines.
We have experienced, and continue to experience, lower than targeted product
yields, which have resulted in delays of customer shipments, lost revenues and
impaired gross margins. In order to improve our gross margins, we may need to
develop new, more cost-effective manufacturing processes and techniques, and if
we fail to do so, our gross margins may be adversely affected.
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 NET REVENUES.
We currently manufacture substantially all of our products in our
facilities located in Santa Clara, and San Jose, California and at our first
smaller facility in Shenzhen China. We plan to devote significant resources to
expand our manufacturing capacity at our second facility in San Jose, California
and our significantly larger second facility in Shenzhen, China. We are in the
process of fitting up both of these new facilities in San Jose and Shenzhen and
any delay in the fit up of these facilities could result in delays of product
delivery. We could experience difficulties and disruptions in the manufacture of
our products while we transition to these new facilities, which could prevent us
from achieving timely delivery of products and could result in lost revenues. We
could also face the inability to procure and install the necessary capital
equipment, a shortage of raw materials we use in our products, a lack of
availability of manufacturing personnel to work in our facilities, difficulties
in achieving adequate yields from new manufacturing lines and an inability to
predict future order volumes. We may experience delays, disruptions, capacity
constraints or quality control problems in our manufacturing operations, and, as
a result, product shipments to our customers could be delayed, which would
negatively impact our revenues, competitive position and reputation. For
example, we have experienced a disruption in the manufacture of some of our
products due to changes in our manufacturing processes, which resulted in
reduced manufacturing yields
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and delays in the shipment of our products. If we experience similar disruptions
in the future, it may result in lower yields or delays of our product shipments,
which could adversely affect our revenues, gross margins and results of
operations. 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 profitability.
OUR MANUFACTURING OPERATIONS IN CHINA SUBJECT US TO RISKS INHERENT IN DOING
BUSINESS IN CHINA, WHICH MAY HARM OUR MANUFACTURING CAPACITY AND OUR NET
REVENUES.
We have a manufacturing facility located in Shenzhen, China that became
operational in June 2000. In addition, in July 2000, we acquired a second
facility in Shenzhen, China. These facilities and our ability to operate the
facilities may be adversely affected by changes in the laws and regulations of
the People's Republic of China, such as those relating to taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters. These manufacturing facilities are located on land leased from China's
government by Shenzhen New and High-Tech Village Development Co. and the
Shenzhen Libaoyi Industry Development Co., Ltd. pursuant to land use
certificates and agreements, each with terms of 50 years. We lease the smaller
of our manufacturing facilities from Shenzhen New and High-Tech Village
Development Co. pursuant to a lease agreement that will expire in November 2002,
subject to our option to renew for an additional three-year period. We purchased
approximately 43% of the second facility in Shenzhen, China and leased the
remainder of the facility for a term of five years from Shenzhen Libaoyi
Industry Development Co., Ltd., with an option to purchase the leased portion of
the facility during the first three years of the lease term. Our assets and
facilities located in China are subject to the laws and regulations of China and
our results of operations in China are subject to the economic and political
situation there.
We believe that our operations in Shenzhen, China are in compliance with
China's applicable legal and regulatory requirements. However, there can be no
assurance that China's central or local governments will not impose new,
stricter regulations or interpretations of existing regulations which would
require additional expenditures. China's economy differs from the economies of
many countries in such respects as structure, government involvement, level of
development, growth rate, capital reinvestment, allocation of resources,
self-sufficiency, rate of inflation and balance of payments position, among
others. In the past, China's economy has been primarily a planned economy
subject to state plans. Since 1978, China's government has been reforming its
economic and political systems. Reforms of this kind have resulted in
significant economic growth and social change. We can not assure you that
China's policies for economic reforms will be consistent or effective. Our
results of operations
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and financial position may be harmed by changes in the political, economic or
social conditions in China.
We plan to export substantially all the products manufactured at our
facilities in China. Accordingly, upon application to and approval by the
relevant government authorities, we will not be subject to certain of China's
taxes and are exempt from customs duties on imported components or materials and
exported products. We are required to pay income tax in China, subject to
certain tax holidays. We may become subject to other taxes in China or may be
required to pay customs duties in the future. In the event that we are required
to pay other taxes in China or customs duties, our results of operations could
be materially and adversely affected.
To successfully meet our overall production goals, we will have to
coordinate and manage effectively between our facilities in the United States
and in China. We have limited experience in coordinating and managing production
facilities that are located on different continents or in the transfer of
manufacturing operations from one facility to another. Our failure to
successfully coordinate and manage multiple sites on different continents or to
transfer our manufacturing operations could seriously harm overall production.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.
Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to qualification of the manufacturing line
for volume production. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through varying levels of qualification with our
customers. Customers may require that we be registered under international
quality standards, such as ISO 9001. This customer qualification process
determines whether our manufacturing lines meet the customers' quality,
performance and reliability standards. If there are delays in qualification of
our products, our customers may drop the product from a long-term supply
program, which would result in significant lost revenue opportunity over the
term of that program.
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RISKS RELATED TO OUR INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD SERIOUSLY
HARM OUR ABILITY TO USE OUR PROPRIETARY TECHNOLOGY TO GENERATE REVENUE.
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 our patent applications will be approved, that
any patents that may issue will protect our intellectual property or that any
issued patents will not be challenged by third parties. Other parties may
independently develop similar or competing technology or design around any
patents that may be issued to us. Our contract with Agilent provides Agilent the
right to manufacture our products using our proprietary intellectual property if
Agilent terminates the contract for cause, including if we are unable to supply
specified quantities of our products to Agilent. The contract contains a
confidentiality provision designed to prevent misappropriation of our
intellectual property. However, we cannot be certain that the steps we have
taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S INTELLECTUAL
PROPERTY RIGHTS, AND IF WE ARE UNSUCCESSFUL IN DEFENDING THIS CLAIM, WE MAY HAVE
TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS NON-INFRINGING
AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES.
U.S.A. Kaifa Technology, Inc., acquired in August 1999 by E-Tek
Dynamics, Inc., which was recently acquired by JDS Uniphase, filed a complaint
against us in December 1999 in the United States District Court for the Northern
District of California, alleging, among other things, that we have infringed
some of their intellectual property rights. We cannot be certain that we will be
successful in our defense. If we are unsuccessful in defending this action, any
remedies awarded to Kaifa may harm our business. Furthermore, defending this
action will be costly and divert management's attention regardless of whether we
successfully defend the action. On February 23, 2000, we filed a motion to
dismiss several of Kaifa's claims. On the same date, our employees named in the
complaint also filed motions to dismiss Kaifa's complaints against them. On
April 28, 2000, Kaifa voluntarily dismissed its claims against two of the
individual defendants. On May 3, 2000, the Court dismissed Kaifa's claim against
us for negligent interference with contract with prejudice. Also on May 3, 2000,
the Court dismissed Kaifa's claims for trade secret misappropriation and unfair
competition against an individual defendant.
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On June 2, 2000, we answered the complaint, denying any liability,
asserting various affirmative defenses and seeking a declaration that the patent
is not infringed by us, is invalid and/or is unenforceable. Currently, the
parties are engaged in fact discovery. For more information about current legal
proceedings, see "Part II - Other Information, Item 1 Legal Proceedings."
IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY
BE UNABLE TO COMPETE EFFECTIVELY.
We regard substantial elements of our technology as proprietary and
attempt to protect them by relying on patent, trademark, service mark, copyright
and trade secret laws. We also rely on confidentiality procedures and
contractual provisions with our employees, consultants and corporate partners.
The steps we take to protect our intellectual property may be inadequate, time
consuming and expensive. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property, which could harm our business.
It may be necessary to litigate to enforce our patents, copyrights, and
other intellectual property rights, to protect our trade secrets, to determine
the validity of and scope of the proprietary rights of others or to defend
against claims of infringement or invalidity. Such litigation can be time
consuming, distracting to management, expensive and difficult to predict. Our
failure to protect or enforce our intellectual property could have an adverse
effect on our business, financial condition, prospects and results of operation.
For more information about current legal proceedings, see "Part II -
Other Information, Item 1 - Legal Proceedings."
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND
SELL OUR PRODUCTS.
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, or 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 seriously harm our ability to manufacture and sell
our products.
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RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued FAS 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The Company believes that the
adoption of FAS 133 will not have a significant impact on the Company's
operating results or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, ("SAB 101") "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB 101 is effective for years
beginning after December 15, 1999, and is required to be reported beginning in
the quarter ended December 31, 2000. SAB 101 is not expected to have a
significant effect on the Company's consolidated results of operations,
financial position or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the Company's results of
operations, financial position, or cash flows.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings- On December 8, 1999, U.S.A. Kaifa Technology,
Inc., ("Kaifa"), acquired in August 1999 by E-Tek Dynamics, Inc., which was
recently acquired by JDS Uniphase, filed a complaint against us for patent
infringement in the United States District Court, Northern District of
California. On December 30, 1999, Kaifa filed a first amended complaint adding
state law claims against us and adding as defendants ten individuals currently
employed by us. In addition to maintaining its original claim of patent
infringement against us, Kaifa asserted claims of intentional and negligent
interference with contract against us, trade secret misappropriation against all
of the defendants, unfair competition against all of the defendants and breach
of contract against several of the individual defendants. Kaifa seeks a
declaratory judgment, damages, preliminary and permanent injunctive relief and
specific enforcement of the individual defendants' alleged contractual
obligations. Kaifa alleges that our infringement is willful and seeks enhanced
damages and attorneys' fees. On April 28, 2000, Kaifa voluntarily dismissed its
claims against two of the individual defendants. On May 3, 2000, the court
dismissed Kaifa's claim of negligent interference with contract against us and
both of Kaifa's claims for trade secret misappropriation and unfair competition
against an individual defendant. On June 2, 2000, we answered the complaint,
denying any liability, asserting various affirmative defenses and seeking a
declaration that the patent is not infringed by us, is invalid and/or is
unenforceable. Currently, the parties are engaged in fact discovery.
We intend to defend the action vigorously. A claim construction hearing
regarding the asserted patent claims is scheduled for January 2001, and trial is
scheduled for October 2001. If we are unsuccessful in defending this action, any
remedies awarded to Kaifa may harm our business. Furthermore, defending this
action will be costly and divert management's attention regardless of whether we
successfully defend the action.
A former employee filed a lawsuit against us in Santa Clara Superior
Court on March 10, 2000 alleging three causes of action of wrongful termination
in violation of public policy, breach of the covenant of good faith and fair
dealing and fraud. The former employee's claims stem from the termination of his
employment with us in February 2000. The former employee seeks unspecified
general and special damages, punitive damages, attorneys' fees and costs in the
form of cash and shares of our common stock. We plan to vigorously defend
against these claims.
ITEM 2. Changes in Securities and Use of Proceeds- We conducted our
initial public offering ("IPO") on May 18, 2000, pursuant to a Registration
Statement on Form S-1 File No. 333-31396). In the IPO, we sold an aggregate of
5,650,000 shares of common stock (including 650,000 shares sold in connection
with the exercise of the underwriters' over-allotment option) at $20.00 per
share. The sale of the shares of common stock generated aggregate gross proceeds
of approximately $113.0 million for
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the Company. The aggregate net proceeds were approximately $103.6 million, after
deducting underwriting discounts and commissions of approximately $7.9 million
and directly paying expenses of the offering of approximately $1.5 million.
We conducted a follow-on public offering of our common stock on August
11, 2000 pursuant to a Registration Statement on Form S-1 File No. 333-42416).
In the Secondary Offering, we sold an aggregate of 4,025,000 shares of common
stock (including 525,000 shares sold in connection with the exercise of the
underwriters' over-allotment option) at $115.00 per share. The sale of the
shares of common stock generated aggregate gross proceeds of approximately
$462.9 million for the Company. The aggregate net proceeds were approximately
$438.8 million, after deducting underwriting discounts and commissions of
approximately $23.1 million and directly paying expenses of the offering of
approximately $1.0 million.
We intend to use the net proceeds from these sales of common stock for
general corporate purposes, including capital expenditures, primarily for the
purchase of equipment and the acquisition of and improvements to our United
States and China facilities and working capital. We also intend to use a portion
of the net proceeds to fund expected working capital and capital expenditure
requirements for our pending acquisitions of JCA Technology, Inc. ("JCA") and
Globe Y. Technology, Inc. ("Globe Y"). Additionally, a portion of the proceeds
may be used to fund up to $25 million of the $600 million acquisition cost for
JCA. In the third quarter of 2000, we used $29.3 million of cash to fund
operating activities of $11.4 million, capital expenditures of $12.6 million,
and increases in other assets of $5.3 million (primarily advances to suppliers).
The amounts we actually expend for working capital and other purposes may vary
significantly and will depend on a number of factors, including the amount of
our future revenues and other factors described under "Risk Factors."
Accordingly our management will retain broad discretion in the allocation of the
net proceeds of these offerings. We may also use a portion of the net proceeds
to acquire products, technologies or additional businesses that are
complementary to our current and future business and product lines. From time to
time, we engage in discussions with companies regarding potential acquisitions,
however, we currently have no material commitments or agreements with respect to
any acquisition other than with JCA and Globe Y.
ITEM 3. Defaults Upon Senior Securities-Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders-Not
Applicable.
ITEM 5. Other Information-Not Applicable.
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ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits-Exhibit 27.1 -- Financial Data Schedule
b) Reports on Form 8-K --
-Form 8-K filed on October 26, 2000 regarding the
signing of a definitive agreement to acquire JCA
Technology, Inc.
-Form 8-K filed on October 26, 2000 regarding the
signing of a definitive agreement to acquire Globe Y.
Technology, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW FOCUS, INC.
(Registrant)
DATE: November 7, 2000 BY: /s/ Kenneth E. Westrick
--------------------- --------------------------
Kenneth E. Westrick
President and
Chief Executive Officer
DATE: November 7, 2000 BY: /s/ William L. Potts, Jr.
--------------------- --------------------------
William L. Potts, Jr.
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Document
--------- --------
27.1 Financial Data Schedule
