<PAGE> 1
Filed Pursuant to Rule 424(B)(4)
Registration No. 333-42416
3,500,000
Shares
[New focus Logo]
Common Stock
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We are selling 3,500,000 shares of our common stock. Our common stock is
quoted on The Nasdaq Stock Market's National Market under the symbol "NUFO." The
last reported sale price of our common stock on the Nasdaq Stock Market's
National Market on August 10, 2000 was $120.75 per share.
The underwriters have an option to purchase up to 525,000 additional shares
from us to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEW FOCUS
----------------- ----------------- -----------------
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Per Share................................. $115.00 $5.75 $109.25
Total..................................... $402,500,000 $20,125,000 $382,375,000
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Delivery of the shares of common stock will be made on or about August 16,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
EPOCH PARTNERS
The date of this prospectus is August 10, 2000.
<PAGE> 2
[INSIDE FRONT COVER]
The inside front cover page of the prospectus starts with the heading "Smart
Optics for Networks." To the right of the heading is the name of the company.
Under the heading is a diagram of a typical optical network containing terminals
represented by blue boxes with text "Optical Networking Equipment" on them,
routers represented by white cylinders with text "ROUTERS" on them and fiber
amplifiers with text "Fiber Amplifiers" next to them represented by small
rectangular green boxes. These elements in the network are connected by red and
black lines representing fiber optic interconnections.
Underneath this diagram are 5 circles each containing a photograph of a New
Focus product. Under the first circle is text "Fiber Amplifier Products", under
the second "Wavelength Management Products", under the third "High-Speed
Opto-Electronics", under the fourth "Tunable Laser Modules" and under the fifth
"Advanced Photonic Tools". From each of these circles is a black dotted line
that goes to the network element in which each of these products are used.
[INSIDE BACK COVER]
The inside back cover page of the prospectus at the top has the name of the
company.
To the right of the entire page are 5 photographs of New Focus products. To the
left of each of photograph is text describing the product.
The first product has the heading "Fiber Amplifier Products". Under this
heading are 4 bullet points that read
"For advanced fiber amplifiers
Extended wavelength range for more channels
Low loss and high pump power for longer reach
Compact size"
The second product has the heading "Wavelength Management Products". Under this
heading are 4 bullet points that read
"For management of many channels
Efficient processing of densely packed channels
Requires no active cooling
Flexibility for enabling new services"
The third product has the heading "High-Speed Opto-Electronics". Under this
heading are 3 bullet points that read
"For connecting network equipment within a site
High data rate of 10 gigabits per second
Compact, efficient and cost-effective"
The fourth product has the heading "Tunable Laser Modules". Under this heading
are 4 bullet points that read
"For testing fiber optic products
Rapid and precise for high throughput
Rugged and reliable design"
The fifth product has the heading "Advanced Photonic Tools". Under this heading
is 1 bullet point that reads
"Enables development and manufacturing of next-generation fiber optic products"
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 19
USE OF PROCEEDS....................... 20
PRICE RANGE OF COMMON STOCK........... 20
DIVIDEND POLICY....................... 20
CAPITALIZATION........................ 21
DILUTION.............................. 22
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
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BUSINESS.............................. 35
MANAGEMENT............................ 50
CERTAIN TRANSACTIONS.................. 61
PRINCIPAL STOCKHOLDERS................ 65
DESCRIPTION OF CAPITAL STOCK.......... 67
SHARES ELIGIBLE FOR FUTURE SALE....... 69
UNDERWRITING.......................... 71
NOTICE TO CANADIAN RESIDENTS.......... 74
LEGAL MATTERS......................... 75
EXPERTS............................... 75
ADDITIONAL INFORMATION................ 75
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors described under the heading "Risk Factors" and elsewhere in this
prospectus.
NEW FOCUS, INC.
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks(TM) brand.
We leverage our ten years of experience in developing advanced optical products
to enable networking solutions with increased channel counts, higher data rates,
longer reach lengths and new services, and which reduce overall network cost of
ownership. Our high performance products are compact, consume less power and are
designed to be manufacturable in high volumes. We sell our products to over 50
customers including Agilent Technologies, Alcatel USA, Avanex Corporation,
Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent
Technologies, and Nortel Networks Corporation.
The increase in data traffic, coupled with demand for enhanced services and
improved connection times, has increased demand for communications networks
capable of handling large volumes of traffic. Network service providers have had
difficulty in meeting this increased demand due to significant constraints of
the existing communications infrastructure, which was originally designed to
carry only voice traffic. To alleviate this bottleneck, network service
providers are increasingly deploying next-generation optical networks.
Next-generation optical networks will depend on systems and components that
enable extremely long reach, high data rates, increased channel counts and new
services at a low network cost of ownership. The optical networking market is
one of the fastest growing portions of the telecommunications market. Ryan,
Hankin & Kent estimates that the market for fiber optic components was
approximately $6.6 billion in 1999 and is expected to grow to over $22.5 billion
by 2003.
Our Smart Optics for Networks(TM) products enable systems providers to meet
the dynamic demands of next-generation optical networks. Our fiber amplifier
products are widely deployed in optical networks to enable the transmission of
an increased amount of information at very high speeds over extended distances.
Fiber amplifiers enhance the strength of optical signals. Our wavelength
management products, which process and control the many wavelengths on an
optical fiber, enable network equipment providers to increase the number of
channels transmitted and to accurately, efficiently and reliably manage a vast
number of optical signals. We offer high-speed opto-electronic products, or
products that process both optical and electrical signals, that enable
interconnections between equipment in a network service provider's site at 10
gigabits per second. Our high performance tunable laser modules, or laser
modules that have a dynamically adjustable wavelength, enable rapid development,
manufacturing and testing of fiber optic components and systems. We also offer
advanced photonics, or optical, tools that enable network service and equipment
providers to develop their next-generation products. These products leverage our
core competencies for a variety of optical networking applications.
We are committed to designing and manufacturing high quality products that
have been thoroughly tested for reliability and performance. We perform
extensive in-house testing to industry accepted Telcordia, or Bellcore,
standards and have also been recommended for ISO-9001 quality certification. Our
in-house manufacturing capabilities include optical assembly, integration and
testing of our fiber optic products and advanced photonics tools. To meet the
growing demand for our products, we are continuing to expand our manufacturing
capacity while leveraging our capabilities in rapid prototyping, automation,
proprietary tools and processes.
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Our objective is to be the leading provider of innovative, fiber optic
products that enable our customers to deploy and optimize next-generation
optical networks. Key elements of our strategy include:
- leveraging our position as a leading market innovator;
- focusing our research and development efforts on continuing to broaden
our product offerings;
- collaborating with leading innovative systems companies;
- continuing to expand manufacturing capacity and improve process
efficiency; and
- pursuing strategic acquisitions.
We were incorporated in April 1990 in California. We reincorporated in
Delaware in May 2000. Our principal executive offices are located at 2630 Walsh
Avenue, Santa Clara, California 95051, and our telephone number is (408)
980-8088. Our web site is located at "www.newfocus.com." Information contained
on our web site does not constitute a part of this prospectus.
"New Focus," our logo, and "Smart Optics for Networks" are some of the
trademarks, trade names or service marks that we use. This prospectus contains
other trademarks and trade names of our company and other entities.
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THE OFFERING
Common stock offered by New Focus..... 3,500,000 shares
Common stock to be outstanding after
this offering......................... 63,121,717 shares
Use of proceeds....................... General corporate purposes, including
working capital, capital
expenditures, and potential
acquisitions.
Nasdaq National Market symbol......... NUFO
The total number of outstanding shares of our common stock as of July 2,
2000 is 59,621,717, excluding:
- 5,250,000 shares issuable upon exercise of outstanding stock options with
a weighted average exercise price of $8.57 per share;
- 2,855,000 shares reserved for future issuance under our stock plans; and
- 170,000 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $4.35 per share.
Except as otherwise indicated, all information in this prospectus assumes
no exercise of the underwriters' over-allotment option.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should be aware that we recently changed our fiscal year end to
December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended March 31, 1999. Fiscal year 1998 refers to the
twelve-month period ended March 31, 1998. Beginning in 2000, we maintain a
fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to
December 31.
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SIX-MONTH PERIOD
NINE-MONTH PERIOD ENDED ENDED
FISCAL YEAR ENDED MARCH 31, --------------------------- -------------------
------------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, JULY 2,
1996 1997 1998 1999 1998 1999 1999 2000
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues...................... $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 9,322 $ 24,233
Cost of net revenues.............. 5,095 5,946 8,186 9,225 6,625 12,525 5,421 23,842
Gross profit...................... 5,299 4,597 7,296 8,060 5,919 5,576 3,901 391
Operating income (loss)........... 678 (1,449) 27 (4,666) (3,168) (7,594) (2,870) (27,523)
Net income (loss)................. 457 (1,661) (286) (4,971) (3,375) (7,677) (3,063) (26,588)
Historical net income (loss) per
share:
Basic(1)........................ $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36)
======= ======= ======= ======= ======= ======= ======= ========
Diluted(1)...................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36)
======= ======= ======= ======= ======= ======= ======= ========
Weighted average shares:
Basic(1)...................... 1,011 1,096 1,148 2,284 2,245 2,468 2,413 19,546
======= ======= ======= ======= ======= ======= ======= ========
Diluted(1).................... 18,768 1,096 1,148 2,284 2,245 2,468 2,413 19,546
======= ======= ======= ======= ======= ======= ======= ========
Pro forma net loss per share:
Basic and diluted(1)............ $ (0.24) $ (0.13) $ (0.52)
======= ======= ========
Weighted average shares(1)...... 32,223 24,191 51,000
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JULY 2, 2000
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ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 94,998 $476,373
Working capital........................................... 103,166 484,541
Total assets.............................................. 140,239 521,614
Long term debt, less current portion...................... 239 239
Total stockholders' equity................................ 126,391 507,766
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(1) See note 10 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in completing per share
data.
(2) The as adjusted amounts above give effect to the sale of shares of common
stock in this offering at an offering price of $115.00 per share, less
estimated underwriting discounts and commissions and estimated offering
expenses.
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RISK FACTORS
This offering and any investment in our common stock involves a high degree
of risk. You should carefully consider the risks described below and all of the
information contained in this prospectus before deciding whether to purchase 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 $26.6 million for the six-month period ended July
2, 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 July 2, 2000, we had an accumulated deficit of
$42.1 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. 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.
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 July 2, 2000, Agilent Technologies, Corvis
Corporation, Alcatel USA and Corning Incorporated accounted for 14.2%, 11.6%,
11.0% and 10.7% 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 this
growth 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;
- 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.
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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 June 30, 1999, we had a total of 167 employees and at July 2,
2000, we had a total of 888 employees. In addition, we plan to hire 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 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, several of our competitors have large market capitalizations or
cash reserves, and 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 significant
customers are acquired by our competitors, 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
microelectronics business, which includes the 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.
Many of our potential competitors have significantly more established sales and
customer support organizations than we do. In addition, many of our competitors
have much greater name recognition, more extensive customer bases, better
developed distribution channels and broader product offerings than we have.
These companies can leverage their customer bases and broader product offerings
and adopt
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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. For a more detailed discussion of our competition, see
"Business -- Competition."
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 six-month period ended July 2, 2000, we
derived approximately 25% and 23%, 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.
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 REVENUES 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
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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
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 2000, 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.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
We have in the past made strategic acquisitions of intellectual property
and 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 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 six-month period ended July 2, 2000, 30.3% 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.
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.
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WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S PATENT,
CONTRACTUAL AND TRADE SECRET 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., recently acquired by E-Tek Dynamics, Inc.,
which was recently acquired by JDS Uniphase, filed a complaint against us and
some of our employees in December 1999 in the United States District Court for
the Northern District of California, alleging, among other things, that we have
infringed one of their patents, interfered with their contractual rights and
misappropriated their trade secrets. 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. For more information about current legal
proceedings, see "Business -- Legal Proceedings."
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 believe that this claim is without merit and 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 "Business -- 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 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
substantially all of our yttrium vanadate crystals to date. JDS Uniphase
Corporation, one of our competitors, recently acquired Casix. 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 have
agreed to advance Koncent RMB 29 million or approximately U.S.$3.5 million in
conjunction with our supply agreement with Koncent, of which U.S. $2.5 million
has been advanced to date. We are also currently negotiating to expand our
supply agreement with Koncent, which could require further advances. If we have
to advance payment 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
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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 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. We have begun to
manufacture certain of our products at our first smaller facility in 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 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
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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. For a more
detailed discussion about our manufacturing, see "Business -- Manufacturing."
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. under land use certificates and
agreements each with terms of 50 years. We lease one of our manufacturing
facilities from Shenzhen New and High-Tech Village Development Co. under 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 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
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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.
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. For a more detailed discussion about
our intellectual property, see "Business -- Intellectual Property."
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., recently acquired 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.
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 "Business -- 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.
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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
"Business -- 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.
RISKS RELATED TO THIS OFFERING
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, AND OUR ABILITY TO
GROW MAY BE LIMITED AS A RESULT.
We have accelerated the expansion of our manufacturing capacity and our
capital expenditures in connection with this expansion, which has increased our
need for working capital. We believe that the anticipated net proceeds of this
offering, together with our existing cash balances, will be sufficient to meet
our capital requirements at least through the next 12 months. However, if we are
unable to raise a substantial portion of the anticipated proceeds from this
offering, we will be required to seek additional funding prior to that time. If
we are required, to raise additional funds, we may not be able to do so on
favorable terms, or at all. If we cannot raise funds on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
which would seriously harm our business.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE, WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR
ABOVE THE OFFERING PRICE.
This offering price may vary from the market price of our common stock
after the offering. If you purchase shares of common stock, you may not be able
to resell those shares at or above the offering price. The market price of our
common stock has fluctuated significantly since our initial public offering in
May 2000 and we expect that our common stock price will fluctuate significantly
in the future due to:
- any deviations in our net revenues, gross margins or net losses from
levels expected by securities analysts;
- changes in financial estimates by securities analysts;
- changes in market valuations of other optical networking companies; and
- future sales of common stock or other securities.
In addition, the Nasdaq Stock Market's National Market has experienced extreme
volatility that has often been unrelated to the performance of particular
companies. Future market fluctuations may cause our stock price to fall
regardless of our performance.
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INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD DELAY OR PREVENT A CHANGE IN OUR CORPORATE CONTROL AND CAUSE OUR STOCK
PRICE TO DECLINE.
Upon completion of this offering and assuming no exercise of the
underwriters' over-allotment option, our executive officers, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately 55.7% of
our outstanding common stock based on shares outstanding as of July 2, 2000. As
a result, these stockholders will be able to continue to exercise significant
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, which could
delay or prevent an outside party from acquiring or merging with us and cause
our stock price to decline. For a full presentation of the equity ownership of
these stockholders, see "Principal Stockholders."
PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND CHANGE OF CONTROL
AGREEMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN
CONTROL, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing our board of directors to issue preferred stock without
stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect significant amendments to our
certificate of incorporation and bylaws;
- eliminating the ability of stockholders to call special meetings;
- prohibiting stockholder actions by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline. See "Description of Capital Stock -- Delaware
Anti-Takeover Law and Certain Charter and Bylaw Provisions." In addition, we
have a change of control agreement with one of our officers and option
agreements with certain officers which have change of control provisions, which
may discourage, delay or prevent someone from acquiring or merging with us. For
more information about the change of control agreement, see "Management --
Employment and Change-of-Control Agreements."
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market beginning November 13, 2000. Sales of
a substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of the
shares that may be sold in the public market in the future.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements
within the meaning of the federal securities laws that relate to future events
or our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. These risks
and other factors include those listed under "Risk Factors" and elsewhere in
this prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue" or the negative of
these terms or other comparable terminology. In addition, these forward-looking
statements include, but are not limited to, statements regarding the following:
- the expansion of our manufacturing capacity;
- improvement of our manufacturing efficiencies;
- anticipated development and release of new products;
- anticipated sources of future revenues;
- anticipated expenditures for research and development, sales and
marketing and general and administrative expenses; and
- the adequacy of our capital resources to fund our operations.
These statements are only predictions. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
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USE OF PROCEEDS
We expect to receive net proceeds of approximately $381,375,000 from the
sale of the 3,500,000 shares of common stock or approximately $438,731,250 if
the underwriters' over-allotment option is exercised in full, at a public
offering price of $115.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including capital expenditures of approximately $45.0
million in the next six months, primarily for the purchase of equipment and the
acquisition of and improvements to our United States and China facilities, and
working capital. 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 this offering. We may also use a portion of
the net proceeds to acquire products, technologies or 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. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "NUFO" since May 18, 2000. Prior to that time, there was no public market
for the common stock. The following table sets forth, for the period indicated,
the high and low closing prices per share of the common stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
2000
Second Quarter (since May 18, 2000)......................... $100.00 $45.25
Third Quarter (until July 26, 2000)......................... $158.00 $74.52
</TABLE>
On August 10, 2000 the reported last sale price of the common stock on the
Nasdaq National Market was $120.75. As of August 10, 2000 there were in excess
of 400 stockholders of record.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends for
the foreseeable future.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of July 2, 2000:
- on an actual basis; and
- as adjusted basis to give effect to the sale of 3,500,000 shares of
common stock at an offering price of $115.00 per share (less underwriting
discounts and commissions and estimated offering expenses payable by us)
and the application of the net proceeds from the sale.
You should read this table in conjunction with our consolidated financial
statements and the accompanying notes to our consolidated financial statements,
Selected Consolidated Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
JULY 2, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion........................ $ 239 $ 239
Stockholders' equity:
Preferred stock, $0.001 par value: 10,000,000 shares
authorized, no shares issued and outstanding actual and
as adjusted............................................ -- --
Common stock, $0.001 par value: 250,000,000 shares
authorized, 59,621,717 shares issued and outstanding
actual; 63,121,717 shares issued and outstanding as
adjusted............................................... 60 63
Additional paid-in capital.................................. 212,951 594,323
Notes receivable from stockholders.......................... (7,378) (7,378)
Deferred compensation....................................... (37,144) (37,144)
Accumulated deficit......................................... (42,098) (42,098)
-------- --------
Total stockholders' equity........................... 126,391 507,766
-------- --------
Total capitalization................................. $126,630 $508,005
======== ========
</TABLE>
The total number of outstanding shares of our common stock as of July 2,
2000 is 59,621,717, excluding:
- 5,250,000 shares issuable upon exercise of outstanding stock options with
a weighted average exercise price of $8.57 per share;
- 2,855,000 shares reserved for future issuance under our stock plans; and
- 170,000 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $4.35 per share.
21
<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the offering price per share of our common
stock and the net tangible book value per share of common stock after this
offering. Our net tangible book value as of July 2, 2000, was $125,722,000 or
$2.11 per share of common stock. Net tangible book value per share was
calculated by dividing the sum of total assets less liabilities, less intangible
assets by the total number of common shares outstanding at July 2, 2000.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to the sale of the
3,500,000 shares of common stock offered hereby at an offering price of $115.00
per share less underwriting discounts and commissions and estimated offering
expenses, our pro forma net tangible book value as of July 2, 2000, would have
been $507,097,000 or approximately $8.03 per share. This represents an immediate
increase in net tangible book value of $5.92 per share to existing stockholders
and an immediate dilution in net tangible book value of $106.97 per share to new
investors, or approximately 93% of the offering price of $115.00 per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Offering price per share.................................... $115.00
Net tangible book value per share at July 2, 2000......... $2.11
Increase in net tangible book value per share attributable
to this offering....................................... 5.92
-----
Pro forma net tangible book value per share after this
offering.................................................. 8.03
-------
Dilution in net tangible book value per share to new
investors................................................. $106.97
=======
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, based on an offering price of $115.00 per share, as of July 2, 2000,
the differences between the existing holders of common stock and the new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid,
before deducting the underwriting discounts and commissions and estimated
offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 59,621,717 94% $172,398,138 30% $ 2.89
New investors.......................... 3,500,000 6% 402,500,000 70% $115.00
----------- --- ------------ ---
Total................................ 63,121,717 100% $574,898,138 100%
=========== === ============ ===
</TABLE>
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering and excludes the following:
- 5,250,000 shares issuable upon exercise of outstanding stock options as
of July 2, 2000, with a weighted average exercise price of $8.57 per
share;
- 2,855,000 shares reserved for issuance under our stock plans; and
- 170,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $4.35 per share.
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this prospectus. The statement of operations data
for the fiscal years ended March 31, 1998 and 1999, and the nine-month period
ended December 31, 1999, and the consolidated balance sheet data at March 31,
1999, and December 31, 1999, are derived from, and are qualified by reference
to, our audited consolidated financial statements and notes thereto included
elsewhere in this prospectus. The statement of operations data for the years
ended March 31, 1996 and 1997, and the consolidated balance sheet data as of
March 31, 1996, 1997 and 1998, are derived from, and are qualified by reference
to, consolidated financial statements not appearing in this prospectus. The
consolidated statement of operations data for the six-month periods ended June
30, 1999 and July 2, 2000 and the consolidated balance sheet data as of July 2,
2000 are unaudited. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, have been included to present
fairly the unaudited quarterly results when read in conjunction with the audited
financial statements and notes thereto appearing elsewhere in this prospectus.
Historical results are not necessarily indicative of results that may be
expected for any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE-MONTH NINE-MONTH SIX-MONTH SIX-MONTH
FISCAL YEAR ENDED MARCH 31, PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
------------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, JULY 2,
1996 1997 1998 1999 1998 1999 1999 2000
------- ------- ------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................ $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 9,322 $ 24,233
Cost of net revenues........ 5,095 5,946 8,186 9,225 6,625 12,525 5,421 23,842
------- ------- ------- ------- ------- ------- ------- --------
Gross profit.............. 5,299 4,597 7,296 8,060 5,919 5,576 3,901 391
Operating expenses:
Research and
development............. 1,724 3,115 3,721 7,379 5,250 7,352 3,721 8,501
Sales and marketing....... 1,289 1,662 2,193 2,987 2,113 2,982 1,800 2,565
General and
administrative.......... 1,608 1,269 1,355 2,360 1,724 2,704 1,241 3,792
Deferred compensation..... -- -- -- -- -- 132 9 13,056
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses........... 4,621 6,046 7,269 12,726 9,087 13,170 6,771 27,914
------- ------- ------- ------- ------- ------- ------- --------
Operating income (loss)..... 678 (1,449) 27 (4,666) (3,168) (7,594) (2,870) (27,523)
Interest and other income,
net....................... (200) (210) (303) (303) (207) (81) (191) 935
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before
provision for income
taxes..................... 478 (1,659) (276) (4,969) (3,375) (7,675) (3,061) (26,588)
Provision for income
taxes..................... 21 2 10 2 -- 2 2 --
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)........... $ 457 $(1,661) $ (286) $(4,971) $(3,375) $(7,677) $(3,063) $(26,588)
======= ======= ======= ======= ======= ======= ======= ========
Historical net income (loss)
per share:
Basic..................... $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36)
======= ======= ======= ======= ======= ======= ======= ========
Diluted................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36)
======= ======= ======= ======= ======= ======= ======= ========
Weighted average shares:
Basic................... 1,011 1,096 1,148 2,284 2,245 2,468 2,413 19,546
======= ======= ======= ======= ======= ======= ======= ========
Diluted................. 18,768 1,096 1,148 2,284 2,245 2,468 2,413 19,546
======= ======= ======= ======= ======= ======= ======= ========
Pro forma net loss per
share:
Basic and diluted......... $ (0.24) $ (0.13) $ (0.52)
======= ======= ========
Weighted average shares... 32,223 24,191 51,000
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------- DECEMBER 31, JULY 2,
1996 1997 1998 1999 1999 2000
------ ------ ------- ------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 376 $ 250 $ 196 $ 51 $28,067 $ 94,998
Working capital........................................... 2,066 616 (1,166) 479 29,026 103,166
Total assets.............................................. 5,186 5,564 8,197 8,240 44,852 140,239
Long-term debt, less current portion...................... 60 129 79 588 368 239
Total stockholders' equity (net capital deficiency)....... 1,229 (431) (702) (1,183) 35,013 126,391
</TABLE>
See note 10 of notes to consolidated financial statements for an
explanation of the determination of the weighted average common and common
equivalent shares used to compute net loss per share.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. The results described below are not necessarily indicative of
the results to be expected in any future period. This discussion and analysis
contains forward-looking statements within the meaning of the federal securities
laws. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or our predictions. See "Special Note Regarding
Forward-Looking Statements."
OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks(TM) brand.
We were founded in April 1990 and initially developed and offered advanced
optical products principally for research and commercial applications. In
January 1997, we began development of a high performance tunable laser module, a
laser module with a dynamically adjustable wavelength, for test and measurement
in the manufacturing and development of optical networking products. In May
1998, we began leveraging our extensive experience in developing advanced
optical products to enable networking solutions with increased channel counts,
higher data rates, longer reach lengths and new services, and which reduce
overall network cost of ownership. Our high-performance products are compact,
consume less power and are designed to be manufacturable in high volumes.
We currently derive revenues from the sales of two groups of products,
telecom products and commercial photonics products. Through fiscal 1999,
comprised of the twelve-month period ended March 31, 1999, substantially all of
our revenues were generated from sales of commercial photonics products. Our
commercial photonics products include advanced photonics tools, which are
primarily used for commercial and research applications in a wide variety of
industries. Beginning in 1999, we began to derive an increasing amount of our
revenues from sales of telecom products. Our telecom products include fiber
amplifier products, wavelength management products, high-speed opto-electronics
and tunable laser modules. We sell these products primarily to manufacturers of
networking and test equipment in the optical telecommunications market. For the
nine-month period ended December 31, 1999, sales of our telecom products
accounted for 27.6% of overall net revenues. For the six-month period ended July
2, 2000, sales of our telecom products accounted for 55.1% of overall net
revenues and are expected to continue to increase as a percentage of our overall
net revenues. We sell our products to over 50 customers including Agilent
Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis
Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks
Corporation. In the nine-month period ended December 31, 1999, none of our
customers accounted for more than 10% of our net revenues. In the six-month
period ended July 2, 2000, Agilent Technologies and Corvis Corporation accounted
for 14.3% and 14.2% of our net revenues, respectively. None of our other
customers accounted for more than 10% of our net revenues for the six-month
period ended July 2, 2000.
We market and sell our telecom products predominantly through our direct
sales force. To date, most of our direct sales have been in North America,
however, we recently began marketing and selling our telecom products
internationally, principally in Europe. We market and sell our commercial
photonics products through a combination of catalog sales, international
distributors and direct sales primarily in the United States, Europe and Asia.
For the nine-month period ended December 31, 1999, 28.7% of international sales
were from telecom products and 71.3% were from commercial photonics products.
For the six-month period ended July 2, 2000, 47.9% of international sales were
from telecom products and 52.1% were from commercial photonics products.
Our cost of net revenues consists of raw materials, direct labor and
manufacturing overhead, which includes, among other costs, production start-up
and prototype costs. In addition, we rely on contract manufacturers for some of
our key components, which are included in our cost of net revenues.
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
materials costs and test units and other expenses related
24
<PAGE> 26
to the design, development, testing and enhancements of our products. We expense
our research and development costs as they are incurred. In addition, from time
to time, we receive funding for research and development projects. For fiscal
years 1998 and 1999, the nine-month period ended December 31, 1999 and the
six-month period ended July 2, 2000, we received an aggregate of $6.0 million
for research and development activities, which was used to offset research and
development costs. Of this amount, funding from government agency contracts
accounted for $4.7 million. Under the terms of these contracts, we were
reimbursed for substantially all of our costs incurred under the related
projects. Research and development funding from corporate customers provided
$1.3 million of which Agilent Technologies, accounted for $1.0 million. Agilent
Technologies funded a portion of the development of a tunable laser product. We
believe that a significant level of investment for product research and
development is required to remain competitive. Accordingly, we expect to
continue to devote substantial resources to product research and development,
and we expect our research and development expenses to continue to increase in
absolute dollars.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. We intend to expand our sales and
marketing operations and efforts substantially for our telecom products, both
domestically and internationally, in order to increase market awareness and to
generate sales of our products. However, we cannot be certain that any increased
expenditures will result in higher net revenues. In addition, we believe our
future success depends upon establishing successful relationships with a variety
of key customers. We believe that continued investment in sales and marketing is
critical to our success and expect these expenses to increase in absolute
dollars in the future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding our information systems. We expect these
expenses to increase in absolute dollars as we continue to add personnel and
incur additional costs related to the growth of our business and our operations
as a public company.
In connection with the grant of stock options to our employees, we recorded
deferred compensation of approximately $50.3 million through July 2, 2000,
representing the difference between the estimated fair market value of the
common stock for accounting purposes and the option exercise price of these
options at the date of grant. These amounts are being amortized using the
attribution vesting method over the vesting period of the stock options, which
for us is generally five years from the date of grant.
25
<PAGE> 27
RESULTS OF OPERATIONS
You should be aware that we recently changed our fiscal year end to
December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended on March 31, 1999. Fiscal year 1998 refers to
the twelve-month period ended on March 31, 1998.
<TABLE>
<CAPTION>
SIX-MONTH
NINE-MONTH PERIOD ENDED
FISCAL YEAR ENDED FISCAL YEAR ENDED PERIOD ENDED --------------------
MARCH 31, MARCH 31, DECEMBER 31, JUNE 30, JULY 2,
1998 1999 1999 1999 2000
----------------- ----------------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues........ 52.9 53.4 69.2 58.2 98.4
----- ----- ----- ----- ------
Gross profit................ 47.1 46.6 30.8 41.8 1.6
----- ----- ----- ----- ------
Operating expenses:
Research and
development............ 24.0 42.7 40.6 39.9 35.1
Sales and marketing...... 14.2 17.3 16.5 19.3 10.6
General and
administrative......... 8.8 13.6 14.9 13.4 15.6
Deferred compensation.... -- -- 0.7 -- 53.9
----- ----- ----- ----- ------
Total operating
expenses.......... 47.0 73.6 72.7 72.6 115.2
----- ----- ----- ----- ------
Operating income (loss)..... 0.1 (27.0) (41.9) (30.8) (113.6)
Interest and other income,
net...................... (2.0) (1.8) (0.5) (2.1) 3.9
----- ----- ----- ----- ------
Loss before provision for
income taxes............. (1.9) (28.8) (42.4) (32.9) (109.7)
Provision for income
taxes.................... -- -- -- -- --
----- ----- ----- ----- ------
Net loss.................... (1.9)% (28.8)% (42.4)% (32.9)% (109.7)%
===== ===== ===== ===== ======
</TABLE>
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND JULY 2, 2000
Net Revenues
Net revenues increased from $9.3 million for the six-month period ended
June 30, 1999 to $24.2 million for the six-month period ended July 2, 2000,
primarily as a result of increased sales of our telecom products. Sales of our
telecom products, which began in March 1999, accounted for $495,000, or 5.3% of
total net revenues, for the six-month period ended June 30, 1999 and $13.4
million, or 55.1% of total net revenues for the six months ended July 2, 2000.
Gross Margin
Gross margin, including amortization of deferred stock compensation,
decreased from a positive 41.8% in the six-month period ended June 30, 1999 to a
negative 8.6% in the six-month period ended July 2, 2000. Excluding $2.5 million
of amortization of deferred stock compensation for the six-month period ended
July 2, 2000, gross margin decreased from a positive 41.8% in the six-month
period ended June 30, 1999 to a positive 1.6% in the six-month period ended July
2, 2000. This decrease in the gross margin was primarily a result of increased
manufacturing overhead costs of approximately $5.3 million associated with the
expansion of our telecom manufacturing operations domestically and
internationally and costs of approximately $3.8 million associated with the
transition to volume manufacturing of new telecom products. Increased U.S.
manufacturing overhead costs included increases in payroll and related costs for
additional manufacturing personnel of approximately $2.0 million and higher
equipment and facility costs of approximately $1.1 million. Start-up
manufacturing costs for our China operations, which began limited production in
June 2000, accounted for approximately $2.0 million of the increase in
manufacturing overhead in the six-month period ended July 2, 2000. We have
experienced and continue to experience lower-than-targeted yields for our
telecom products which have resulted in delays of customer shipments,
26
<PAGE> 28
lost revenue and lower than anticipated gross margins for these products. We are
currently implementing programs to improve yields for our telecom products,
which we expect to improve gross margins for these products in the long term. If
these programs are not successful, however, we would expect that our overall
gross margins would not increase as anticipated.
Research and Development Expenses
Research and development expenses, including amortization of deferred stock
compensation, increased from 39.9% of net revenues, or $3.7 million, in the
six-month period ended June 30, 1999, to 48.7% of net revenues, or $11.8 million
in the six-month period ended July 2, 2000. Excluding the $3.3 million of
amortization of deferred stock compensation for the six-month period ended July
2, 2000, research and development expenses decreased from 39.9% of net revenues,
or $3.7 million in the six-month period ended June 30, 1999 to 35.1% of net
revenues, or $8.5 million, in the six-month period ended July 2, 2000. Research
and development expenses decreased as a percentage of net revenues as a result
of increased sales 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, increased from 19.3% of net revenues, or $1.8 million, in the
six-month period ended June 30, 1999 to 13.7% of net revenues, or $3.3 million,
in the six-month period ended July 2, 2000. Excluding $755,000 of amortization
of deferred compensation for the six-month period ended July 2, 2000, sales and
marketing expenses decreased as a percentage of net revenues from 19.3%, or $1.8
million, in the six-month period ended June 30, 1999 to 10.6% of net revenues,
or $2.6 million, in the six-month period ended July 2, 2000.
General and Administrative Expenses
General and administrative expenses, including amortization of deferred
stock compensation, increased from 13.3% of net revenues, or $1.2 million, in
the six-month period ended June 30, 1999 to 42.6% of net revenues, or $10.3
million, in the six-month period ended July 2, 2000. Excluding $6.5 million of
amortization of deferred stock compensation for the six-month period ended July
2, 2000, general and administrative expenses increased from 13.3% of net
revenues, or $1.2 million, in the six-month period ended June 30, 1999 to 15.6%
of net revenues, or $3.8 million, in the six-month period ended July 2, 2000.
The increase was primarily due to increased staffing and associated expenses
necessary to manage and support our increased scale of operations.
Interest and Other Income, Net
Interest and other income totaled a net interest expense of $191,000 for
the six-month period ended June 30, 1999 compared to net interest and other
income of $935,000 for the six-month period ended July 2, 2000. Interest expense
totaled $202,000 and $143,000 in the six-month period ended June 30, 1999 and
the six-month period ended July 2, 2000, respectively. Interest income totaled
$3,000 and $1.0 million in the six-month period ended June 30, 1999 and
six-month period ended July 2, 2000. The increase in interest income for the
six-month period ended July 2, 2000 compared to the six-month period ended June
30, 1999 was primarily due to interest on the $103.6 million in proceeds from
our May 2000 initial public offering.
Income Taxes
The provision for income taxes of approximately $2,000 for the six-month
period ended June 30, 1999 consists of current state minimum taxes. Due to our
loss position, there was no provision for income taxes for the six-month period
ended July 2, 2000.
27
<PAGE> 29
FISCAL YEARS ENDED MARCH 31, 1998 AND 1999 AND THE NINE-MONTH PERIOD ENDED
DECEMBER 31, 1999
Net Revenues
Net revenues increased from $15.5 million in fiscal 1998 to $17.3 million
in fiscal 1999 as a result of increased sales of our commercial photonics
products. We began shipping our telecom products in March 1999. Total net
revenues for the nine-month period ended December 31, 1999 increased to $18.1
million, primarily as a result of sales of our telecom products, which were $5.0
million, or 27.6% of total net revenues.
Gross Margin
Gross margin decreased from 47.1% in fiscal 1998 to 46.6% in fiscal 1999.
The absolute dollar amount of manufacturing costs increased by $1.0 million from
fiscal 1998 to fiscal 1999, due primarily to an increase in net revenues. Gross
margin, including amortization of deferred stock compensation, decreased to
30.5% for the nine-month period ended December 31, 1999. Excluding $62,000 of
amortization of deferred stock based compensation for the nine-month period
ended December 31, 1999, gross margin decreased to 30.8% for the nine-month
period ended December 31, 1999. The decrease in gross margin from fiscal 1999 to
the nine-month period ended December 31, 1999, was primarily due to the costs
related to the expansion of our manufacturing facilities for our telecom
products. Increases in manufacturing overhead costs from fiscal 1999 to the
nine-month period ended December 31, 1999, included increases of approximately
$472,000 in payroll and related costs for additional manufacturing personnel,
higher materials costs for manufacturing prototyping of approximately $279,000,
and higher depreciation costs of approximately $127,000 related to increased
investment in plant and equipment.
Research and Development Expenses
Research and development expenses increased from 24.0% of net revenues, or
$3.7 million, in fiscal 1998 to 42.7% of net revenues, or $7.4 million, in
fiscal 1999. This increase was primarily due to the costs related to the
development of our telecom products. Research and development, including
amortization of deferred stock compensation expenses were 40.9% of net revenues,
or $7.4 million, for the nine-month period ended December 31, 1999. Excluding
$54,000 of amortization of deferred stock compensation for the nine-month period
ended December 31, 1999, research and development expenses were 40.6% of net
revenues, or $7.4 million, for the nine-month period ended December 31, 1999.
These expenses were incurred primarily in connection with the continued
development of existing telecom products, as well as for new telecom products.
Sales and Marketing Expenses
Sales and marketing expenses increased from 14.2% of net revenues, or $2.2
million, in fiscal 1998 to 17.3% of net revenues, or $3.0 million, in fiscal
1999. Sales and marketing expenses were 16.5% of net revenues, or $3.0 million,
for the nine-month period ended December 31, 1999. The increase in the sales and
marketing expenses in each of these periods was attributable primarily to the
hiring of additional sales and marketing personnel and to the expansion of our
sales and marketing efforts. In the nine-month period ended December 31, 1999 we
increased our sales and marketing headcount by 14% and we increased our spending
for marketing communication materials, including catalogs, and customer and
technical service system improvements.
General and Administrative Expenses
General and administrative expenses increased from 8.8% of net revenues, or
$1.4 million, in fiscal 1998 to 13.6% of net revenues, or $2.4 million, in
fiscal 1999. General and administrative expenses increased to 15.0% of net
revenues including amortization of deferred stock compensation, or $2.7 million,
for the nine-month period ended December 31, 1999. The increase over these
periods was primarily due to increased staffing and associated expenses
necessary to manage and support our increased scale of operations. In addition,
the increase in general and administrative costs for the nine-month period ended
December 31, 1999, was also attributable to hiring and recruiting expenses for
personnel associated with our telecom products.
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Interest and Other Income, Net
Interest and other income totalled a net expense of $303,000 in 1998 and
1999 and $81,000 for the nine-month period ended December 31, 1999. Interest
expense was the largest component of these amounts totalling $328,000, $327,000
and $176,000 for fiscal 1998, 1999 and the nine-month period ended December 31,
1999, respectively. The interest expense for these periods consisted of interest
on debt and capital lease obligations.
Income Taxes
The provision for income taxes of approximately $2,000 for the nine-month
period ended December 31, 1999 and fiscal 1999 consists of current state minimum
taxes. The provision for income taxes of $10,000 for fiscal 1998, reflects
federal alternative minimum taxes and state minimum taxes.
As of December 31, 1999, we had approximately $12 million of federal and
$400,000 of state net operating loss carryforwards for tax purposes and $900,000
and $700,000 of federal and state research and development tax credit
carryforwards available to offset future taxable income. The net operating loss
and tax credit carryforwards will expire at various dates beginning in 2004
through 2019, if not utilized. We have not recognized any benefit from the
future use of loss carryforwards for these periods or for any other periods
since inception.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of the assets is more likely
than not. Based upon the weight of available evidence, which included our
historical operating performance and the reported cumulative net losses in all
prior years, we have provided a full valuation allowance against our net
deferred tax assets.
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<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data
from our consolidated statement of operations and the data as a percentage of
net revenues. The consolidated statement of operations data have been derived
from our unaudited consolidated financial statements. In the opinion of
management, these statements have been prepared on substantially the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
-----------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, APRIL 2, JULY 2,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............... $4,251 $ 4,375 $ 4,741 $ 4,581 $ 6,675 $ 6,845 $ 9,782 $ 14,451
Cost of net revenues....... 2,181 2,347 2,600 2,821 4,367 5,337 10,786 13,056
------ ------- ------- ------- ------- ------- -------- --------
Gross profit (loss)...... 2,070 2,028 2,141 1,760 2,308 1,508 (1,004) 1,395
------ ------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development............ 1,633 2,384 2,129 1,592 2,259 3,501 3,609 4,892
Sales and marketing...... 732 698 874 926 930 1,126 1,100 1,465
General and
administrative......... 605 550 636 605 940 1,159 1,424 2,368
Deferred compensation.... -- -- -- 9 29 94 5,548 7,508
------ ------- ------- ------- ------- ------- -------- --------
Total operating
expenses............. 2,970 3,632 3,639 3,132 4,158 5,880 11,681 16,233
------ ------- ------- ------- ------- ------- -------- --------
Operating loss............. (900) (1,604) (1,498) (1,372) (1,850) (4,372) (12,685) (14,838)
Interest and other income,
net...................... (70) (45) (96) (95) 33 (19) 224 711
------ ------- ------- ------- ------- ------- -------- --------
Loss before provision for
income taxes............. (970) (1,649) (1,594) (1,467) (1,817) (4,391) (12,461) (14,127)
Provision for income
taxes.................... -- -- 2 -- -- 2 -- --
------ ------- ------- ------- ------- ------- -------- --------
Net loss................... $ (970) $(1,649) $(1,596) $(1,467) $(1,817) $(4,393) $(12,461) $(14,127)
====== ======= ======= ======= ======= ======= ======== ========
Net loss per share......... $(0.41) $ (0.69) $ (0.66) $ (0.61) $ (0.74) $ (1.74) $ (2.12) $ (0.45)
====== ======= ======= ======= ======= ======= ======== ========
Shares used in computing
net loss per share....... 2,354 2,396 2,406 2,419 2,455 2,530 5,891 31,691
====== ======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, APRIL 2, JULY 2,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues............ 51.3 53.6 54.8 61.6 65.4 78.0 110.3 90.4
------ ------- ------- ------- ------- ------- ------- ------
Gross profit (loss)........... 48.7 46.4 45.2 38.4 34.6 22.0 (10.3) 9.7
------ ------- ------- ------- ------- ------- ------- ------
Operating expenses:
Research and development...... 38.4 54.5 44.9 34.8 33.8 51.1 36.9 33.9
Sales and marketing........... 17.2 16.0 18.4 20.2 13.9 16.4 11.2 10.1
General and administrative.... 14.2 12.6 13.4 13.2 14.1 16.9 14.6 16.4
Deferred compensation......... -- -- -- 0.2 0.4 1.4 56.7 52.0
------ ------- ------- ------- ------- ------- ------- ------
Total operating expenses.... 69.8 83.1 76.7 68.4 62.2 85.8 119.4 112.3
------ ------- ------- ------- ------- ------- ------- ------
Operating loss.................. (21.1) (36.7) (31.5) (30.0) (27.6) (63.8) (129.7) (102.7)
Interest and other income,
net........................... (1.7) (1.0) (2.1) (2.0) 0.4 (0.3) 2.3 4.9
------ ------- ------- ------- ------- ------- ------- ------
Loss before provision for income
taxes......................... (22.8) (37.7) (33.6) (32.0) (27.2) (64.1) (127.4) (97.8)
Provision for income taxes...... -- -- 0.1 -- -- 0.1 -- --
------ ------- ------- ------- ------- ------- ------- ------
Net loss........................ (22.8)% (37.7)% (33.7)% (32.0)% (27.2)% (64.2)% (127.4)% (97.8)%
====== ======= ======= ======= ======= ======= ======= ======
</TABLE>
We believe that quarter-to-quarter comparisons of our operating results
will not be meaningful. You should not rely on our results for any quarter as an
indication of our future performance. Our operating results in future quarters
may be below public market analysts' or investors' expectations, which would
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<PAGE> 32
likely cause the price of our common stock to fall. The following discussion
highlights significant events that have impacted our net revenues and financial
results for the eight quarters ended July 2, 2000.
Net revenues increased in each of the previous eight quarters, with the
exception of a decrease in the three-month period ended June 30, 1999. In that
quarter, we experienced component supply and integration issues related to new
versions of some of our commercial photonics products, which affected our
ability to meet demand for these products. These issues were addressed in the
following quarter as we refined and improved our manufacturing processes.
Increased demand for our telecom products resulted in significant revenue
increases from these products in our four most recent quarters. Net revenues
from our telecom products were $450,000, or 9.8% of net revenues, for the
three-month period ended June 30, 1999, $2.0 million, or 30.3% of net revenues,
for the three-month period ended September 30, 1999, $2.5 million, or 36.9% of
net revenues, for the three-month period ended December 31, 1999, $4.9 million,
or 49.9%, of net revenues, for the three-month period ended April 2, 2000 and
$8.5 million, or 58.6% of net revenues, for the three-month period ended July 2,
2000. We expect quarterly revenues from our telecom products to continue to
increase. Sales of our commercial photonics products have fluctuated between
$4.1 million and $6.0 million over the last eight quarters.
Gross margins as a percentage of net revenues decreased in each of the
previous eight quarters, with the exception of increases in the three-month
periods ended September 30, 1998 and July 2, 2000. In the three-month period
ended April 2, 2000, we experienced a significant decrease in our gross margin
percentage primarily as a result of increased manufacturing costs associated
with the expansion of our telecom manufacturing operations domestically and
internationally and the transition to volume manufacturing of new telecom
products. Manufacturing overhead spending for telecom products increased during
each of the five quarters from the three-month period ended March 31, 1999, to
the three-month period ended July 2, 2000, as we added manufacturing employees,
expanded production facilities and invested in additional manufacturing
equipment. In the three-month period ended July 2, 2000, our gross margin
percentage increased from the three-month period ended April 2, 2000 primarily
as a result of increased manufacturing volumes for both our telecom and
commercial photonics products resulting in improved absorption of our fixed
manufacturing costs. We plan to accelerate our manufacturing overhead spending
to support the growth in our worldwide operations. This additional spending will
dampen the favorable impact of expected improvements in manufacturing
efficiencies on our telecom products, thus affecting the rate of improvement in
our gross margin percentage for the near term.
Research and development expenses increased in each of the previous eight
quarters, with the exception of a decrease in the three-month period ended March
31, 1999, and the three-month period ended June 30, 1999. These increases were
primarily due to the addition of personnel, development prototyping costs,
depreciation expense related to increased investment in development equipment,
consulting charges and other costs incurred for the development of our telecom
products. We have also incurred significant expenses related to the expansion of
our patent portfolio for our telecom products. We expect research and
development costs to continue to increase for our telecom products.
Sales and marketing expenses increased in each of the previous eight
quarters, with the exception of slight decreases in the three-month periods
ended December 31, 1998 and April 2, 2000. The increased sales and marketing
expenses were primarily due to an increase in the number of sales and marketing
personnel, sales commissions, marketing expenses and other customer-related
costs. We expect sales and marketing costs to continue to increase in absolute
dollars as we build our sales and marketing organization.
General and administrative expenses increased in each of the previous eight
quarters, with the exception of the three-month periods ended December 31, 1998,
and June 30, 1999. During the three-month periods ended September 30, 1999,
December 31, 1999 April 2, 2000 and July 2, 2000, we experienced a substantial
increase in general and administrative costs due to an increase in the number of
personnel and additional costs related to building an infrastructure for a
public company, which included
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<PAGE> 33
increased legal, accounting, recruiting and information systems costs. We expect
general and administrative expenses to continue to increase in absolute dollars.
LIQUIDITY AND CAPITAL RESOURCES
From our inception in 1990 to our initial public offering 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 17, 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. Proceeds to us, net of issuance
costs, were approximately $103.6 million. Our cash and cash equivalents totaled
$95.0 million as of July 2, 2000. Net working capital increased by $1.6 million
for fiscal 1999, by $28.5 million for the nine-month period ended December 31,
1999 and by $74.1 million for the six-month period ended July 2, 2000.
Our cash and cash equivalents increased from $51,000 as of March 31, 1999,
to $28.1 million as of December 31, 1999 to $95.0 million as of July 2, 2000.
The cash and cash equivalent increase in the nine-month period ended December
31, 1999 was primarily due to cash generated by financing activities, including
the receipt of an aggregate of $43.7 million from the sales of convertible
preferred stock during the nine-month period ended December 31, 1999, partially
offset by $5.7 million of cash used in operations, $5.8 million used to purchase
equipment and the net repayment of debt of approximately $4.3 million. The cash
and cash equivalent increase for the six-month period ended July 2, 2000 was
primarily due to cash generated by financing activities, including the receipt
of $103.6 million from our initial public offering, partially offset by $19.0
million of cash used in operations and $13.9 million used to purchase equipment.
Cash used in operating activities was $583,000 in fiscal 1998, $3.9 million
in fiscal 1999 $5.7 million in the nine-month period ended December 31, 1999,
$2.0 million for the six-month period ended June 30, 1999 and $19.0 million for
the six-month period ended July 2, 2000. Cash used in operating activities in
fiscal 1998 was primarily due to our net loss of $286,000, increases in
inventory balances of $1.5 million, increases in accounts receivable balances of
$1.2 million, partially offset by non-cash charges of $700,000 and increases in
accounts payable of $1.1 million. Cash used in operating activities in fiscal
1999 was primarily due to our net loss of $5.0 million, decreases in accounts
payable of $884,000, partially offset by non-cash charges of $598,000 and
increases in accrued expenses of $697,000. Cash used in operating activities in
the nine-month period ended December 31, 1999, was primarily due to our net loss
of $7.7 million, increases in inventory balances of $2.6 million and the
accounts receivable balance of $1.0 million, partially offset by non-cash
charges of $872,000 and increases in accounts payable of $3.9 million. Cash used
in operating activities for six-month period ended July 2, 2000 was primarily
due to our net loss of $26.6 million, increases in inventories of $7.1 million
and increases in accounts receivable of $2.7 million partially offset by
non-cash charges of $14.8 million and increases in accounts payable of $2.6
million.
Cash used in investing activities was $379,000 in fiscal 1998, $1.4 million
in fiscal 1999, $5.7 million in the nine-month period ended December 31, 1999,
$1.4 million for the six-month period ended June 30, 1999 and $18.4 million for
the six-month period ended July 2, 2000. In each period, cash was primarily used
to acquire property, plant and equipment. In the six-month period ended July 2,
2000, advances to a supplier and increases in other assets accounted for $4.5
million of the total cash used in investing activities.
Cash generated by financing activities was $908,000 in fiscal 1998, $5.1
million in fiscal 1999 and $39.5 million in the nine-month period ended December
31, 1999 and $104.3 million in the six-month period ended July 2, 2000. Cash
generated by financing activities in fiscal 1998 was primarily due to net
borrowings of $567,000 under our bank lending facilities and proceeds of
$400,000 from promissory notes issued. Cash generated by financing activities in
fiscal 1999 was primarily due to proceeds of $4.2 million from the sale of
convertible preferred stock and net borrowings of $750,000 under an equipment
loan. Cash generated by financing activities in the nine-month period ended
December 31, 1999, was primarily
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<PAGE> 34
due to proceeds of $43.7 million from the sales of convertible preferred stock
and $1.2 million under our bank lending facilities, partially offset by $5.5
million of repayments of our bank lending facilities, an equipment loan and
promissory notes. Cash generated by financing activities in the six-month period
ended July 2, 2000 was primarily due to proceeds of $103.6 million from the sale
of 5,650,000 shares of our common stock in our initial public offering.
We entered into an equipment loan facility with Western Technology
Investment for a maximum of $2,000,000, under which our right to borrow has
expired. The loan facility bears interest at 8.4% per annum and has a
termination payment of 10% of the original principal amount. Certain equipment
we own secures the loan facility. At March 31, 1999, we had borrowed $800,000
under this facility of which $750,000, $598,000 and $526,000 was outstanding at
March 31, 1999, December 31, 1999 and July 2, 2000, respectively.
In May 2000, we entered into a lease for an additional 130,000 square feet
of space in San Jose, California from Lincoln-RECP Hellyer Opco, LLC. Under the
terms of the lease we are obligated for future minimum lease payments of
approximately $25.0 million over the seven-year lease term. In addition, we have
agreed to provide an irrevocable letter of credit for $4.0 million as collateral
for the performance of our obligations under the lease. In connection with the
lease, we issued a two-year warrant to Lincoln-RECP Hellyer Opco, LLC to
purchase 30,000 shares of our common stock with an exercise price of $20 per
share. The warrant is non-forfeitable and immediately exercisable.
In May 2000, we entered into a three-year supply agreement with Fuzhou
Koncent Communication, Inc. ("Koncent") (formerly Fuzhou Conet Communication,
Inc.) to supply us with yttrium vanadate crystals and agreed to advance $3.5
million (of which $2.5 million had been advanced as of July 2, 2000) to Koncent
against future orders of these crystals.
We expect to incur approximately $45.0 million of capital expenditures over
the next six months to purchase equipment and expand our operations and
manufacturing capacity in the United States and China. In July 2000, we acquired
a second manufacturing facility in Shenzhen, China. Pursuant to the agreement,
we purchased approximately 43% of the second facility in Shenzhen for
approximately U.S. $3.7 million and leased the remainder of the facility for a
term of five years from the 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.
We have accelerated the expansion of our manufacturing capacity and our
capital expenditures in connection with this expansion, which has increased our
need for working capital. We believe that the anticipated net proceeds from this
offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We maintain our cash and cash equivalents primarily in money market funds.
We do not have any derivative financial instruments. As of July 2, 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
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. Accordingly, we
could experience the risks of fluctuating currencies and may choose to engage in
currency hedging activities to reduce these risks.
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RECENT ACCOUNTING PRONOUNCEMENTS
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 is
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 Company
does not expect the application of FIN 44 to have a material impact on the
Company's results of operations, financial position, or cash flows.
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). SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued SFAS 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133, which deferred the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. We will become subject to SFAS No.
133 on January 1, 2001. Because we do not currently hold any derivative
instruments and do not engage in hedging activities, we do not believe that the
adoption of SFAS No. 133 will have a material impact on our financial position
or results of operations.
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BUSINESS
OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks brand. We
leverage our ten years of experience in developing advanced optical products, to
enable networking solutions with increased channel counts, higher data rates,
longer reach lengths and new services, and which reduce overall network cost of
ownership. Our high-performance products are compact, consume less power and are
designed to be manufacturable in high volumes.
INDUSTRY BACKGROUND
Dramatic Increases in the Volume of Data Traffic
The Internet has become an essential communications and transaction medium.
The volume of high-speed data traffic over communications networks continues to
grow dramatically, outpacing that of traditional voice traffic. According to
International Data Corporation, a leading market research company, the number of
Internet users worldwide reached approximately 142 million in 1998 and is
forecasted to grow to approximately 502 million users by the end of 2003.
According to Ryan, Hankin & Kent, a leading market research and consulting firm,
Internet and other data traffic is expected to increase 8,100% between 1999 and
2003. This growth is primarily attributable to the increasing use of the
Internet among consumer and business users, easier and cheaper access to the
Internet and the large and growing number of personal computers in the home and
the workplace. E-commerce in particular is generating enormous data traffic over
communications networks as it becomes a critical strategic element of many
businesses.
Evolution of the Optical Network
The increase in data traffic, coupled with demand for enhanced services and
improved connection times, has increased demand for high capacity, or high
bandwidth, communications networks. Network service providers have had
difficulty in meeting this increased demand due to significant constraints of
the existing communications infrastructure, which was originally designed to
carry only voice traffic. These constraints have caused network congestion,
decreased reliability and made it difficult for network service providers to
upgrade networks effectively. To alleviate this bottleneck, network service
providers are increasingly deploying next-generation optical networks that
address the demand for high-speed communications.
Optical networks transmit data by pulses of light through an optical fiber.
Light in a glass medium can carry more information over longer distances than
electrical signals over a copper medium. Optical signals are generated through
the use of lasers that produce light at specific colors, or wavelengths. In
addition to lasers, a variety of other fiber optic components are used to
create, combine, isolate, amplify, split, channel and perform various other
functions on these optical signals. Fiber optic components are split into two
broad categories: actives, or opto-electronics, which process both optical and
electrical signals and passives, which process only optical signals. Innovations
at the fiber optic component level have historically enabled a number of major
advances in optical networking systems.
Traditionally, optical signals at only a single wavelength, or channel,
were used to carry information in optical networks. With the invention of
innovative components capable of separating light into different specified
wavelengths for transmission in an optical fiber, network systems vendors began
developing enhanced equipment, including wavelength division multiplexing, or
WDM, systems, which greatly increased network capacity based on these new
components. WDM solutions increase network capacity by transmitting data
simultaneously on a number of different wavelengths along the same optical
fiber. At the destination, these wavelengths are separated and the data
extracted. Therefore, WDM technology increases the bandwidth of an optical
network proportional to the number of different wavelengths that are
transmitted.
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<PAGE> 37
In addition to increasing the number of channels, component innovation has
also resulted in an increase in the amount of data which can be transmitted per
channel, or data rate. Network service providers have been continually upgrading
the data rates of their optical networks, for example, from OC-3, or 155.5
megabits per second, to OC-48, or 2.5 gigabits per second. Service providers
today are beginning to deploy OC-192, or 10 gigabits per second, equipment
throughout their networks and are in the early stages of developing and testing
equipment with OC-768, or 40 gigabits per second, capability, creating a need
for innovative components in optical testing equipment capable of operating at
these high speeds. With increased data rates and number of channels, the amount
of data processed by network equipment has increased dramatically. As the data
rate and bandwidth between network equipment sites has expanded, the data rate
between the equipment within these sites has not kept pace. As a result, there
is increasingly a need for high data rate, or high-speed, connections to link
the equipment within a network service provider's site.
Component innovations have also led to the development of the fiber
amplifier, which enhances the strength of optical signals, resulting in a
dramatic increase in the distance over which optical signals can be transmitted
without regeneration, which is the process of converting the signals from
optical to electrical and back to optical to restore signal quality and
strength. Regeneration requires large, expensive equipment, often in remote
locations, which can be costly to deploy, operate and maintain. Fiber amplifiers
restore the signal strength without regeneration and result in significantly
lower equipment, operations and maintenance costs. Prior to the development of
fiber amplifiers, signal attenuation, or loss, limited the distance over which
an optical signal could be transmitted without regeneration, or reach, to
approximately 70 kilometers. With fiber amplifiers, the reach of optical
networks has increased to thousands of kilometers. With improvements in fiber
amplifiers, network equipment manufacturers are continuing to develop longer
reach capability that has led to, among other things, all-optical networks that
operate without any regeneration. These all-optical networks depend on advanced
fiber optic components that enable extremely long reach.
Requirements of Optical Communications Systems
The increasing need for bandwidth has resulted in strong demand for optical
networking systems and a proliferation of new development efforts by traditional
and emerging network equipment providers. These providers are seeking to develop
next-generation optical networking systems, which require:
Increased channel counts. Service providers are demanding optical networks
with higher channel counts to increase bandwidth. However, with current WDM
technology, the number of wavelengths that can be transmitted, or channel count,
is limited. Current WDM technology requires that data be transmitted within a
defined range of wavelengths and with a large space between each channel. These
limitations constrain the channel count and the overall bandwidth. Network
equipment providers can increase the channel count by extending the range of
wavelengths over which data can be transmitted. At the same time, the channel
count can be increased by reducing the spacing between channels with dense
wavelength division multiplexing, or DWDM, which is a technology that increases
network capacity by transmitting data simultaneously on many densely packed
wavelengths along the same optical fiber. According to Ryan, Hankin & Kent, the
market for DWDM optical components is expected to grow at a compound annual
growth rate of 51% from 1999 to 2003. As wavelength range and channel counts
increase, service and network equipment providers will also need to effectively
manage the increasingly complex flow of high speed optical signals in a vast
number of wavelengths.
Higher data rates. Future systems will continue to require higher data
rates to handle the rapid growth in data traffic. Next-generation optical
networks are being developed with data rates of OC-192 and OC-768. As higher
speed optical networking systems are being developed, service and equipment
providers will need test and measurement equipment that is faster than the
products being measured in order to ensure accurate testing of the equipment. In
addition to increasing data rates between network equipment sites, network
service providers are demanding an increase in data rates between network
equipment, such as between routers, switches and DWDM terminals and other
equipment, within a site. As a result, service
36
<PAGE> 38
and network equipment providers are demanding a large number of short-reach,
high data rate interconnections.
Longer reach. The varied and unpredictable geographical pattern of Internet
data traffic requires longer reach networks. Regeneration stations are expensive
and are costly to deploy, operate and maintain. As a result, service providers
are demanding optical networks with longer reach between regeneration stations.
Very long reach is ultimately needed for all-optical networks that do not
require regeneration.
Enabling new services. Competition among service providers is driving the
need to provide differentiated services. Similar to the introduction of systems
that increased the bandwidth and reach of current networks, there is a need for
network equipment capable of managing and flexibly delivering this bandwidth at
the fiber optic component level. Traditional methods of managing bandwidth by
converting optical signals to electrical signals for processing are limited to a
specific protocol and data rate. When processing is performed entirely in optics
without the conversion to electronics, the processing is independent of the
protocol and data rate.
Cost-effectiveness. Growth in data traffic and price competition in the
telecommunications market increasingly requires service providers to seek
solutions that reduce their overall network cost of ownership. In addition to
the basic cost of equipment, service providers incur substantial costs in terms
of space required to deploy the equipment, power consumption and on-going
operations and maintenance. In order to continue to grow and upgrade their
networks to meet higher traffic demands in a cost-effective manner, service
providers need compact, low-power consuming equipment.
THE NEW FOCUS OPPORTUNITY
In order to address the growing requirements of communications networks,
there is a demand for the introduction of increasingly sophisticated systems at
a rapid rate. To meet this performance and functionality requirement, equipment
providers must utilize increasingly sophisticated components. The fiber optic
components market, including actives and passives, is one of the fastest growing
portions of the telecommunications market. Ryan, Hankin & Kent estimates that
the market for fiber optic components was approximately $6.6 billion in 1999 and
is expected to grow to over $22.5 billion by 2003. As a result of the rapid pace
of new product introductions and the difficulty of designing and producing the
requisite components, equipment providers are increasingly turning to suppliers
of fiber optic products. These suppliers must offer high performance products
that are compact, consume less power and are designed to be manufacturable in
high volumes. These new innovative fiber optic products enable systems companies
to offer solutions with increased channel counts, higher data rates, longer
reach lengths and new services, and which reduce overall network cost of
ownership.
THE NEW FOCUS SOLUTION
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks brand. We
enable networking solutions with increased channel counts, higher data rates,
longer reach lengths and new services, and which reduce overall network cost of
ownership. Our high-performance products are compact, consume less power and are
designed to be manufacturable in high volumes. We believe our Smart Optics for
Networks(TM) products provide our customers the following key benefits:
Increased channel counts. Our wavelength management products, which process
and control the many wavelengths on an optical fiber, and fiber amplifier
products enable systems with extended fiber bandwidth, thereby increasing the
efficiency of optical networks by transmitting a greater number of wavelengths
in a single optical fiber. Our wavelength management products also enable
network DWDM systems to accurately, efficiently and reliably manage the vast
number of optical signals by separating these signals into different paths that
can be processed individually. Our interleavers effectively double the capacity
of DWDM systems by doubling the number of channels operating on a single fiber.
Our WDM couplers split optical signals on a single fiber into two different
wavelengths on two fibers, enabling them to be processed on an individual basis.
Our optical circulators are used for directing optical signals into the
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appropriate sections of a fiber amplifier and offer wide wavelength operation to
accommodate many optical channels. These circulators enable advanced
next-generation fiber amplifiers that amplify signals at multiple wavelength
bands and signals travelling in both directions along a fiber.
Higher data rates. Our high-speed opto-electronics enable our customers to
solve the bandwidth bottleneck between equipment within a network service
provider's site. To address this problem we offer our 10 gigabits per second, or
Gbps, transceivers which are designed to be low cost, small sized and low-power
consuming solutions. Our advanced photonics tools enable network service and
equipment providers to develop and test their next-generation offerings,
including OC-768 products.
Longer reach. Our fiber amplifier products enable the transmission of
information at very high speeds over extended distances. We reduce the expense
associated with amplification and regeneration equipment by extending the
distances over which an optical signal can be transmitted. We offer products
with wide wavelength range and low loss that enable the high power amplification
needed to drive optical signals for very long distances often associated with
next-generation all-optical networks.
Enabling new services. Our products enable network equipment manufacturers
and service providers to offer products capable of managing and flexibly
delivering bandwidth at the fiber optic component level. Our optical circulators
enable equipment capable of delivering or dynamically adding and dropping a
single wavelength at any point in the network. Our tunable lasers, or lasers
with dynamically adjustable wavelengths, are being developed to enable flexible
networks that can be reconfigured to address changing data traffic patterns.
Cost-effectiveness. Our products enable network solutions with reduced
overall network cost of ownership. Our products are designed with compact form
factor and low power consumption to reduce system space and power requirements.
We design our products for high volume manufacturing and offer several different
products utilizing the same or similar fiber optic packaging, thereby decreasing
cost. Our fiber amplifier products increase the reach and number of channels
within a DWDM network, reducing the expense of signal amplification and
regeneration.
THE NEW FOCUS STRATEGY
Our objective is to be the leading provider of innovative, fiber optic
products that enable our customers to deploy and optimize next-generation
optical networks. Key elements of our strategy include:
Leverage our position as a leading market innovator. We believe that we
have a unique combination of component design and systems architecture
knowledge, an extensive intellectual property portfolio, as well as strong
management experience in the optical networking industry. Since our founding in
1990, we have focused exclusively on developing optical products and have formed
close relationships with leading research and development organizations in
addition to optical networking companies. We intend to leverage our reputation
in the industry to obtain new customers, partners and employees.
Focus our research and development efforts on continuing to broaden our
product offerings. We believe that the breadth and depth of our product line,
including both actives and passives, differentiates us from many of our
competitors. We will continue to expand the breadth of our product line by
developing and offering best-in-class Smart Optics for Networks(TM) products. We
believe we can accomplish this goal by continuing to aggressively invest in
product development and leverage our existing technological capabilities,
including the intellectual property and optical expertise gained through the
development of our position as a leading innovator of advanced photonics tools.
For example, we are presently leveraging our expertise in tunable lasers for
test and measurement to develop advanced tunable transmitters as solutions to
replace existing fixed wavelength lasers.
Collaborate with leading innovative systems companies. We believe that we
are integral to the development efforts of our customers, which provides us with
unique insight into the requirements of next-generation optical networks.
Regular contact with key decision-makers in both service and equipment
providers' organizations provides us with opportunities to collaborate with
these companies to provide the required products, solve implementation problems
and aid in the design of future systems architecture. In
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addition, we believe our ability to design and offer our customers innovative
fiber optic products for their system solutions gives us a strategic advantage
over our competitors with respect to system design wins. We intend to continue
to target our development efforts to both the current systems manufacturers as
well as emerging optical systems companies, whose innovative designs, we
believe, will drive the next-generation optical network.
Continue to expand manufacturing capacity and improve process
efficiency. We intend to continue to expand our first, smaller manufacturing
capacity and improve process efficiency. We commenced operations in our
Shenzhen, China facility in June 2000 and will continue to expand our capacity
within our current facilities. We will also look for additional sites for future
expansion. We will continue to invest in improving our processing efficiencies
through the use of automation, proprietary tools and processes.
Pursue strategic acquisitions. We believe that we have a strong reputation
for technical innovation combined with a willingness to collaborate with the
leading technologists in the optical, or photonics, industry. We are regularly
approached by photonic technologists looking to commercialize their intellectual
property. We have integrated the intellectual property from several of these
technologists into our existing business, resulting in several new product
introductions. We intend to continue to leverage our reputation to aggressively
pursue strategic acquisitions that can provide us with key intellectual
property, strategic products and highly-qualified engineering personnel to
rapidly increase our technological expertise and expand the breadth of our
product portfolio.
PRODUCTS
Our Smart Optics for Networks(TM) products enable systems providers to meet
the dynamic demands of next-generation optical networks. Our product offerings
include fiber amplifier products, wavelength management products, high-speed
opto-electronics, tunable laser modules and advanced photonics tools. We
categorize our products by stage of development, such as shipping to customers,
beta testing, which refers to products in advanced customer testing, and alpha
testing, which refers to products in the early stages of customer and industry
testing.
FIBER AMPLIFIER PRODUCTS
Fiber amplifiers are widely deployed in DWDM and other networks to amplify
optical signals at periodic intervals along a fiber optic link. Our fiber
amplifier products enable systems with increased channel counts and longer reach
lengths at a lower overall network cost of ownership.
<TABLE>
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
----------------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel counts Shipping
(C-Band) - Low loss - Longer reach
----------------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel counts Beta testing
(L-Band) - Low loss - Longer reach
----------------------------------------------------------------------------------------------------
Polarization Beam - Low loss - Longer reach Shipping
Combiners - Efficient polarization - Cost-effectiveness
control
- Compact
----------------------------------------------------------------------------------------------------
Isolator Arrays - Low loss - Longer reach Beta testing
- Reduced part count, - Cost-effectiveness
lower cost per port
----------------------------------------------------------------------------------------------------
</TABLE>
- Optical circulators. Optical circulators are used for directing optical
signals into the appropriate sections of a fiber amplifier. Current
optical circulators are inadequate for the next generation of fiber
amplifiers because of their limited wavelength range and relatively high
losses. Our optical circulators have fewer parts than available
alternatives, resulting in wide wavelength operation and
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very low losses to accommodate many optical channels. The wide wavelength
range enables next-generation fiber amplifiers to amplify signals at
multiple wavelength bands and signals travelling in both directions along
a fiber. Our optical circulators operate in the two standard wavelength
bands, the C-Band and the L-Band.
- Polarization beam combiners. Polarization beam combiners are used to
combine the optical power from two pump lasers operating at the same
wavelength into a single fiber, thereby effectively doubling the amount
of power in the fiber amplifier. Additional pump power is essential to
support the increased number of channels in the next-generation DWDM
systems. However, current solutions are bulky and do not efficiently
combine optical power of the same wavelength in order to increase pump
power. Our polarization beam combiners are compact components which
efficiently combine the optical power of the same wavelength with minimal
loss, thereby enabling efficient pumping of these high power amplifiers.
- Isolator arrays. Isolators are fiber optic devices that ensure that light
is transmitted in the correct direction. Isolator arrays are multiple
isolators in a single package. As the functionality and performance of
fiber amplifiers increase, the number of components within each amplifier
increases greatly and the size of each component becomes a significant
factor. Our two-in-one isolator arrays offer very low loss and the same
functionality as traditional isolators in half of the space, thus
providing significant cost and space savings.
WAVELENGTH MANAGEMENT PRODUCTS
As the number of channels in DWDM systems increases, advances in products
to manage optical signals on different wavelengths are increasingly critical.
Our wavelength management products enable DWDM systems to accurately,
efficiently and reliably manage the vast number of optical signals.
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
---------------------------------------------------------------------------------------------------------
DWDM Interleavers - Dense channel spacing - Increased channel Alpha testing
- Compact counts
- Requires no active cooling - Cost-effectiveness
---------------------------------------------------------------------------------------------------------
WDM Couplers - Low loss - Longer reach Beta testing
- Cost-effective all-fiber product - Cost-effectiveness
- Enables new services
---------------------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Shipping and
- Low loss counts Beta testing
- Enables new services
---------------------------------------------------------------------------------------------------------
</TABLE>
- DWDM interleavers. DWDM interleavers combine signals from two fibers onto
a single fiber in the same wavelength range. Thus, DWDM interleavers
effectively double the capacity of DWDM systems by doubling the number of
channels transmitted on a single fiber. Current interleavers are bulky,
expensive and require active cooling, or separately powered temperature
control, which significantly increases system complexity. Our DWDM
interleaver design does not require active cooling and is considerably
smaller and less expensive than current solutions.
- WDM couplers. WDM couplers split optical signals on a single fiber into
two different wavelength ranges on two fibers so that they can be
processed separately. Our WDM couplers have low loss and are designed for
robust operation under difficult environmental conditions, such as
vibration, mechanical shock or humidity, over a long period of time.
- Optical circulators. Our optical circulators, as described above, are
also used in wavelength management applications to direct optical signals
to the appropriate sections of the system. These circulators enable new
services such as adding or dropping individual channels at defined points
in the network.
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HIGH-SPEED OPTO-ELECTRONICS
Our high-speed, high data rate opto-electronic products are focused on
compact, low power consuming, low cost solutions for short-range
interconnections at 10 Gbps and above.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
10 Gbps VCSEL-based - Compact - Cost-effectiveness Alpha
transceivers - Low power consumption - Higher data rates testing
- Requires no active
cooling
----------------------------------------------------------------------------------------------
</TABLE>
- 10 Gbps Vertical Cavity Surface Emitting Lasers. Transceivers convert
optical signals to electronic signals and vice versa and are an essential
component of optical networks. Current solutions for service providers
are expensive, large and power consuming transmitters and receivers. In
contrast, our 10 Gbps transceivers are designed around vertical cavity
surface emitting laser-based transceivers, or VCSEL, which are lasers
that emit light perpendicular to the semiconductor surface. These lasers
do not require external modulation or active cooling and are low cost to
manufacture. In addition, our transceivers are designed to consume little
power and to be compact, making them an attractive solution for
short-range, high data rate interconnections.
TUNABLE LASER MODULES
Our high performance tunable laser modules are used for testing and
measuring fiber optic components and systems in manufacturing, development and
research environments. We are also developing a tunable laser module for
replacement of conventional fixed wavelength lasers in telecommunications
networks.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
Swept-wavelength lasers - Rapid, precise - Reduced development Shipping
wavelength scanning and manufacturing time
----------------------------------------------------------------------------------------------
Test and measurement - Wide wavelength range - Enables development of Shipping
lasers systems with increased
channel counts systems
----------------------------------------------------------------------------------------------
Tunable transmitters - High output power - Cost-effectiveness Alpha testing
- Wide wavelength range - Enables new services
----------------------------------------------------------------------------------------------
</TABLE>
- Swept-wavelength lasers. Swept-wavelength lasers continuously and
linearly scan wavelengths. Our swept-wavelength lasers provide rapid
wavelength scanning for precise measurement of network components and
systems, reducing development time for new products and reducing
manufacturing bottlenecks.
- Test and measurement tunable lasers. Our high precision tunable lasers
are used for test and measurement in the manufacturing and development of
optical network products. Our test and measurement tunable laser modules
operate across a wide tuning range for thorough testing and provide high
output power for improved accuracy. These laser modules are designed and
tested to withstand harsh environmental conditions without degradation of
performance.
- Tunable transmitters. As DWDM systems rapidly grow in channel count, the
number of wavelength-specific parts has grown proportionally. Current
fixed wavelength laser solutions result in deployment, inventory and
maintenance problems for network service and equipment providers. We are
presently developing advanced tunable transmitters as solutions to
replace existing fixed wavelength lasers. Our tunable transmitters are
designed for high output power over a very wide
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wavelength range to meet the requirements of existing transmitters while
providing a high degree of flexibility. These tunable transmitters are
designed to enable reconfigurable, flexible networks.
ADVANCED PHOTONICS TOOLS
We offer a wide range of photonics tools for advanced research, development
and manufacturing. These products leverage our core competencies in optics for a
number of applications including telecommunications research and product
development. For example, our precision opto-mechanics and picomotor products,
or products that position fiber optic and optical parts, are used for advanced
manufacturing of fiber optic components and for research and development of
high-speed network products. As another example, photodetectors, which are
devices that convert optical signals to electrical signals, faster than the
products being measured are needed to accurately characterize the optical
performance of the tested device, and our high-speed photodetectors are being
used to develop OC-768 products.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Precision - Precise positioning - Enables automated fiber Shipping
opto-mechanics optic manufacturing
----------------------------------------------------------------------------------------------------
Picomotors - Precise positioning - Enables development of Shipping
next-generation products
----------------------------------------------------------------------------------------------------
Photodetectors - High speeds - Enables development of high Shipping
data rate products
----------------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
Our technical capabilities span several key areas that we believe will
result in rapid development and deployment of our Smart Optics for Networks(TM)
products.
Wideband passives technology. As more channels are needed in DWDM networks
to handle more data traffic, the fiber optic elements within the network need to
accommodate more wavelengths and hence more channels. Our wideband passives
technology, or capability to develop fiber optic devices that process only
optical signals, enables us to develop advanced fiber amplifier and WDM products
that have a wide wavelength operating range with low cost by design. Our
wideband passives technology is based on a patent pending design that eliminates
unnecessary parts that are wavelength sensitive, thereby resulting in wide
wavelength operation for high channel count. Our wideband passives technology is
used in our rapidly growing optical circulator products.
Wavelength management technology. The growing number of wavelengths or
channels in DWDM systems has caused these systems to become increasingly complex
and difficult to handle. Our wavelength management technology enables efficient
management of numerous signals by separating them into different paths that can
be treated individually. This technology includes capabilities in advanced
micro-optic design for products with new materials, geometries and
functionality, and in design, development and manufacturing for all-fiber based
products. Our wavelength management technology is used in our wavelength
management products.
Advanced fiber optic packaging. Our advanced fiber optic packaging
technology enables us to develop components with compact size, high reliability
and improved temperature sensitivity. This technology also enables a common
platform across many products, resulting in economies of scale and significantly
reducing design, development and test time. Our packaging meets Telcordia, or
Bellcore, industry standards for reliability and is qualified by many key
network equipment providers. This technology is based on our design capabilities
in micro-optic and all-fiber packaging and our advanced testing facilities and
expertise. Our advanced fiber optic packaging technology is used in our fiber
amplifier and wavelength management products.
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Tunable laser technology. Traditional laser transmitters operate at only a
single wavelength, corresponding to a single channel. Our tunable laser
technology allows us to create transmitters that have a tunable, or adjustable,
wavelength so that each laser can operate on any number of the required
channels. Our capabilities and intellectual property in this area include
advanced laser design, development and manufacturing, advanced laser packaging
for high robustness and reliability, dynamic filter technology to adjust the
laser wavelength to any desired channel, and integrated wavelength locking
technology that results in minimal error in the laser wavelength from the
desired channel. These capabilities have resulted in tunable laser products with
high output power and wide wavelength coverage.
High-speed opto-electronics technology. Our high-speed opto-electronics
capabilities include analog chip design, photodetector design and advanced
manufacturing, packaging and assembly. This capability has resulted in our 60
gigahertz photodetector product and electronic amplifier products at speeds
greater than 15 gigahertz, while allowing us to develop transmitters, modulators
and receivers that operate at data rates of OC-192 or OC-768.
Advanced thin films. Specialized precision thin film coatings result in
extremely low optical reflections and are a critical part of many optical
devices. When applied to our tunable lasers, the low reflections result in high
optical power output and wide wavelength tunability, or range, of over 50
nanometers. Our advanced thin film capability includes advanced thin film design
and processes, equipment and facilities for depositing the specialized coatings
and thin film monitoring capability for precision control of the thin film
properties. This capability has resulted in high performance active devices such
as our tunable lasers modules.
CUSTOMERS
We sell our fiber optic products to network equipment providers and our
advanced photonics tools to suppliers of components, systems and
services-related products in the optical networking industry. We have sold our
products to over 50 customers, and no single customer accounted for more than
10% of our revenues for the nine-month period ended December 31, 1999. For the
three-month period ended July 2, 2000, Agilent Technologies, Corvis Corporation,
Alcatel USA and Corning Incorporated accounted for 14.2%, 11.6%, 11.0% and 10.7%
of our net revenues, respectively. None of our other customers accounted for
more than 10% of our net revenues for the six-month period ended July 2, 2000.
The following is a list of our telecom product customers that represented
more than $500,000 of revenue in the twelve months ended July 2, 2000 and a list
of our commercial photonics product customers that represented more than
$200,000 of revenue in the twelve months ended July 2, 2000:
<TABLE>
<S> <C>
TELECOM PRODUCTS: COMMERCIAL PHOTONICS PRODUCTS:
Agilent Technologies Applied Laser Technology
Alcatel USA BFI Optilas
Avanex Corporation Corning Incorporated
Corning Incorporated ERIM International
Corvis Corporation GSI Lumonics
JDS Uniphase Corporation INDECO
Jet Propulsion Laboratory
KLA-Tencor Corporation
Molecular Dynamics, Inc.
Optima Research
Positive Light
Schlumberger Technology Corporation
</TABLE>
AGILENT TECHNOLOGIES
Agilent Technologies is a global, diversified technology company focusing
on high-growth markets in the communications, electronics, life sciences and
healthcare industries. In 1996, Agilent found that they required a low-cost
tunable laser for testing long-range optical equipment. In that year, we began
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collaborating with Agilent for the development of a low-cost tunable laser
product. From 1996 to 1999, we developed a low-cost tunable laser according to
Agilent's needs. In addition to funding a portion of this project, Agilent
agreed to begin commercial purchase of our low-cost tunable laser product. We
delivered the first product, a tunable laser module along with the associated
control electronics, in the second half of 1999. By incorporating our products,
Agilent has been able to offer a broader line of tunable lasers for their
customers at more competitive prices than previous solutions.
ALCATEL
Alcatel is a premier provider of optical networking equipment for the
telecommunications industry. In order to meet the need for next-generation
systems, Alcatel's systems require a number of optical circulators. In 1998, we
first developed the intellectual property for design and production of a
circulator that allows wider wavelength range, lower loss, and more compact size
than previously available products. In early 1999, Alcatel took delivery of a
beta test version of this product, concluding a number of very successful tests.
Alcatel presently deploys our circulator products to enhance the performance of
their systems.
AVANEX
Avanex is a provider of photonics processors for optical networks. Avanex
requires highly reliable tunable lasers to use as an integral part of their
manufacturing process. Our products address these needs in two areas. First, we
supply the tunable test lasers that are incorporated into Avanex's standard
production line. Our tunable test lasers have allowed Avanex to decrease the
calibration time required at each station. Second, our swept wavelength lasers
are being incorporated into production lines for Avanex's next-generation high
performance devices. Our technology allows faster optimization for the device in
production.
CORNING
Corning is a premier provider of optical fiber, cable and photonic products
for the telecommunications industry. In order to meet the need for higher power
amplifiers driven by increasing channel counts in WDM networks, Corning
developed a complex, high-end fiber amplifier product that required a number of
circulators. In 1998, we first developed the intellectual property for design
and production of a circulator that allows higher channel counts than previously
available products. In early 1999, Corning took delivery of a beta test version
of this product, concluding a number of successful tests. Corning presently
deploys our circulator products to enhance the performance of their fiber
amplifier products and to allow for more complex fiber amplifier architectures
demanded by Corning's customers.
QTERA
Qtera Corporation, a wholly owned subsidiary of Nortel Networks, is a
provider of extremely long reach, high power network solutions. In developing
these solutions, Qtera had a need for a packaging solution for one of the key
components used in their system. This package was required to pass rigid
Telcordia testing. We used our existing intellectual property and developed new
intellectual property that solves the packaging problem and addresses Qtera's
needs. We consider this technology to be a core competency. In addition to
enhancing Qtera's product offerings, we have leveraged this technology to supply
solutions to other systems vendors. Qtera's deployment of this technology will
provide carriers with increased power and signal transmission distance, reducing
the number of regeneration points in a network.
CUSTOMER AGREEMENTS
In December 1996, we entered into a development agreement with
Hewlett-Packard GmbH, now Agilent Technologies Deutschland GmbH, for the
development of tunable laser modules meeting
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specifications established by Agilent. Pursuant to this development agreement,
as amended in November 1997 and December 1999, we agreed to develop tunable
laser modules for Agilent and Agilent agreed to make installment payments to us
to cover part of the development costs of the tunable laser modules with each
installment payment payable upon the completion of specified development phases.
In addition, the agreement provides for an initial price to Agilent per tunable
laser module purchased, with increases or decreases in the price based upon
increases or decreases in Agilent's list prices to its customers. Pursuant to
this agreement, Agilent has an irrevocable, exclusive, transferable right to
manufacture and distribute the product developed by us, and Agilent may
manufacture the product itself or have the tunable laser modules manufactured by
a third party. We may not sell the tunable laser modules developed under our
contract with Agilent to anyone other than Agilent without Agilent's prior
written consent.
In January 2000, we entered into a memorandum of agreement with Alcatel USA
in which Alcatel commits to purchase from us a minimum percentage of Alcatel's
demand for one of our products. The issuance of purchase orders is subject to
receipt of final approval by internal management of Alcatel and to mutually
agreed to terms and conditions. If the required management approval is withheld,
Alcatel will not place a purchase order and will not be subject to penalties,
costs or other liability.
In January 2000, we entered into an agreement with Corning Incorporated,
pursuant to which Corning agrees to pay certain negotiated prices for our
products during the term of the agreement and offers price protection to Corning
should Corning receive offers from one of our competitors for similar quantity
and quality goods under like terms and conditions. Corning is not obligated to
purchase any minimum amounts of our products under the terms of the agreement,
and they may stop placing orders with us at any time, regardless of any forecast
they may have previously provided. The agreement terminates by its terms in
December 2000, unless we agree with Corning to extend the term for another one
year period.
SALES, MARKETING AND CUSTOMER SUPPORT
We sell and market our fiber optic products primarily through direct sales.
We sell and market our photonics tools primarily through a combination of direct
sales, catalog sales and distributors. We focus our direct sales efforts on
service providers and optical network equipment manufacturers. Our direct sales
account managers cover the market on an assigned account basis. We believe that
support services are essential to the successful installation and ongoing
support of our products. Our support services include customer service and
technical support. Our customer service representatives assist customers with
orders, returns and other administrative functions. Our technical support
engineers provide customers with answers to technical and product related
questions as well as application support relating to the use of our products in
the customer's applications. These engineers also help to define the features
that are required for our products to be successful in specific applications.
MANUFACTURING
We manufacture the majority of our products internally. We do, however,
outsource, on a limited basis, manufacturing of selected subcomponents,
primarily for our commercial photonics products. We have manufacturing
operations in Santa Clara, California, San Jose, California, Madison, Wisconsin,
Middleton, Wisconsin and Shenzhen, China. We are currently establishing
additional manufacturing facilities in San Jose, California and Shenzhen, China.
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. Pursuant to this supply
agreement, we have agreed to advance Koncent RMB 29 million, or approximately
U.S.$3.5 million, against future orders of which we have already advanced
$2,500,000 as of July 2, 2000. The advancement will be repaid in full by May 31,
2003 to the extent that any amount remains outstanding. The agreement provides
that Koncent will devote specified manufacturing capacity to meet our
anticipated supply requirements based on our projections, and we have agreed to
place our orders
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for yttrium vanadate crystals with Koncent, up to their manufacturing capacity.
Our agreement may be terminated if either party materially breaches the
agreement or upon the consent of both parties.
We are committed to designing and manufacturing high quality products that
have been thoroughly tested for reliability and performance. Our manufacturing
processes utilize stringent quality controls, including incoming material
inspection, in-process testing and final test. We perform extensive in-house
thermal, shock and environmental testing, including testing to industry accepted
standards developed by Telcordia, a company that provides certain centralized
research and standard coordination for Regional Bell Operating Companies. Our
products are designed to be fully compliant with standards for quality and
interoperability with existing installation and maintenance systems. Our
commitment to manufacturing high quality products is evidenced by our being
recommended for ISO-9001 quality certification.
We will also continue to leverage our competencies in rapid prototyping,
automation and proprietary tools and processes to improve our manufacturing
abilities.
Rapid prototyping. As advances in optical network technologies accelerate,
the time required to introduce new products into the market needs to be
minimized. Our capabilities include precision machining and advanced tooling
design for quick turn implementation of new designs into product prototypes.
These capabilities result in reduced development times for new products and
support yields and capacity improvement efforts within manufacturing.
Automation and proprietary tools and processes. Traditional manufacturing
processes for fiber optic components and modules are highly manual, yet require
high precision and high yields. Our proprietary tools and processes include
automated precision processes, technology and equipment that result in increased
capacity and yields. For example, our robotics technology has pick-and-place
capability at the one micro-meter level, the precision required in the assembly
of our products. We have developed intellectual property in this area and have
applied it to products that are presently in production as well as those that
are in development.
RESEARCH AND DEVELOPMENT
We have assembled a team of engineers, technicians and operators with
significant experience in the optical networking industry, highly specialized
manufacturing industries such as semiconductor capital equipment and optical
storage, and the communications industry. Our team has expertise in optics,
fiber optic package design, opto-electronics and systems architecture. Our
product development efforts focus on high-speed opto-electronics, innovative
fiber optic products and advanced automation techniques, which will enable us to
offer next-generation products in volume.
We have made, and will continue to make, a substantial investment in
research and development. Our gross research and development expenses totaled
$6.2 million for our fiscal year ended March 31, 1998, $9.1 million for our
fiscal year ended March 31, 1999, $8.4 million for the nine-month period ended
December 31, 1999 and $9.2 million for the six-month period ended July 2, 2000.
COMPETITION
Competition in the optical networking market in which we provide products
is intense. We face competition from companies, including JDS Uniphase
Corporation, Lucent Technologies and Nortel Networks Corporation. Some of our
competitors, including JDS Uniphase Corporation, Lucent Technologies and Nortel
Networks Corporation are also our customers. Lucent Technologies and Nortel
Networks Corporation are vertically integrated and provide both entire fiber
optic systems and the components that comprise fiber optic systems. We compete
with these companies with respect to the development, marketing and sale of
fiber optic components. In some cases, we supply test equipment and photonics
tools to competitors of our fiber optics components business.
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
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<PAGE> 48
support of their products. In addition, our competitors have large market
capitalizations or cash reserves and are much better positioned than we are to
acquire other companies in order to gain new technologies or products that may
displace our product lines. Any of these acquisitions could give our competitors
a strategic advantage. Many of our potential competitors have significantly more
established sales and customer support organizations than we do. In addition,
many of our competitors have much greater name recognition, more extensive
customer bases, better developed distribution channels, broader product
offerings and greater manufacturing capacity 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.
The principal factors upon which we compete are:
- the innovative nature and features of fiber optic component products;
- ability to rapidly develop and introduce new products;
- responsive customer service and support; and
- price.
We believe we compete favorably on each of these factors.
INTELLECTUAL PROPERTY
Our success and ability to compete depend substantially upon our
technology. We pursue patent protection in the United States and abroad, and as
of July 2, 2000 we have been granted 28 U.S. patents and one European patent. As
of July 2, 2000, we have 30 U.S. utility filings, of which two have been allowed
by the U.S. Patent and Trademark Office, 20 U.S. provisional filings and nine
overseas filings in various stages of prosecution, and we continue to file new
patent applications in the United States and overseas. The expiration dates of
our patents range from May 25, 2009 to September 15, 2017.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as our existing
contracts with equipment manufacturers, our licensing agreements with companies
and universities, the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. We cannot assure you that others will not develop
technologies that are similar or superior to our technologies.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our proprietary information. Our confidentiality agreements
generally prohibit the disclosure or use of the technology being evaluated or
licensed. From time to time we license our technology to various third parties
pursuant to non-exclusive license agreements that prohibit the disclosure or use
of the technology except as set forth in the agreements. Despite these efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and there can be no assurance that the steps taken
by us will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do
the laws of the United States.
Substantial litigation regarding intellectual property rights exists in
each of the market segments in which we participate. We expect that the optical
networking industry may be increasingly subject to third-party infringement
claims as the number of competitors grows and the functionality of products in
different industry segments overlaps. In addition, we believe that many of our
competitors have filed or intend to file patent applications covering aspects of
their technology on which they may claim our technology infringes. We are
currently defending a claim brought against us by U.S.A. Kaifa Technology, Inc.,
which was recently acquired by E-Tek Dynamics, Inc., which has been acquired by
JDS Uniphase, alleging, among other things, that we have infringed some of their
intellectual property rights. We cannot make any
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<PAGE> 49
assurances that additional third parties in the future will not claim
infringement by us with respect to our products and our associated technology.
The Kaifa claim and other claims of this kind in the future, with or without
merit, could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, result in injunctions against us, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements of this kind, if required, may not
be available on terms acceptable to us, if at all. A successful claim of product
infringement against us and failure or inability by us to license the infringed
or similar technology could harm our business.
EMPLOYEES
At July 2, 2000, we had a total of 888 employees located in both the United
States and the People's Republic of China. Of the total, 665 were in
manufacturing, 119 were in research and development, 32 were engaged in sales
and marketing, 72 were in administration. None of our employees are subject to a
collective bargaining agreement and we believe that our relations with our
employees are good.
FACILITIES
Our corporate headquarters facility, of approximately 55,000 square feet,
is located in Santa Clara, California. We lease our corporate headquarters
facility pursuant to a lease agreement that expires in April 2005. We also have
a facility of 52,000 square feet in San Jose. In May 2000 we entered into a
lease with Lincoln-RECP Hellyer Opco, LLC for an additional facility of 130,000
square feet, also in San Jose. Under this lease we have obligations of
approximately $25.0 million in lease payments over the seven year term.
We also have facilities in Wisconsin. We lease approximately 2,000 square
feet of space in Madison, Wisconsin under a lease agreement that expires
December 2000. We are also leasing approximately 2,500 square feet in Middleton,
Wisconsin, pursuant to a lease agreement that expires November 2000 or, upon our
occupation of a 14,000 square foot facility, pursuant to a new lease agreement
that expires in 2007.
We have established a manufacturing facility in Shenzhen, China located on
land leased from China's government by the Shenzhen New and High-Tech Village
Development Co. under land use certificates and agreements with terms of 50
years. We lease this manufacturing facility from the Shenzhen New and High-Tech
Village Development Co. under a lease agreement that will expire in November
2002, subject to our option to renew for an additional three-year period. The
size of this facility in Shenzhen, China is approximately 20,000 square feet.
In addition, in July 2000 we acquired a second facility in Shenzhen, China.
We purchased approximately 43% of this facility in Shenzhen and will lease the
remainder of the facility for a term of five years from the 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. The size of this
facility is approximately 250,000 square feet.
LEGAL PROCEEDINGS
On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, recently
acquired 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.
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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 enforceable. 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of July 2, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth E. Westrick.................. 43 President and Chief Executive Officer, Director
William L. Potts, Jr................. 53 Chief Financial Officer
Dr. Timothy Day...................... 36 Chief Technical Officer and Vice President, Engineering,
Telecom
Nicola Pignati....................... 51 Chief Operating Officer
Paul G. Smith........................ 42 Vice President, General Manager, Telecom
Dr. Bao-Tong Ma...................... 50 Vice President, General Manager, New Focus Pacific Co.
Dr. Robert A. Marsland............... 36 Vice President, Focused Research, Inc.
George Yule.......................... 61 Vice President, Supply Chain Management
Dr. Milton Chang..................... 57 Chairman of the Board of Directors
Dr. David L. Lee..................... 50 Director
John Dexheimer(1).................... 45 Director
Dr. Winston S. Fu(1)................. 34 Director
R. Clark Harris(1)(2)................ 63 Director
Robert D. Pavey(2)................... 58 Director
</TABLE>
-------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Kenneth E. Westrick has served as our President, Chief Executive Officer
and director since November 1997. Prior to joining us, Mr. Westrick spent nine
years at Cornerstone Imaging, Inc. where he held positions such as Senior Vice
President, General Manager Display Division and Managing Director Europe. Mr.
Westrick has nearly 20 years experience managing different aspects of technology
start-up companies, generally in the computer industry. Mr. Westrick holds a
B.S. in economics from Northwestern University and an M.B.A. from Stanford
University.
William L. Potts, Jr. has served as our Chief Financial Officer since
February 2000. Prior to joining us, Mr. Potts worked at Komag, Incorporated from
July 1987 to February 2000. For ten years he served as Komag's chief financial
officer and most recently held the position of Executive Vice President, Chief
Financial Officer and Secretary. Prior to joining Komag in 1987, Mr. Potts held
financial management positions in the computer, medical and entertainment
industries. Early in his career he served on the consulting staff of Arthur
Andersen & Co. Mr. Potts holds a B.S. in industrial engineering from Lehigh
University and an M.B.A. from Stanford University.
Dr. Timothy Day is one of our co-founders and has served as our Chief
Technical Officer since July 1990 and as our acting Vice President of
Engineering, Telecom since November 1998. Since our founding, Dr. Day has served
us in various other positions, including acting General Manager, acting Vice
President, Operations and as the former Vice President, Focused Research. Dr.
Day received both a B.S. and an M.S. in physics from San Diego State University
and a Ph.D. in electrical engineering from Stanford University. Dr. Day is a
member of IEEE Lasers and Electro-Optics Society, Optical Society of America and
the Society of Photo-Instrumentation Engineers.
Nicola Pignati joined us in April 2000 as our Chief Operating Officer.
Prior to joining us, Mr. Pignati was President, Chief Executive Officer, and
Founder of MMC Technology, Incorporated since April 1996. From September 1994 to
April 1996, Mr. Pignati was Vice President of Operations at Conner Peripherals,
which was subsequently acquired by Seagate Technology, Incorporated. Mr. Pignati
received both a B.S. and an M.S. in mechanical engineering from San Jose State
University.
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Paul G. Smith joined us in May 1998 as Vice President, General Manager,
Telecom. From April 1997 to May 1998, Mr. Smith was Senior Vice President of
Marketing and Sales and from May 1995 to April 1997 he was Vice President of
Marketing at Asante Technologies, Inc. From May 1994 to May 1995, Mr. Smith was
CEO of Holosoft, Inc. Mr. Smith received a B.S. in engineering from the
University of Alabama and a M.S.E.E. from Purdue University.
Dr. Bao-Tong Ma joined us in November 1999 as Vice President, General
Manager, New Focus Pacific Co. From November 1990 to November 1999, Dr. Ma was
employed by IBM's Microelectronics Division. From 1993 to 1999, Dr. Ma was
involved in setting up and running an IBM subsidiary in China, holding various
positions, including Vice General Manager and Deputy General Manager. Dr. Ma
holds a B.S. in metallurgy from Shanghai Metallurgy Institute and a Ph.D. in
materials science from University of Pennsylvania.
Dr. Robert A. Marsland is one of our co-founders and has served as our Vice
President, Focused Research, since July 1997. From July 1994 to July 1997, Dr.
Marsland was employed as a Senior Scientist at Focused Research, Inc. Dr.
Marsland received his B.S. in electrical engineering from Arizona State
University and studied at Stanford University on an Office of Naval Research
fellowship. Dr. Marsland received a Ph.D. in engineering from Stanford. Dr.
Marsland is a member of IEEE Microwave Theory and Techniques Society, the Lasers
and Electro-optics Society and the Optical Society of America.
George Yule our Vice President of Supply Chain Management joined us in
January 1998. From October 1997 to January 1998, he served as Vice President and
General Manager of the Display Division of Cornerstone Imaging, Inc. and from
February 1993 to October 1997 as its Vice President, Operations. Mr. Yule
received a B.S. in electronic engineering from Worcester Polytechnic Institute
and an M.B.A. from Stanford University.
Dr. Milton Chang is one of our co-founders and has served as one of our
directors since our inception in April 1990. Dr. Chang has also served as the
chairman of our board of directors since May 1996. From 1990 to 1997, Dr. Chang
served as our President and Chief Executive Officer and continues to perform
research and marketing activities for us. From 1996 to 1998, Dr. Chang served on
the Visiting Committee for Advanced Technology of the National Institute of
Standards and Technology. He has also served in various positions at Newport
Corporation, including as its President and Chief Executive Officer. Currently,
Mr. Chang is a member of the board of directors for Agility Communications,
Inc., Acturus Engineering, LightConnect, Inc., Lightwave Electronics, Inc.,
Yesvideo.com and Gadzoox Networks, Inc. Dr. Chang holds a B.S. in electrical
engineering from the University of Illinois and a M.S. and Ph.D. both in
electrical engineering from the California Institute of Technology.
Dr. David L. Lee has served as one of our directors since April 2000. Since
July 2000, Dr. Lee has served as a general managing partner at Clarity Partners,
a private equity firm. He has also been a managing director of Pacific Capital
Group since 1989. Dr. Lee was President and Chief Operating Officer and a
director of Global Crossing Ltd. from its inception in March 1997 until June
2000. Prior to joining Pacific Capital Group, Dr. Lee was Group Vice President
of Finance and Acquisitions at TRW Information Systems Group. Dr. Lee is a
graduate of McGill University and holds a Ph.D. in Physics and a Ph.D. in
Economics from the California Institute of Technology. Dr. Lee is a Certified
Public Accountant.
John Dexheimer has served as one of our directors since July 1998. Since
January 1999, he has served as President of Lightwave Advisors, Inc., a venture
capital and business development advisor to firms in optical communications,
software and Internet companies. From March 1990 through December 1998, Mr.
Dexheimer was a managing director and partner at C.E. Unterberg Towbin, an
investment banking and venture capital firm, and its predecessor, Unterberg
Harris. Mr. Dexheimer holds a B.S. from the University of Minnesota Institute of
Technology and an M.B.A. from Harvard University.
Dr. Winston S. Fu has served as one of our directors since June 1999. Dr.
Fu is the non-managing member of Presidio Management Group VI, LLC, the general
partner of U.S. Venture Partners, a venture capital firm. Prior to joining U.S.
Venture Partners in August 1997, Dr. Fu was enrolled in the MBA
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program at Northwestern University. Prior to that, Dr. Fu served as the director
of product marketing and various other positions at Vixel Corporation. Dr. Fu
holds a B.S. in physics from Massachusetts Institute of Technology, an M.B.A.
from Northwestern University and a Ph.D. in applied physics from Stanford
University.
R. Clark Harris has served as one of our directors since December 1998. Mr.
Harris is a partner in NorthEast Ventures, a venture capital firm. Prior to
joining NorthEast Ventures in June 1998, Mr. Harris served as the president of a
major division of Uniphase, now JDS Uniphase, from May 1995 to May 1998. Before
joining JDS Uniphase in 1995, Mr. Harris spent 19 years at United Technologies
Corporation in various operating positions, including Senior Vice President of
Sikorsky Aircraft Division. Mr. Harris received a B.A. in engineering from
Georgia Tech and holds an M.B.A. from Massachusetts Institute of Technology.
Robert D. Pavey has served as one of our directors since June 1999. Mr.
Pavey is a partner at Morgenthaler Venture Partners, a venture capital firm,
which he joined in 1969. Mr. Pavey also sits on the board of directors of
BlueGill Technologies, Inc., Endgate Corporation, LightChip, Inc., Lightwave
Microsystems Corporation, and Think & Do Software, Inc. Mr. Pavey is also a
Trustee of the Commonfund, an educational firm for non-profit endowments. Mr.
Pavey holds a B.S. in physics from The College of William & Mary, an M.S. in
metallurgy from Columbia University, and an M.B.A. from Harvard University.
BOARD OF DIRECTORS
Our board of directors currently consists of seven authorized members. Our
certificate of incorporation provides for a classified board of directors
consisting of three classes of directors, each serving staggered three-year
terms. As a result, a portion of our board of directors will be elected each
year. This classification of the board of directors may delay or prevent a
change in control of our company or in our management. See "Description of
Capital Stock -- Delaware Anti-Takeover Law and Certain Charter and Bylaw
Provisions."
Our board of directors appoints our executive officers on an annual basis
to serve until their successors have been elected and qualified. There are no
family relationships among any of our directors or officers.
COMMITTEES
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Fu, Dexheimer and Harris. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of Messrs. Harris and Pavey. The
compensation committee reviews and recommends to the board of directors the
salaries, incentive compensation and benefits of our officers and employees
other than our chief executive officer, and administers our stock plans and
employee benefit plans.
Compensation Committee Interlocks and Insider Participation
With the exception of Milton Chang, who served as our President and Chief
Executive Officer from 1990 to 1997, and continues to perform research and
marketing activities for us, none of the members of our board who are members of
the compensation committee or who has served on our compensation committee
during our last fiscal year is currently, or has ever been at any time since our
formation, one of our officers or employees. Dr. Chang served on our
compensation committee during the nine-month period ended December 31, 1999. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more officers
serving as a member of our board of directors or compensation committee.
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Compensation
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. We have in the past granted
non-employee directors options to purchase our common stock pursuant to the
terms of our 1990 Incentive Stock Option Plan and 1998 Stock Plan. We may also
grant non-employee directors options to purchase our common stock pursuant to
the terms of our 2000 Director Option Plan. See "-- Stock Plans."
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
Compensation
The following table sets forth all compensation paid or accrued during our
nine-month period ended December 31, 1999, to our President and Chief Executive
Officer and each of our four next most highly compensated officers whose
compensation exceeded $100,000 for the same period. In accordance with the rules
of the Securities and Exchange Commission, the compensation described in this
table does not include perquisites and other personal benefits received by the
executive officers named in the table below which do not exceed the lesser of
$50,000 or 10% of the total salary and bonus reported for these officers.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION FOR NINE-MONTH ---------------------------------------
PERIOD ENDED DECEMBER 31, 1999 SECURITIES
------------------------------------ RESTRICTED UNDER-
ALL OTHER STOCK LYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
---------------------------- -------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth E. Westrick.............. $144,127(1) $15,600 -- -- -- --
President and Chief Executive
Officer
George Yule...................... $135,852(2) $18,307 -- -- -- --
Vice President, Supply Chain
Management
Paul G. Smith.................... $133,538(3) $23,072 -- -- -- --
Vice President, General
Manager, Telecom
Laurie Conner(4)................. $119,231(5) $ -- -- -- -- --
Dr. Timothy Day.................. $111,007(6) $18,499 -- -- -- --
Chief Technical Officer, Vice
President, Engineering, Telecom
</TABLE>
-------------------------
(1) Kenneth Westrick's annual compensation for the twelve months ended December
31, 1999, was $227,869.
(2) George Yule's annual compensation for the twelve months ended December 31,
1999, was $192,580.
(3) Paul Smith's annual compensation for the twelve months ended December 31,
1999, was $193,533.
(4) We entered into a separation release agreement with Laurie Conner on
December 16, 1999, pursuant to which Ms. Conner's employment relationship
with us terminated as of February 15, 2000, and she continued to receive
salary through her termination date.
(5) Laurie Conner's annual compensation for the twelve months ended December
31, 1999, was $155,000.
(6) Dr. Day's annual compensation for the twelve months ended December 31,
1999, was $167,814.
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Option grants in the nine-month period ended December 31, 1999
There were no grants of stock options to any of the executive officers
named in the table above during the nine-month period ended December 31, 1999.
Aggregate option exercises in the nine-month period ended December 31, 1999, and
values at December 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at December 31, 1999. The value of unexercised in-the-money
options is based on a fair market value of $120.75 per share based on the
closing price of our common stock on August 10, 2000 as reported on the Nasdaq
National Market minus the actual exercise prices. All options were granted under
our 1990 Incentive Stock Option Plan, as amended, or our 1999 Stock Plan. These
options vest over five years and otherwise generally conform to the terms of our
1990 Incentive Stock Option Plan and our 1999 Stock Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
----------------------------------- -----------------------------
EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Kenneth E. Westrick............... 833,334 1,166,666 $100,239,664 140,335,336
George Yule....................... 103,334 196,666 $ 12,421,247 23,638,753
Paul G. Smith..................... 133,334 266,666 $ 16,016,747 32,033,253
Laurie Conner..................... 85,000 215,000 $ 10,210,625 25,826,875
Dr. Timothy Day................... 527,334 162,666 $ 63,610,734 19,554,266
</TABLE>
-------------------------
(1) The options vest according to the following vesting schedule: one-fifth of
the shares subject to the option vest twelve months after the vesting
commencement date and one-sixtieth of the shares subject to the option vest
each month thereafter. Pursuant to an amendment to the 1990 Incentive Stock
Option Plan and the 1999 Stock Plan, our executives may, at any time,
exercise options which are unvested, subject to our right of repurchase
which lapses on the same vesting schedule.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation limits the liability
of our directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability associated with any of the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of our directors' liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
the capacity as an officer, director, employee or other agent, regardless of
whether our bylaws would permit indemnification.
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We entered into indemnification agreements with each of our officers and
directors containing provisions that require us to, among other things,
indemnify those officers and directors against liabilities that may arise by
reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
STOCK PLANS
1990 Incentive Stock Option Plan
Our 1990 Incentive Stock Option Plan provided for the grant of incentive
stock options to employees, including officers and employee directors, and for
the grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants.
As of July 2, 2000, options to purchase 1,574,441 shares of common stock
issued pursuant to this plan were outstanding.
Options. Options granted under the 1990 Incentive Stock Option Plan must
generally be exercised within 30 days after the end of the optionee's status as
an employee, director or consultant of ours, or within 12 months after the
optionee's termination by death or disability, but in no event later than the
expiration of the option's term.
Transferability of Options. Options and stock purchase rights granted under
the 1990 Incentive Stock Option Plan are generally not transferable by the
optionee, and each option and stock purchase right is exercisable during the
lifetime of the optionee only by the optionee.
Adjustments upon Merger or Asset Sale. The 1990 Incentive Stock Option Plan
provides that in the event of our merger with or into another corporation, or a
sale of substantially all of our assets, each option and stock purchase right
shall be assumed or an equivalent option substituted for by the successor
corporation. If the outstanding options and stock purchase rights are not
assumed or substituted for by the successor corporation, the options will
terminate as of the closing date of the merger.
Termination of the 1990 Incentive Stock Option Plan. The 1990 Incentive
Stock Option Plan expired in July 2000. Any shares reserved for issuance under
the 1990 Incentive Stock Option and any shares returned to the plan as of the
date of our initial public offering were added to the shares reserved for
issuance under our 2000 Stock Plan following the completion of our initial
public offering.
1998 Stock Plan
Our 1998 Stock Plan provided for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants.
As of July 2, 2000, options to purchase 290,035 shares of common stock
under this plan were outstanding.
Options granted under the 1998 Stock Plan must generally be exercised
within 30 days after the end of the optionee's status as an employee, director
or consultant of ours, or within 12 months after the optionee's termination by
death or disability, but in no event later than the expiration of the option's
term.
Transferability of Options. Options and stock purchase rights granted under
the 1998 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
Adjustments upon Merger or Asset Sale. The 1998 Stock Plan provides that in
the event of our merger with or into another corporation, or a sale of
substantially all of our assets, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the
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outstanding options and stock purchase rights are not assumed or substituted for
by the successor corporation, the options shall terminate as of the date of
merger.
Termination of the 1998 Stock Plan. As of May 17, 2000, the date of our
initial public offering, the 1998 Stock Plan was rolled into the 2000 Stock
Plan. Any shares reserved for issuance under the 1998 Stock Plan and any shares
returned to the plan were added to the shares reserved for issuance under our
2000 Stock Plan following the completion of our initial public offering.
1999 Stock Plan
Our 1999 Stock Plan provided for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants.
As of July 2, 2000, options to purchase 2,094,809 shares of common stock
issued pursuant to this plan were outstanding.
Options. Options granted under the 1999 Stock Plan must generally be
exercised within 30 days after the end of the optionee's status as an employee,
director or consultant of ours, or within 12 months after the optionee's
termination by death or disability, but in no event later than the expiration of
the option's term.
Transferability of Options. Options and stock purchase rights granted under
the 1999 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
Adjustments upon Merger or Asset Sale. The 1999 Stock Plan provides that in
the event of our merger with or into another corporation, or a sale of
substantially all of our assets, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options and stock purchase rights are not assumed or substituted
for by the successor corporation, the optionees will become fully vested in and
have the right to exercise the options or stock purchase rights. If an option or
stock purchase right becomes fully vested and exercisable in the event of a
merger or sale of assets, the administrator must notify the optionee that the
option or stock purchase right is fully exercisable for a period of 15 days from
the date of the notice, and the option or stock purchase right will terminate
upon the expiration of the 15-day period.
Termination of the 1999 Stock Plan. As of May 17, 2000, the date of our
initial public offering, the 1999 Stock Plan was rolled into the 2000 Stock
Plan. Any shares reserved for issuance under the 1999 Stock Plan and any shares
returned to the 1999 Stock Plan were reserved for issuance under the 2000 Stock
Plan following the completion of our initial public offering.
2000 Stock Plan
Our 2000 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 2000 Stock Plan was adopted by our board of directors in
February 2000 and approved by our stockholders in April 2000.
As of July 2, 2000, a total of 1,000,000 shares of our common stock were
reserved for issuance pursuant to our 2000 Stock Plan, plus any shares reserved
for issuance under the 1998 and 1999 Stock Plans and any shares returned to the
1998 and 1999 Stock Plans. As of July 2, 2000, options to purchase 1,290,625
shares of common stock under this plan were outstanding.
The number of shares reserved for issuance under our 2000 Stock Plan will
increase annually on the first day of our fiscal year beginning in 2001 by an
amount equal to the lesser of six percent of the outstanding shares of our
common stock on the first day of the year, 9,000,000 shares or a lesser amount
as our board of directors may determine.
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Administration. Our board of directors or a committee of our board of
directors administers the 2000 Stock Plan. The administrator of our 2000 Stock
Plan has the power to determine, among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The exercise price of all incentive stock options granted under
the 2000 Stock Plan must be at least equal to the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 2000 Stock Plan is
determined by the administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the date of grant. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option granted must be at least equal 110% of the fair
market value on the grant date and the term of the incentive stock option must
not exceed five years. The term of all other options granted under the 2000
Stock Plan may not exceed 10 years.
During any fiscal year, each optionee may be granted options to purchase a
maximum of 1,000,000 shares. In addition, in connection with an optionee's
initial employment with us, the optionee may be granted an option covering an
additional 1,000,000 shares.
Options granted under the 2000 Stock Plan must generally be exercised
within three months after the end of the optionee's status as an employee,
director or consultant of ours, or within 12 months after the optionee's
termination by death or disability, but in no event later than the expiration of
the option's term.
Transferability of Options. Options and stock purchase rights granted under
the 2000 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
Adjustments upon Merger or Asset Sale. The 2000 Stock Plan provides that in
the event of our merger with or into another corporation, or a sale of
substantially all of our assets, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options and stock purchase rights are not assumed or substituted
for by the successor corporation, the optionees will become fully vested in and
have the right to exercise the options or stock purchase rights. If an option or
stock purchase right becomes fully vested and exercisable in the event of a
merger or sale of assets, the administrator must notify the optionee that the
option or stock purchase right is fully exercisable for a period of 15 days from
the date of the notice, and the option or stock purchase right will terminate
upon the expiration of the 15-day period.
Amendment and Termination of the 2000 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 2000 Stock Plan, as long
as this action does not affect any shares of common stock previously issued and
sold or any option previously granted under the 2000 Stock Plan.
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Unless earlier terminated, the 2000 Stock Plan will terminate automatically 10
years from the date of obtaining stockholder approval of the plan in April 2000.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in February 2000 and approved by our stockholders in April 2000, and became
effective in May 2000. A total of 1,000,000 shares of our common stock has been
reserved for issuance under the 2000 Employee Stock Purchase Plan, plus
automatic annual increases beginning on January 1, 2001 equal to the lesser of
1,000,000 shares, 1.25% of the outstanding shares on that date or an amount
determined by our board of directors. As of July 2, 2000, no shares have been
issued pursuant to this plan.
Structure of the 2000 Employee Stock Purchase Plan. The 2000 Employee Stock
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, contains consecutive, six-month offering periods. The offering
periods generally start on the first trading day on or after January 31 and July
31 of each year, except for the first offering period, which commenced on the
first trading day on or after the effective date of this offering and ends on
the last trading day on or before July 30, 2002.
Eligibility. All of our employees except those employed by New Focus
Pacific Co. are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, no employee shall be granted an
option to purchase stock under the plan if that employee:
- immediately after the grant of the option owns stock possessing five
percent or more of the total combined voting power or value of all
classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Purchases. The 2000 Employee Stock Purchase Plan permits participants to
purchase our common stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's base
straight time gross earnings and commissions, exclusive of payments for shift
premium, bonuses, incentive compensation, incentive payments and other
compensation. The maximum number of shares a participant may purchase during
each purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock either:
- at the beginning of the offering period; or
- at the end of the offering period.
Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us.
Transferability of Rights. Rights granted under the 2000 Employee Stock
Purchase Plan are not transferable by a participant other than by will, the laws
of descent and distribution or as otherwise provided under the 2000 Employee
Stock Purchase Plan.
Merger or Asset Sale. The 2000 Employee Stock Purchase Plan provides that,
in the event we merge with or into another corporation or if there is a sale of
substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new exercise date will be set.
Amendment and Termination of the 2000 Employee Stock Purchase Plan. The
2000 Employee Stock Purchase Plan will terminate in 2010. Our board of directors
has the authority to amend or terminate the
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2000 Employee Stock Purchase Plan, except that no action may impair any
outstanding rights to purchase stock under the 2000 Employee Stock Purchase
Plan.
2000 Director Option Plan
Our 2000 Director Option Plan provides for automatic grants of stock
options to our non-employee directors. The 2000 Director Option Plan was adopted
by our board of directors in February 2000 and approved by our stockholders in
April 2000. A total of 200,000 shares of our common stock have been reserved for
issuance under the 2000 Director Option Plan. As of July 2, 2000, no shares had
been issued pursuant to this plan.
Option Grants. The 2000 Director Option Plan generally provides for an
automatic initial grant of an option to purchase 25,000 shares of our common
stock to each non-employee director on the date when the person first becomes a
non-employee director, whether through election by our stockholders or
appointment by our board of directors to fill a vacancy.
After the initial grant, each non-employee director will automatically be
granted subsequent options to purchase 5,000 shares of our common stock each
year on the date of our annual stockholders' meeting, if on that date he or she
has served on our board of directors for at least six months. Each initial
option grant and each subsequent option grant shall have a term of 10 years.
Each initial option grant will vest as to 25% of the shares subject to the
option on the anniversary of its date of grant and 1/36 of the shares shall vest
each month thereafter, provided the individual remains our outside director on
this date. Each subsequent option grant will fully vest on the anniversary of
its date of grant. The exercise price of all options will be 100% of the fair
market value per share of our common stock on the date of grant.
Options granted under the 2000 Director Option Plan must be exercised
within three months of the end of the optionee's tenure as a director of the
Company, or within 12 months after the director's termination by death or
disability, but in no event later than the expiration of the option's 10 year
term.
Transferability of Options. No option granted under the 2000 Director
Option Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable, during the lifetime of
the optionee, only by the optionee.
Merger, Asset Sale and Change of Control. The 2000 Director Option Plan
provides that in the event of our merger with or into another corporation, or a
sale of substantially all of our assets, the successor corporation shall assume
each option or substitute an equivalent option. If outstanding options are not
assumed or substituted for by the successor corporation, each option will become
fully exercisable for a period of thirty days from the date our board of
directors notifies the optionee of the option's full exercisability, after which
period the option shall terminate. In the event of a change of control each
outstanding option will become fully vested and exercisable.
Amendment and Termination of the 2000 Director Option Plan. The
administrator will have the authority to amend, suspend or terminate the 2000
Director Option Plan, so long as no action affects any shares of common stock
previously issued and sold or any option previously granted under the 2000
Director Option Plan. Unless terminated sooner, the 2000 Director Option Plan
will terminate automatically 10 years from the effective date of the plan.
401(k) PLAN
In April, 1993, we adopted a 401(k) Profit Sharing Plan and Trust covering
our employees who (a) are age 21 as of the 401(k) Profit Sharing Plan and Trust
effective date, and (b) have at least six months of service with us. The 401(k)
Profit Sharing Plan and Trust excludes nonresident alien employees. Our 401(k)
Profit Sharing Plan and Trust is intended to qualify under Section 401(k) of the
Internal Revenue Code, so that contributions to the 401(k) Profit Sharing Plan
and Trust by employees or by us and the investment earnings thereon are not
taxable to the employees until withdrawn. If our 401(k) Profit Sharing Plan and
Trust qualifies under Section 401(k) of the Internal Revenue Code, our
contributions will be deductible by us when made. Our employees may elect to
reduce their current
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compensation by up to the statutorily prescribed annual limit of $10,500 in 2000
and to have those funds contributed to the 401(k) Profit Sharing Plan and Trust.
The 401(k) Profit Sharing Plan and Trust permits us, but does not require us, to
make additional matching contributions on behalf of all participants. To date,
we have not made any contributions to the 401(k) Profit Sharing Plan and Trust.
EMPLOYMENT AND CHANGE-OF-CONTROL AGREEMENTS
From time to time, we have entered into employment agreements with our
executive officers, including the executive officers listed in the "Summary
Compensation Table."
Laurie Conner. In June 1998, Laurie Conner accepted our offer of
employment. The terms of Ms. Conner's employment with us provided that if her
employment with us were to be terminated as a result of a change of control, Ms.
Conner would continue to receive her salary for the earlier of three months or
attaining subsequent employment. On December 16, 1999, we entered into a
separation and general release agreement with Laurie Conner under which Laurie
Conner's employment relationship with us terminated as of February 15, 2000, at
which time Ms. Conner's salary and benefits terminated and her unvested options
ceased to vest.
Dr. Bao-Tong Ma. In October 1999, Dr. Bao-Tong Ma accepted our offer of
employment. The terms of Dr. Ma's employment provide that if we terminate his
employment without cause prior to the first anniversary of employment, Dr. Ma
would receive his salary until the earlier of 24 months or new employment. Dr.
Ma's stock options would cease to vest upon termination. If Dr. Ma's employment
is terminated after the first anniversary of employment, but prior to the second
anniversary, Dr. Ma would continue to receive his salary for 12 months. If Dr.
Ma's employment is terminated after the second anniversary, but prior to the
third anniversary, Dr. Ma would continue to receive his salary for six months.
If Dr. Ma's employment is terminated following the third anniversary of
employment, he will not receive any severance.
In January 2000, we amended our stock option agreements with Kenneth E.
Westrick, George Yule, Paul G. Smith, Dr. Robert A. Marsland and Dr. Timothy Day
to give these officers the right to purchase both vested and unvested shares and
to pay for the shares with a promissory note. In addition, we amended the stock
option agreements to provide that if the employment or consulting relationship
of these officers is terminated involuntarily within 18 months of a change in
control then 50% of their unvested options shall vest.
In April 2000, we hired Nicola Pignati and pursuant to the terms of his
employment granted him an option to purchase 500,000 shares of our common stock
and to pay for the shares with a promissory note. The option vests in accordance
with our standard 5-year vesting schedule, except that 100,000 of the shares
subject to the option will vest on November 13, 2000. In addition, in the event
Mr. Pignati is terminated without cause, provided that he signs a full waiver
and release of claims, he will receive a severance pay amount equal to twelve
months' salary plus any scheduled bonuses.
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CERTAIN TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below, for
the last three years, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
- in which the amount involved exceeded or will exceed $60,000, and
- in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will be
subject to approval by a majority of the disinterested members of our board of
directors.
SERIES D PREFERRED STOCK.
On July 31, 1998, and August 6, 1998, we sold 3,977,000 shares of our
Series D preferred stock at a price of $1.00 per share. The purchasers of the
Series D preferred stock included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES D STOCK COMMON STOCK
--------- -------------- ------------
<S> <C> <C>
George Yule.............................................. 44,000 44,000
John Dexheimer........................................... 125,000 125,000
</TABLE>
George Yule is our Vice President of Supply Chain Management and John
Dexheimer is one of our directors.
SERIES E PREFERRED STOCK.
On June 14, 1999, we sold 10,857,616 shares of our Series E preferred stock
at a price of $1.20 per share. The purchasers of the Series E preferred stock
included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES E STOCK COMMON STOCK
--------- -------------- ------------
<S> <C> <C>
Kenneth E. Westrick...................................... 416,668 416,668
Morgenthaler Venture Partners V, L.P. ................... 5,000,000 5,000,000
U.S. Venture Partners VI, L.P............................ 5,000,000 5,000,000
</TABLE>
Kenneth E. Westrick is our President, Chief Executive Officer and one of
our directors. Morgenthaler Venture Partners V, L.P. is a venture capital firm
that holds in excess of 5% of our common stock and of which Mr. Pavey, one of
our directors, is a partner. U.S. Venture Partners VI, L.P. is a venture capital
firm that together with its affiliated entities holds in excess of 5% of our
common stock and of which Dr. Winston Fu, one of our directors is the
non-managing member of Presidio Management Group VI, LLC, the general partner of
U.S. Venture Partners VI, L.P.
SERIES G PREFERRED STOCK.
On November 23, 1999, December 7, 1999 and December 28, 1999 we sold
9,230,728 shares of our Series G preferred stock at a price of $3.25 per share.
The purchasers of the Series G preferred stock included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES G STOCK COMMON STOCK
--------- -------------- ------------
<S> <C> <C>
R. Clark Harris.......................................... 40,000 40,000
Morgenthaler Venture Partners, V, L.P.................... 1,384,614 1,384,614
Entities Affiliated with U.S. Venture Partners........... 1,384,614 1,384,614
</TABLE>
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R. Clark Harris is one of our directors. Morgenthaler Venture Partners V,
L.P. is a venture capital firm that holds in excess of 5% of our common stock
and of which Mr. Pavey, one of our directors, is a partner, and U.S. Venture
Partners is a venture capital firm that together with its affiliated entities
holds in excess of 5% of our common stock and of which Dr. Winston Fu, one of
our directors, is the non managing member of Presidio Management Group VI, LLC,
the general partner of U.S. Venture Partners VI, L.P.
LOANS FROM SHAREHOLDER
From April 1991 to September 1997, Dr. Milton Chang loaned us a total of
$1,815,000. On July 7, 1999, we repaid all of the outstanding principal and
interest owing under the promissory note, which totaled approximately
$2,400,000, however, Dr. Chang agreed to loan us up to $2,424,000 upon thirty
days written request. This agreement was terminated in December 1999.
LOANS TO OFFICERS
The following is a list of loans made by us to certain of our officers, in
connection with the purchase of shares of our stock. Each of these loans were
made pursuant to a full recourse promissory note secured by a stock pledge. Each
of these loans was issued in connection with the exercise of stock options which
had previously been granted by the board of directors pursuant to our stock
option plans at the fair market value of our common stock on the date of grant,
as determined in good faith by our board of directors, based upon market
conditions, results of operations and recent sales of our preferred stock to
third party investors. The notes bear no interest but interest will be imputed
and reported annually as compensation on the officer's W-2. All unvested shares
purchased by the officers are subject to repurchase by us at the original
exercise price if the officer's employment is terminated.
On January 12, 2000, we loaned $1,044,208 to Kenneth E. Westrick, our
President and Chief Executive Officer, secured by a stock pledge, in connection
with the purchase of 2,000,000 shares of our common stock pursuant to the
exercise of a stock option granted to him on September 30, 1997 at $0.4625 per
share and associated costs. The note is interest-free and is due and payable on
January 11, 2005. The entire principal amount on this note remains outstanding.
On January 12, 2000, we loaned $375,000 to Paul G. Smith, our Vice
President, General Manager, Telecom, secured by a stock pledge, in connection
with the purchase of 400,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on May 4, 1998 at $0.625 per share and the
purchase on the same date of 200,000 shares of our common stock pursuant to the
exercise of a stock option granted to him on January 11, 2000 at $0.625 per
share. The note is interest-free and is due and payable on January 11, 2005. The
entire principal amount on this note remains outstanding.
On January 12, 2000, we loaned $312,500 to Dr. Bao-Tong Ma, our Vice
President, General Manager, New Focus Pacific Co., secured by a stock pledge, in
connection with the purchase of 500,000 shares of our common stock pursuant to
the exercise of a stock option granted to him on January 11, 2000 at $0.625 per
share. The note is interest-free and is due and payable on January 11, 2005. The
entire principal amount on this note remains outstanding.
On January 12, 2000, we loaned $173,134 to George Yule, our Vice President,
Supply Chain Management, secured by a stock pledge, in connection with the
purchase of 200,000 shares of our common stock pursuant to the exercise of a
stock option granted to him on January 28, 1998 at $0.5125 and 100,000 shares of
our common stock pursuant to the exercise of a stock option granted to him on
July 17, 1998 at $0.625 per share and associated costs. The note is
interest-free and is due and payable on January 11, 2005. The entire principal
amount on this note remains outstanding.
On January 12, 2000, we loaned $137,232 to Dr. Robert A. Marsland, our Vice
President, Focused Research, Inc. secured by a stock pledge, in connection with
the purchase of 400,000 shares of our common stock pursuant to the exercise of a
stock option granted to him on July 29, 1990 at $0.0025 per share and 70,000
shares of our common stock pursuant to the exercise of a stock option granted to
him on
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October 8, 1998 at $0.625 per share and associated costs. The note is
interest-free and is due and payable on January 11, 2005. The entire principal
amount on this note remains outstanding.
On January 12, 2000, we loaned $255,483 to Dr. Timothy Day, our Chief
Technology Officer and Vice President, Engineering, Telecom, secured by a stock
pledge, in connection with the purchase of 400,000 shares of our common stock
pursuant to the exercise of a stock option granted to him on July 29, 1990 at
$0.0025 per share, 100,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on November 21, 1996 at $0.4625 per share,
120,000 shares of our common stock pursuant to the exercise of a stock option
granted to him on January 28, 1998 at $0.5125 per share and 70,000 shares of our
common stock pursuant to the exercise of a stock option granted to him on
October 8, 1998 at $0.625 per share and associated costs. The note is
interest-free and is due and payable on January 11, 2005. The entire principal
amount on this note remains outstanding.
On February 9, 2000 we loaned $375,000 to Kenneth E. Westrick, our
President and Chief Executive Officer, secured by a stock pledge, in connection
with the purchase of 300,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on February 9, 2000 at $1.25 per share. The
note is interest-free and is due and payable on February 8, 2005. The entire
principal amount on this note remains outstanding.
On February 18, 2000 we loaned $125,000 to Paul G. Smith, our Vice
President, General Manager, Telecom, secured by a stock pledge, in connection
with the purchase of 100,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on February 9, 2000 at $1.25 per share. The
note is interest-free and is due and payable on February 17, 2005. The entire
principal amount on this note remains outstanding.
On February 9, 2000 we loaned $125,000 to Dr. Robert A. Marsland, our Vice
President Focused Research Inc., secured by a stock pledge, in connection with
the purchase of 100,000 shares of our common stock pursuant to the exercise of a
stock option granted to him on February 9, 2000 at $1.25 per share. The note is
interest-free and is due and payable on February 8, 2005. The entire principal
amount on this note remains outstanding.
On February 9, 2000 we loaned $375,000 to Dr. Timothy Day, our Chief
Technical Officer and Vice President Engineering, secured by a stock pledge, in
connection with the purchase of 300,000 shares of our common stock pursuant to
the exercise of a stock option granted to him on February 9, 2000 at $1.25 per
share. The note is interest-free and is due and payable on February 8, 2005. The
entire principal amount on this note remains outstanding.
On February 9, 2000 we loaned $750,000 to William L. Potts, Jr., our Chief
Financial Officer, secured by a stock pledge, in connection with the purchase of
600,000 shares of our common stock pursuant to the exercise of a stock option
granted to him on February 9, 2000 at $1.25 per share. The note is interest-free
and is due and payable on February 9, 2005. The entire principal amount on this
note remains outstanding.
OTHER MATTERS
From 1990 to 1997, Dr. Chang served as our President and Chief Executive
Officer. Since 1997, we have employed Dr. Chang in a research and marketing
capacity. Dr. Chang received compensation of $84,770, $110,000 and $110,000 for
the nine-month period ended December 31, 1999, fiscal year ended March 31, 1999
and fiscal year ended March 31, 1998, respectively.
On March 3, 1999 and November 1, 1999, we entered into consulting
agreements with John Dexheimer, one of our directors, for services to be
rendered in connection with our Series E, Series F and Series G Preferred Stock
financings. Pursuant to these agreements, Mr. Dexheimer received a cash payment
of $618,731 and warrants to purchase 111,972 shares of Series E Preferred Stock
at an exercise price of $1.20 per share.
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INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and officers. These indemnification agreements require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. For a
description of the limitation of our directors' liability and our
indemnification of officers, see "Management -- Limitations on Directors' and
Officers' Liability and Indemnification."
EMPLOYMENT AGREEMENTS
We have entered into employment arrangements, compensation arrangements and
severance arrangements with certain of our executive officers, see
"Management -- Employment and Change-of-Control Agreements" and "-- Executive
Officers -- Compensation." For information regarding stock options, see
"Management -- Stock Plans."
FUTURE TRANSACTIONS
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of July 2, 2000, and as adjusted to
reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our current executive officers named in the compensation table
above;
- each of our directors; and
- all directors and executive officers as a group.
As of July 2, 2000, there were 59,621,717 shares of our common stock
outstanding. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on the information furnished by
the owners, have sole voting power and investment power with respect to their
shares. Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission. In computing the number of shares beneficially
owned by a person and the percent ownership of that person, shares of common
stock subject to options or warrants held by that person that are currently
exercisable or will become exercisable within 60 days after July 2, 2000 are
deemed outstanding, while the shares are not deemed outstanding for purposes of
computing percent ownership of any other person. Unless otherwise indicated in
the footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
SHARES --------------------------
BENEFICIALLY PRIOR TO
NAME OR GROUP OF BENEFICIAL OWNERS OWNED OFFERING AFTER OFFERING
---------------------------------- ------------ -------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Kenneth E. Westrick(1)................................... 2,597,334 4.4% 4.1%
Dr. Timothy Day(2)....................................... 1,010,000 1.7 1.6
Dr. Robert A. Marsland(3)................................ 670,400 1.1 1.1
Nicola Pignati(4)........................................ 500,400 * *
Paul G. Smith(5)......................................... 700,000 1.2 1.1
Dr. Bao-Tong Ma(6)....................................... 500,000 * *
William L. Potts, Jr.(7)................................. 600,100 * *
George Yule(8)........................................... 327,400 * *
Dr. Milton Chang(9)...................................... 10,471,856 17.6 16.6
John Dexheimer(10)....................................... 265,639 * *
Dr. Winston S. Fu(11).................................... 6,386,614 10.7 10.1
R. Clark Harris(12)...................................... 64,000 * *
Robert Pavey(13)......................................... 6,388,614 10.7 10.1
Dr. David L. Lee(14)..................................... -- -- --
All directors and officers as a group (14 persons)(15)... 30,573,057 51.1 48.3
5% STOCKHOLDERS
Dr. Milton Chang(9)...................................... 10,471,856 17.6 16.6
Morgenthaler Ventures Partners V, L.P. .................. 6,388,614 10.7 10.1
Entities associated with U.S. Venture Partners(11)....... 6,384,614 10.7 10.1
London Pacific Life & Annuity Company.................... 4,615,386 7.7 7.3
</TABLE>
------------------------
* Denotes less than one percent of the outstanding stock.
(1) Includes 1,266,665 shares subject to our right of repurchase which lapses
over time. Also includes 21,080 shares held by Mr. Westrick's minor
daughter and 22,600 shares held by Mr. Westrick's minor son.
(2) Includes 433,667 shares subject to our right of repurchase, which lapses
over time.
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<PAGE> 67
(3) Includes 146,667 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 500,000 shares subject to an option exercisable within 60 days of
July 2, 2000.
(5) Includes 483,333 shares subject to our right of repurchase, which lapses
over time.
(6) Includes 500,000 shares subject to our right of repurchase, which lapses
over time.
(7) Includes 600,000 shares subject to our right of repurchase, which lapses
over time.
(8) Includes 166,667 shares subject to our right of repurchase, which lapses
over time.
(9) Includes 800,000 shares held by Chang Partners, a California limited
partnership, of which Dr. Chang is a general partner.
(10) Includes 29,333 shares subject to an option, which is exercisable within 60
days of July 2, 2000.
(11) Includes 5,937,690 shares held by U.S. Venture Partners VI, L.P., 185,154
shares held by USVP VI Entrepreneurs Partners, L.P., 166,000 shares held by
USVP VI Affiliates Fund, L.P. and 95,770 shares held by 2180 Associates
Fund VI, L.P. Dr. Fu is a non-managing member of Presidio Management Group
VI, LLC, the general partner of U.S. Venture Partners entities. Dr. Fu
disclaims beneficial ownership of shares held by these entities, except to
the extent of his pecuniary interest in these entities.
(12) Includes 5,334 shares subject to an option exercisable within 60 days of
July 2, 2000.
(13) Includes 6,388,614 shares held by Morgenthaler Ventures Partners V, L.P.
Mr. Pavey is a partner at Morgenthaler Ventures. Mr. Pavey disclaims
beneficial ownership of shares held by this entity, except to the extent of
his pecuniary interest in this entity.
(14) Dr. Lee was appointed to our board of directors on April 19, 2000, and
granted an option to purchase 25,000 shares of our common stock at an
exercise price of $5.00 per share.
(15) Includes an aggregate of 534,667 shares subject to options exercisable
within 60 days of July 2, 2000 and 3,596,999 shares subject to our right of
repurchase, which lapses over time.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 260,000,000 shares, $0.001 par value per share,
divided into two classes designated common stock and preferred stock. Of the
shares authorized, 250,000,000 shares are designated as common stock and
10,000,000 shares are designated as preferred stock. The following description
of our capital stock is only a summary. You should refer to our certificate of
incorporation and bylaws as in effect upon the closing of this offering, which
are incorporated by reference into this registration statement, of which this
prospectus forms a part, from our registration statement on Form S-1,
Registration No. 333-31396, declared effective by the Securities and Exchange
Commission on May 17, 2000 and by the provisions of applicable Delaware law.
COMMON STOCK
As of July 2, 2000, there were 59,621,717 shares of common stock
outstanding which were held of record by in excess of 400 stockholders. There
will be 63,121,717 shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after July 2, 2000, after giving effect to the sale of our common stock in this
offering. In addition there are an aggregate of 2,855,000 shares reserved for
issuance under our 2000 Stock Plan, 2000 Employee Stock Purchase Plan and 2000
Director Option Plan. See "Management -- Stock Plans" for a description of our
stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation does not provide for cumulative voting in
the election of directors. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of our common stock are entitled to
receive ratably any dividends, as may be declared from time to time by our board
of directors out of funds legally available for that purpose. In the event of
our liquidation, dissolution or winding up, holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Holders of our common stock have no preemptive or other
subscription or conversion rights. There are no redemption or sinking fund
provisions applicable to our common stock. All outstanding shares of common
stock are fully paid and non-assessable, and the shares of common stock to be
issued upon the completion of this offering will be fully paid and non-
assessable.
PREFERRED STOCK
Our certificate of incorporation provides that our board of directors has
the authority, without action by the stockholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series. The rights, preferences and privileges of each
series of preferred stock may be greater than the rights of our common stock. It
is not possible to state the actual effect of the issuance of any shares of
preferred stock upon the rights of holders of our common stock until the board
of directors determines the specific rights of the holders of any preferred
stock that may be issued. However, the effects might include, among other
things: (1) restricting dividends on the common stock, (2) diluting the voting
power of the common stock, (3) impairing the liquidation rights of the common
stock and (4) delaying or preventing a change in our control without further
action by the stockholders. Upon the closing of this offering, no shares of
preferred stock will be outstanding, and we have no present plans to issue any
shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement we entered into with holders of
shares of our preferred stock, the holders of 35,196,140 shares, assuming
conversion of all outstanding shares of preferred stock, are entitled to certain
registration rights regarding these shares. The registration rights provide that
if we propose to register any securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, they are entitled to notice of the registration and are
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<PAGE> 69
entitled to include shares of their common stock in the registration. This right
is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of shares included in the
registration. The holders of these shares may also require us to file up to two
registration statements under the Securities Act at our expense with respect to
their shares of common stock. We are required to us our best efforts to effect
this registration, subject to conditions and limitations. Furthermore, the
holders of these shares may require us to file additional registration
statements on Form S-3, subject to conditions and limitations. These rights
terminate on the earlier of five years after the effective date of this
offering, or when a holder is able to sell all its shares pursuant to Rule 144
under the Securities Act in any 90-day period. The Company has received a waiver
from holders of the requisite majority of shares subject to registration rights
on behalf of all holders of registration rights, waiving the holders' rights to
have their shares of the Company's Common Stock registered in this offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of our company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent officers
and directors. These provisions, summarized below, may discourage certain types
of coercive takeover practices and inadequate takeover bids and encourage
persons seeking to acquire control of our company to first negotiate with our
company. We believe that the benefits of increased protection of our company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the
disadvantages of discouraging proposals of this kind because, among other
things, negotiation of proposals of this kind could result in an improvement of
their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless, with certain exceptions, the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our bylaws eliminate the right of stockholders to act by written consent
without a meeting and require a majority of stockholders to call a special
meeting. Our certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe LP.
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
Our common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol "NUFO."
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<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market following this offering or the possibility of sales of this kind
occurring could adversely affect market prices for our common stock or could
impair our ability to raise capital through an offering of equity securities.
Furthermore, since a majority of our shares are subject to contractual and legal
restrictions on resale as described below, sales of substantial amounts of our
common stock in the public market after these restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
Upon completion of this offering, we will have 63,121,717 shares of common
stock outstanding, based on shares outstanding as of July 2, 2000, assuming the
issuance of 3,500,000 of common stock offered by us in this offering and
assuming no exercise of the underwriters' over-allotment option. All of the
3,500,000 shares sold in this offering will be freely tradable without
restriction or registration under the Securities Act. However, the sale of any
of these shares if purchased by "affiliates" as that term is defined in Rule 144
are subject to certain limitations and restrictions that are described below. In
addition, in our recent initial public offering 5,750,000 shares of our common
stock were sold and these shares are also freely tradable without restriction
except for the "affiliate" restrictions described below.
Of the outstanding shares of common stock following this offering,
44,113,061 shares are subject to "lock-up agreements" with the underwriters.
These lock-up agreements provide that, except under limited exceptions, the
stockholder may not offer, sell, contract to sell or otherwise dispose of any of
our common stock or securities that are convertible into or exchangeable for, or
that represent the right to receive, our common stock until November 13, 2000.
The underwriters, however, may in their sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
An additional 9,230,728 shares which were issued in our Series G Preferred Stock
financing will not be tradable until December 2000 pursuant to Rule 144.
In addition, holders of stock options could exercise such options and sell
certain of the shares upon exercise as described below. As of July 2, 2000,
there were a total of 5,250,000 shares of common stock subject to outstanding
options under our 1990 Incentive Stock Option Plan, 1998 Stock Plan, 1999 Stock
Plan, and 2000 Stock Plan all of which are subject to lock up agreements or will
not be vested prior to the expiration of the lock up agreements. The Company has
filed a registration statement on Form S-8 to register all of the shares of
common stock issued or reserved for issuance under our 1990 Incentive Stock
Plan, 1998 Stock Plan, 1999 Stock Plan, 2000 Stock Plan, 2000 Employee Stock
Purchase Plan and 2000 Director Plan. On November 13, 2000, the date that the
lock-up agreements expire, a total of 1,384,380 shares of our common stock
subject to outstanding options will be vested and generally available for resale
in the public market.
Rule 144
In general, under Rule 144 as currently in effect, beginning August 15,
2000, a person who has beneficially owned shares of our common stock for at
least one year would be entitled to sell shares. An affiliate who has owned
shares of our common stock for at least one year would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 631,217 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq Stock
Market's National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
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<PAGE> 71
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell those shares beginning
August 15, 2000 in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of those options (including exercises after May 17, 2000). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning August 15, 2000 may be sold
by persons other than "affiliates," as defined in Rule 144, subject only to the
manner of sale provisions of Rule 144. Securities issued in reliance on Rule 701
may be sold by "affiliates" under Rule 144 without compliance with its one year
minimum holding period requirement.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated August 10, 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.,
CIBC World Markets Corp., U.S. Bancorp Piper Jaffray Inc., Dain Rauscher
Incorporated and Epoch Securities, Inc. are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,575,000
Chase Securities Inc........................................ 490,000
CIBC World Markets Corp..................................... 455,000
U.S. Bancorp Piper Jaffray Inc.............................. 455,000
Dain Rauscher Incorporated.................................. 297,500
Epoch Securities, Inc. ..................................... 227,500
---------
Total............................................. 3,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults,
the purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 525,000 additional shares from us at the offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $3.45 per share. The underwriters and
selling group members may allow a discount of $0.10 per share on sales to other
broker/dealers. After the public offering, the public offering price and
concession and discount to broker/dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us................... $5.75 $5.75 $20,125,000 $23,143,750
Expenses payable by us..................... $0.29 $0.25 $ 1,000,000 $ 1,000,000
</TABLE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof or pursuant to options granted under our option plans.
Our officers and directors and substantially all of our stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that
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<PAGE> 73
transfers, in whole or in part, any of the economic consequences of ownership of
our common stock, whether any such aforementioned transaction is to be settled
by delivery of our common stock or such other securities, in cash or otherwise,
or publicly disclose the intention to make any such offer, sale, pledge or
disposition, or to enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation until November 13 2000.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "NUFO".
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under the
Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of the
number of shares the underwriters are obligated to purchase, which creates a
syndicate short position. The short position may be either a covered short
position or a naked short position. In a covered short position, the number of
shares over-allotted by the underwriters is not greater than the number of
shares which they may purchase in the over-allotment option. In a naked short
position, the number of shares involved is greater than the number of shares
in the over-allotment option. The underwriters may close out any short
position by either exercising their over-allotment option and/or purchasing
shares in the open market.
- Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. In determining the source of shares to close out
the short position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market as compared to the
price at which they may purchase shares through the over-allotment option. If
the underwriters sell more shares than could be covered by the over-allotment
option -- a naked short position -- that position can only be closed out by
buying shares in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure
on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate member
is purchased in a stabilizing or syndicate covering transaction to cover
syndicate short positions.
- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations, make
bids for or purchases of the common stock until the time, if any, at which a
stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the common
stock or preventing or retarding a decline in the market price of the common
stock. As a result, the price of the common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make Internet distributions on the same
basis as other allocations.
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Epoch Securities, Inc. is an investment banking firm formed in November
1999. In addition to this offering, Epoch Securities, Inc. has engaged in the
business of public and private equity investing and financing and financial
advisory services since its inception. The five senior members of the Epoch
Securities, Inc. investment banking team have in the aggregate in excess of 40
years of investment banking and related experience in the securities industry.
Epoch Securities, Inc. does not have any material relationship with us or any of
our officers, directors or other controlling persons, except for its contractual
relationship with us under the terms of the underwriting agreement entered into
in connection with this offering.
The corporate parents of Charles Schwab & Co., Inc., Ameritrade (Inc.) and
TD Waterhouse Investor Services, Inc. are equity investors in Epoch's corporate
parent. Under the terms of Epoch's distribution agreement, Charles Schwab,
Ameritrade and TD Waterhouse are entitled to receive an allocation of any shares
allocated in the offering to Epoch on a free retention basis. Until they accept
this allocation, however, they are not obligated to take any shares. If they do
take shares, they are obligated to try to sell those shares to brokerage
customers who buy shares through the Internet, a computerized system or other
automated system, but they otherwise are entitled to allocate shares following
their customary practices. Charles Schwab, Ameritrade and TD Waterhouse are not
underwriters under the underwriting agreement. Because of their current
relationship to Epoch and their role in the distribution of securities, however,
they may be deemed to be underwriters as that term is defined in the Securities
Act in connection with this offering. They believe their activities fall within
the selling dealer exception to the definition and, therefore, believe that they
are not "underwriters" under the Securities Act.
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<PAGE> 75
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE> 76
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors have audited our consolidated
financial statements and schedule at March 31, 1999 and December 31, 1999 and
for each of the two years in the period ended March 31, 1999, and for the nine
months ended December 31, 1999 as described in their report. We have included
our financial statements and schedule in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given upon
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. A copy of the registration statement may be inspected
by anyone without charge at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or any portion of the registration statement may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed fees. The Commission
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
75
<PAGE> 77
NEW FOCUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
New Focus, Inc.
We have audited the accompanying consolidated balance sheets of New Focus,
Inc. as of March 31, 1999 and December 31, 1999, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the two years in the period ended March 31, 1999, and for
the nine-month period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of New Focus, Inc.
at March 31, 1999 and December 31, 1999, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1999, and for the nine-month period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
February 25, 2000, except as to Note 12,
as to which the date is May 8, 2000
F-2
<PAGE> 79
NEW FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JULY 2,
1999 1999 2000
--------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 51 $ 28,067 $ 94,998
Accounts receivable, less allowance for doubtful accounts
of $135 at March 31, 1999 $160 at December 31, 1999 and
$454 at July 2, 2000.................................... 2,064 3,102 5,755
Unbilled receivables...................................... 192 121 131
Inventories............................................... 3,654 6,217 13,294
Prepaid expenses and other current assets................. 141 243 1,575
------- -------- --------
Total current assets.................................. 6,102 37,750 115,753
Property and equipment, net................................. 1,880 6,895 19,381
Other assets, net of accumulated amortization of $29 at
March 31, 1999, $56 at December 31, 1999 and $110 at July
2, 2000................................................... 258 207 5,105
------- -------- --------
Total assets.......................................... $ 8,240 $ 44,852 $140,239
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Loans payable to bank..................................... $ 1,755 $ -- $ --
Accounts payable.......................................... 1,788 5,658 8,278
Accrued expenses.......................................... 1,567 2,540 3,678
Deferred research and development funding................. 250 250 343
Current portion of long-term debt......................... 263 276 288
------- -------- --------
Total current liabilities............................. 5,623 8,724 12,587
Notes payable to stockholder/director....................... 2,305 -- --
Accrued interest to stockholder/director.................... 117 -- --
Long-term debt, less current portion........................ 588 368 239
Deferred rent............................................... 790 747 1,022
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value......................... -- -- --
Authorized shares -- 10,000,000 at July 2, 2000
Issued and outstanding shares -- none
Convertible preferred stock, $0.001 par value:
Authorized shares -- 22,760,000 at March 31, 1999 and
44,083,326 December 31, 1999 and none at July 2, 2000
Issued and outstanding shares -- 20,737,000 at March 31,
1999, 41,939,144 at December 31, 1999 and none at July
2, 2000................................................ 21 42 --
Common stock, $0.001 par value:
Authorized shares -- 80,000,000 at March 31, 1999 and
December 31, 1999 and 250,000,000 at July 2, 2000
Issued and outstanding shares -- 2,410,380 at March 31,
1999, 2,578,824 at December 31, 1999, 59,621,717 at
July 2, 2000........................................... 2 2 60
Additional paid-in capital................................ 6,627 51,168 212,951
Notes receivable from stockholders........................ -- -- (7,378)
Deferred compensation..................................... -- (689) (37,144)
Accumulated deficit....................................... (7,833) (15,510) (42,098)
------- -------- --------
Total stockholders' equity (net capital deficiency)... (1,183) 35,013 126,391
------- -------- --------
Total liabilities and stockholders' equity (net
capital deficiency).................................. $ 8,240 $ 44,852 $140,239
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 80
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
YEARS ENDED MARCH 31, ENDED --------------------------
---------------------- DECEMBER 31, JUNE 30, JULY 2,
1998 1999 1999 1999 2000
--------- --------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $15,482 $17,285 $18,101 $ 9,322 $ 24,233
Cost of net revenues(1)............ 8,186 9,225 12,525 5,421 23,842
------- ------- ------- ------- --------
Gross profit....................... 7,296 8,060 5,576 3,901 391
Operating expenses:
Research and development(2)...... 6,188 9,115 8,386 4,622 9,217
Less funding received from
research and development
contracts..................... (2,467) (1,736) (1,034) (901) (716)
------- ------- ------- ------- --------
Net research and development..... 3,721 7,379 7,352 3,721 8,501
Sales and marketing(3)........... 2,193 2,987 2,982 1,800 2,565
General and administrative(4).... 1,355 2,360 2,704 1,241 3,792
Deferred compensation............ -- -- 132 9 13,056
------- ------- ------- ------- --------
Total operating expenses...... 7,269 12,726 13,170 6,771 27,914
------- ------- ------- ------- --------
Operating income (loss)............ 27 (4,666) (7,594) (2,870) (27,523)
Interest income.................... -- -- 208 3 1,019
Interest expense................... (328) (327) (176) (202) (143)
Other income (expense), net........ 25 24 (113) 8 59
------- ------- ------- ------- --------
Loss before provision for income
taxes............................ (276) (4,969) (7,675) (3,061) (26,588)
Provision for income taxes......... 10 2 2 2 --
------- ------- ------- ------- --------
Net loss...................... $ (286) $(4,971) $(7,677) $(3,063) $(26,588)
======= ======= ======= ======= ========
Historical basic and diluted net
loss per share................... $ (0.25) $ (2.18) $ (3.11) $ (1.27) $ (1.36)
======= ======= ======= ======= ========
Shares used to compute historical
basic and diluted net loss per
share............................ 1,148 2,284 2,468 2,413 19,546
======= ======= ======= ======= ========
Pro forma basic and diluted net
loss per share................... $ (0.24) $ (0.13) $ (0.52)
======= ======= ========
Shares used to compute pro forma
basic and diluted net loss per
share............................ 32,223 24,191 51,000
======= ======= ========
</TABLE>
-------------------------
(1) Excluding $62 and $2,464 in amortization of deferred stock based
compensation for the nine months ended December 31, 1999 and six months
ended July 2, 2000, respectively
(2) Excluding $54 and $3,296 in amortization of deferred stock based
compensation for the nine months ended December 31, 1999 and six months
ended July 2, 2000, respectively
(3) Excluding $10 and $755 in amortization of deferred stock based compensation
for the nine months ended December 31, 1999 and six months ended July 2,
2000, respectively
(4) Excluding $6 and $6,541 in amortization of deferred stock based compensation
for the nine months ended December 31, 1999 and six months ended July 2,
2000, respectively
See accompanying notes.
F-4
<PAGE> 81
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
----------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997.......... 16,160,000 $ 16 1,127,180 $ 1 $ 2,128 $ -- $ --
Issuance of common stock from
exercise of options............ -- -- 157,716 -- 16 -- --
Repurchase of common stock....... -- -- (8,996) -- (1) -- --
Net loss......................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at March 31, 1998.......... 16,160,000 16 1,275,900 1 2,143 -- --
Issuance of Series C preferred
stock, net of issuance cost of
$16............................ 600,000 1 -- -- 493 -- --
Issuance of Series D preferred
stock, net of issuance cost of
$54............................ 3,977,000 4 -- -- 3,919 -- --
Issuance of common stock from
exercise of options............ -- -- 1,443,444 1 187 -- --
Repurchase of common stock....... -- -- (308,964) -- (193) -- --
Warrant issued to long-term
creditor....................... -- -- -- -- 78 -- --
Net loss......................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at March 31, 1999.......... 20,737,000 21 2,410,380 2 6,627 -- --
Issuance of Series E preferred
stock, net of issuance cost of
$489........................... 10,857,616 11 -- -- 12,526 -- --
Issuance of Series F preferred
stock, net of issuance cost of
$28............................ 1,113,800 1 -- -- 1,307 -- --
Issuance of Series G preferred
stock, net of issuance cost of
$160........................... 9,230,728 9 -- -- 29,832 -- --
Issuance of common stock from
exercise of options............ -- -- 168,444 -- 55 -- --
Deferred compensation............ -- -- -- -- 821 -- (821)
Amortization of deferred
compensation................... -- -- -- -- -- -- 132
Net loss......................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at December 31, 1999....... 41,939,144 42 2,578,824 2 51,168 -- (689)
Issuance of common stock from
exercise of options
(unaudited).................... -- -- 9,716,609 10 8,346 (7,690) --
Issuance of stock in connection
with business acquisition
(unaudited).................... -- -- 116,000 -- 1,508 -- (1,300)
Issuance of warrants for rent
(unaudited).................... -- -- -- -- 279 -- --
Repurchase of common stock
(unaudited).................... -- -- (500,000) -- (312) 312 --
Issuance of preferred stock from
exercise of warrants
(unaudited).................... 121,140 -- -- -- 145 -- --
Conversion of preferred stock
into common stock
(unaudited).................... (42,060,284) (42) 42,060,284 42 -- -- --
Issuance of common stock
(unaudited).................... -- -- 5,650,000 6 103,606 -- --
Deferred compensation
(unaudited).................... -- -- -- -- 48,211 -- (48,211)
Amortization of deferred
compensation (unaudited)....... -- -- -- -- -- -- 13,056
Net loss (unaudited)............. -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at July 2, 2000
(unaudited)...................... -- $ -- 59,621,717 $60 $212,951 $(7,378) $(37,144)
=========== ==== ========== === ======== ======= ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balance at March 31, 1997.......... $ (2,576) $ (431)
Issuance of common stock from
exercise of options............ -- 16
Repurchase of common stock....... -- (1)
Net loss......................... (286) (286)
-------- --------
Balance at March 31, 1998.......... (2,862) (702)
Issuance of Series C preferred
stock, net of issuance cost of
$16............................ -- 494
Issuance of Series D preferred
stock, net of issuance cost of
$54............................ -- 3,923
Issuance of common stock from
exercise of options............ -- 188
Repurchase of common stock....... -- (193)
Warrant issued to long-term
creditor....................... -- 78
Net loss......................... (4,971) (4,971)
-------- --------
Balance at March 31, 1999.......... (7,833) (1,183)
Issuance of Series E preferred
stock, net of issuance cost of
$489........................... -- 12,537
Issuance of Series F preferred
stock, net of issuance cost of
$28............................ -- 1,308
Issuance of Series G preferred
stock, net of issuance cost of
$160........................... -- 29,841
Issuance of common stock from
exercise of options............ -- 55
Deferred compensation............ -- --
Amortization of deferred
compensation................... -- 132
Net loss......................... (7,677) (7,677)
-------- --------
Balance at December 31, 1999....... (15,510) 35,013
Issuance of common stock from
exercise of options
(unaudited).................... -- 666
Issuance of stock in connection
with business acquisition
(unaudited).................... -- 208
Issuance of warrants for rent
(unaudited).................... -- 279
Repurchase of common stock
(unaudited).................... -- --
Issuance of preferred stock from
exercise of warrants
(unaudited).................... -- 145
Conversion of preferred stock
into common stock
(unaudited).................... -- --
Issuance of common stock
(unaudited).................... -- 103,612
Deferred compensation
(unaudited).................... -- --
Amortization of deferred
compensation (unaudited)....... -- 13,056
Net loss (unaudited)............. (26,588) (26,588)
-------- --------
Balance at July 2, 2000
(unaudited)...................... $(42,098) $126,391
======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 82
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED NINE MONTHS --------------------------
MARCH 31, ENDED
------------------ DECEMBER 31, JUNE 30, JULY 2,
1998 1999 1999 1999 2000
------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (286) $(4,971) $(7,677) $(3,063) $(26,588)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets.................. 475 588 756 340 1,414
Amortization of intangibles................... 41 10 27 12 54
Amortization of deferred compensation......... -- -- 132 9 13,056
Deferred rent................................. 184 -- (43) (11) 275
Changes in operating assets and liabilities:
Accounts receivable and unbilled
receivables.............................. (1,231) 372 (967) (210) (2,663)
Inventories................................. (1,515) 184 (2,563) (145) (7,077)
Prepaid expenses and other current assets... (78) 93 (102) 234 (1,332)
Accounts payable............................ 1,137 (884) 3,870 937 2,620
Accrued expenses and accrued interest to
stockholder.............................. 440 697 856 (101) 1,138
Deferred research and development funding... 250 -- -- -- 93
------- ------- ------- ------- --------
Net cash used in operating activities........... (583) (3,911) (5,711) (1,998) (19,010)
INVESTING ACTIVITIES
Acquisition of property and equipment........... (396) (1,359) (5,771) (1,190) (13,900)
Decrease (increase) in other assets............. 17 2 24 (221) (4,465)
------- ------- ------- ------- --------
Net cash used in investing activities........... (379) (1,357) (5,747) (1,411) (18,365)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders..... 400 200 -- -- --
Proceeds from issuance of preferred stock....... -- 4,217 43,686 12,568 --
Proceeds from equipment loan.................... -- 800 -- 800 --
Proceeds from capital lease obligations......... -- 35 -- -- --
Payments on notes payable....................... (19) (21) (2,305) -- --
Payments on bank loan........................... (828) (1,772) (3,000) (2,700) --
Proceeds from bank loans........................ 1,395 1,755 1,245 1,055 --
Payments on equipment loan...................... -- (50) (195) (41) (117)
Payments under capital lease obligations........ (55) (36) (12) (3) --
Proceeds from issuance of common stock.......... 16 188 55 53 104,423
Repurchase of common stock...................... (1) (193) -- -- --
------- ------- ------- ------- --------
Net cash provided by financing activities....... 908 5,123 39,474 11,732 104,306
------- ------- ------- ------- --------
Increase (decrease) in cash..................... (54) (145) 28,016 8,323 66,931
Cash at beginning of period..................... 250 196 51 164 28,067
------- ------- ------- ------- --------
Cash at end of period........................... $ 196 $ 51 $28,067 $ 8,487 $ 94,998
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......................... $ 174 $ 155 $ 188 $ 202 $ 143
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Promissory note payable converted to equity..... $ -- $ 200 $ -- $ -- $ --
Interest on note converted to principal......... $ -- $ 680 $ -- $ -- $ --
Warrant issued to long-term creditor/lessor..... $ -- $ 78 $ -- $ 78 $ 279
Stock issued in business acquisition............ $ -- $ -- $ -- $ -- $ 208
</TABLE>
See accompanying notes.
F-6
<PAGE> 83
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
New Focus, Inc. (the Company) was incorporated in California on April 17,
1990 and reincorporated in Delaware on May 8, 2000. The Company is engaged in
developing, manufacturing, and marketing telecommunications equipment and
photonics products primarily for use in the telecommunications and research
markets.
Basis of Presentation
The consolidated financial statements include the Company and its wholly
owned subsidiaries. All intercompany transactions and balances have been
eliminated.
During 1999, the Company changed its year end to December 31, 1999 from
March 31, 2000. Beginning in 2000, the Company maintains a fifty-two/fifty-three
week fiscal year cycle ending on the Sunday closest to December 31. The
six-month periods ended June 30, 1999 and July 2, 2000 contained 181 days and
184 days, respectively.
As of July 2, 2000, the Company had working capital of $103,166,000. For
the nine-month period ended December 31, 1999 and the six-month period ended
July 2, 2000, the Company used cash of $5,711,000 and $19,010,000, respectively
in its operating activities. In addition for the nine-month period ended
December 31, 1999 and the six-month period ended July 2, 2000 the Company used
cash for the acquisition of property and equipment of $5,771,000 and
$13,900,000, respectively. Management believes that, to the extent existing
resources and anticipated revenues are insufficient to fund the Company's
planned activities, additional debt or equity financing will be available.
Cash Equivalents
Cash equivalents consist of a money market fund. For purposes of the
accompanying statements of cash flows, the Company considers all liquid
instruments with an original maturity date of three months or less to be cash
equivalents. The fair value, based on quoted market prices of the cash
equivalents, is substantially equal to their carrying value at March 31, 1999,
December 31, 1999, and July 2, 2000.
Inventories
Inventories are stated at the lower of cost or market on a first-in,
first-out basis. Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JULY 2,
1999 1999 2000
--------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw Materials............................. $1,994 $3,247 $ 6,059
Work in Progress.......................... 372 1,283 5,847
Finished Goods............................ 1,288 1,687 1,388
------ ------ -------
Total..................................... $3,654 $6,217 $13,294
====== ====== =======
</TABLE>
Fixed Assets
The Company records its property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years.
F-7
<PAGE> 84
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
Amortization is computed on leasehold improvements using the straight-line
method over the shorter of the estimated useful lives of the assets or the term
of the lease.
Other Assets
Other assets consist primarily of deposits as well as intangible assets.
Intangible assets, consisting of goodwill and debt issuance costs from warrants
relating to the Company's equipment line are amortized over their estimated
useful lives of approximately three years.
At July 2, 2000 the Company had a $2,500,000 advance to a supplier to be
applied against future purchases.
In connection with the Company's acquisition in July 1996 of Palo Alto
Research Corporation, the Company issued a $110,000 note payable, bearing
interest at 6.74%, to the former owner of the business in exchange for $48,000
in fixed assets and $9,000 in inventory. The remaining $53,000 in the purchase
price was classified as goodwill and is being amortized over four years. The
terms of the note require the Company to repay this debt over four years with
annual installments of $25,000 including interest. At December 31, 1999, the
Company owed $23,400 in principal on this note. The note was repaid during the
six-month period ended July 2, 2000.
Advertising Expenses
The cost of advertising is expensed as incurred. The Company's advertising
costs for the fiscal years ended March 31, 1998 and 1999, the nine-month period
ended December 31, 1999 and for the six-month periods ended June 30, 1999 and
July 2, 2000 were approximately $316,000, $342,000, $257,000, $150,000 and
$220,000, respectively.
Revenue Recognition
Product revenue is recorded upon shipment provided there are no significant
remaining obligations and collectibility is probable. The Company provides an
allowance for estimated returns of defective products.
Research and Development
Company-sponsored research and development costs as well as costs related
to research and development contracts are currently expensed. Total expenditures
for research and development in fiscal years ended March 31, 1998 and 1999, the
nine-month period ended December 31, 1999 and the six-month periods ended June
30, 1999 and July 2, 2000 were $6,188,000, $9,115,000, $8,386,000, $4,622,000
and $9,217,000, respectively. Funding earned under the contractual terms of the
research and development contracts is netted against research and development
costs, which were $2,467,000, $1,736,000, $1,034,000, $901,000 and $716,000 for
the fiscal years ended March 31, 1998 and 1999, the nine-month period ended
December 31, 1999, and for the six-month periods ended June 30, 1999 and July 2,
2000, respectively. The funding relates to various arrangements, primarily with
government agencies, whereby the Company is reimbursed for substantially all of
its costs incurred under the related project. Unbilled receivables reflect the
costs incurred under these contracts that have yet to be billed at the balance
sheet date.
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to
F-8
<PAGE> 85
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
Employees" (APB 25), and has adopted the disclosure-only alternative of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
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 these estimates.
Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 established rules for reporting and displaying comprehensive income. The
Company's comprehensive net loss was the same as its net loss for the years
ended March 31, 1998 and 1999, the nine-months ended December 31, 1999, and the
six-months ended June 30, 1999 and July 2, 2000.
Interim Financial Information
The interim financial information at July 2, 2000 and for the six-month
periods ended June 30, 1999 and July 2, 2000 is unaudited but, in the opinion of
management, includes all adjustments, consisting only of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for the interim periods. The
results of operations for the six-month period ended July 2, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year.
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 is
effective July 1, 2000, but
F-9
<PAGE> 86
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
certain conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's results of
operations, financial position, or cash flows.
2. CONCENTRATION OF REVENUE AND CREDIT AND OTHER RISKS
The Company sells to a large number of companies in the telecommunications
and photonics research markets. The Company performs ongoing credit evaluations
of its customers and does not require collateral. The Company provides reserves
for potential credit losses, and such losses have been within management's
expectations.
Financial instruments that potentially subject the Company to significant
concentrations of credit risks consist principally of cash, cash equivalents and
accounts receivable. The Company places its cash equivalents in high-credit
quality financial institutions. The Company is exposed to credit risk in the
event of default by these institutions to the extent of the amount recorded on
the balance sheet. As of December 31, 1999 and July 2, 2000 all funds are
invested in a single money market fund.
For the six-month period ended July 2, 2000, Agilent Technologies and
Corvis Corporation accounted for 14.3% and 14.2% of net revenues, respectively.
There were no customers which accounted for more than 10% of net revenues for
the years ended March 31, 1998 and 1999, the nine-month period ended December
31, 1999 and the six-month period ended June 30, 1999.
The Company currently purchases several key components and materials used
in the manufacturing process from a single or limited source supplier. Any
interruption or delay in the supply of any of these components or materials, or
the ability to obtain these components and materials from alternate sources at
acceptable prices and within a reasonable amount of time would impair the
Company's ability to meet scheduled product deliveries and could cause customers
to cancel orders.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JULY 2,
1999 1999 2000
--------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Building........................................... $ -- $ -- $ 3,750
Manufacturing and development equipment............ 2,250 6,404 12,871
Computer software and equipment.................... 1,282 1,787 2,938
Office equipment................................... 166 259 659
Leasehold improvements............................. 213 1,120 3,049
Construction in Progress........................... -- 91 294
------- ------- -------
3,911 9,661 23,561
Less accumulated depreciation and amortization..... (2,031) (2,766) (4,180)
------- ------- -------
$ 1,880 $ 6,895 $19,381
======= ======= =======
</TABLE>
4. DEBT
Note payable to stockholder/director
The Company had unsecured promissory notes payable to Dr. Milton Chang, one
of the founders and a member of the Board of Directors. On July 21, 1998, the
principal and interest outstanding was rolled
F-10
<PAGE> 87
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
over into a new promissory note issued with interest at 7.35% per annum. At
March 31, 1999, the Company had borrowings outstanding under this arrangement of
$2,305,000 and owed interest of $117,000. The promissory note and its related
interest were repaid during the nine-month period ended December 31, 1999.
Loan Payable to Bank
On October 19, 1998, the Company entered into a revolving line of credit
agreement with a bank. At March 31, 1999, the Company had borrowings under this
arrangement amounting to $1,755,000 at an interest rate of 8.625%. The line was
repaid during the nine-month period ended December 31, 1999. At December 31,
1999, the line of credit agreement had expired.
Equipment Loan Payable
On February 9, 1999, the Company entered into an agreement for an equipment
loan facility for a maximum of $2,000,000, under which the right to borrow
expired on December 31, 1999. The loan facility charges interest at 8.4% per
annum and has a termination payment for 10% of the original principal amount.
Certain equipment of the Company secures the loan facility. The Company had
borrowed $800,000 under this loan facility of which $750,000, $598,000, and
$526,000 was outstanding at March 31, 1999, December 31, 1999, and July 2, 2000
respectively.
Future minimum payments on this facility at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000........................................... $231
2001........................................... 265
2002........................................... 102
----
Total.......................................... $598
====
</TABLE>
The Company will pay $45,000 in 2000 and $1,000 in 2001 in relation to
other long-term debt facilities outstanding at December 31, 1999.
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements that expire at various dates from fiscal 2000 through
fiscal 2007. Net rental expense for these leases aggregated $444,000, $440,000,
$383,000, $198,000 and $766,000 for the fiscal years ended March 31, 1998 and
1999, the nine-month period ended December 31, 1999, and the six-month periods
ended June 30, 1999 and July 2, 2000 respectively. These amounts are net of
$230,000, $255,000, $91,000, $136,000 and $0 of sublease income for the fiscal
years ended March 31, 1998 and 1999, the nine-month period ended December 31,
1999 and the six-month periods ended June 30, 1999 and July 2, 2000.
In the six-month period ended July 2, 2000 the Company entered into new
leases in Wisconsin, California and China.
F-11
<PAGE> 88
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JULY 2,
1999 2000
------------ -------
<S> <C> <C>
2000.................................. $ 1,405 $ 2,232
2001.................................. 1,964 5,779
2002.................................. 2,016 5,962
2003.................................. 2,061 6,145
2004.................................. 2,132 6,358
Thereafter............................ 3,340 14,336
------- -------
Total minimum payments................ $12,918 $40,812
======= =======
</TABLE>
Litigation
On December 8, 1999, U.S.A. Kaifa Technology, Inc., recently acquired 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 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 claim
against two 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. A claim
construction hearing regarding the asserted patent claims is scheduled for
January 2001, and trial is scheduled for October 2001. The Company intends to
defend the action vigorously. If the Company is unsuccessful in defending this
action, any remedies awarded to Kaifa may have a material adverse effect on the
Company. Furthermore, defending this action will be costly and divert
management's attention regardless of whether the action is successfully
defended.
In addition, the Company is subject to various claims which arise in the
normal course of business. In the opinion of management, the ultimate
disposition of these claims will not have a material adverse effect on the
position of the Company.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit Sharing Plan that allows voluntary
contributions by employees who have six months or more of service. Eligible
employees may elect to contribute up to the maximum allowed under the Internal
Revenue Service regulations.
The Company made matching contributions of a participant's salary deferral
of 10%, 25%, and 25% and recognized costs of $26,000, $131,000 and $125,000
related to this plan in the fiscal years ended March 31, 1998 and 1999 and the
nine-month period ended December 31, 1999, respectively.
F-12
<PAGE> 89
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
7. INCOME TAXES
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate (34%) to loss before
provision for income taxes is explained below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1998 1999 1999
---- ------- ------------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate..................... $(94) $(1,689) $(2,609)
Loss for which no tax benefit is currently recognizable..... 94 1,689 2,609
State taxes................................................. 2 2 2
Alternate minimum taxes..................................... 8 -- --
---- ------- -------
Total provision............................................. $ 10 $ 2 $ 2
==== ======= =======
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 121 $ 1,469 $ 4,363
Tax credit carryforwards................................. 788 1,044 1,428
Capitalized research and development..................... 340 390 786
Other individually immaterial items...................... 735 1,097 501
------- ------- -------
Total deferred tax assets.................................. 1,984 4,000 7,078
Valuation allowance........................................ (1,984) (4,000) (7,078)
------- ------- -------
Net deferred tax assets.................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The valuation allowance increased by $557,000, $2,016,000 and $3,078,000
for the years ended March 31, 1998 and 1999, and the nine-month period ended
December 31, 1999, respectively. Approximately $260,000 of the valuation
allowance for deferred tax assets relates to benefits of stock option deductions
which, when recognized, will be allocated directly to additional paid in
capital.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which included the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
As of December 31, 1999 the Company had federal and state net operating
loss carryforwards of approximately $12,000,000 and $400,000, respectively. As
of December 31, 1999, the Company also had federal and state research and
development tax credit carryforwards of approximately $900,000 and $700,000,
respectively. The net operating loss and tax credit carryforwards will expire at
various dates beginning in 2004 through 2019, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credit carryforwards before utilization.
F-13
<PAGE> 90
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY
Stock Split
On August 20, 1999 the Company's Board of Directors and stockholders
approved a two-for-one stock split of the Company's common and preferred stock.
On February 9, 2000 the Company's Board of Directors and stockholders approved
another two-for-one stock split of the Company's common and preferred stock. All
preferred stock, common stock, common equivalent shares, and per share amounts
have been adjusted retroactively to give effect to the stock splits.
Convertible Preferred Stock
Prior to the initial public offering in May 1999, the Company had
authorized 44,083,326 shares of preferred stock. All issued and outstanding
shares of preferred stock were converted into shares of common stock upon the
closing of the public offering. Preferred stock was as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Series A:
Authorized, issued and outstanding shares................. 15,160,000 15,160,000
========== ============
Series B:
Authorized, issued, and outstanding shares................ 1,000,000 1,000,000
========== ============
Series C:
Authorized, issued, and outstanding shares................ 600,000 600,000
========== ============
Series D:
Authorized shares......................................... 6,000,000 6,000,000
========== ============
Issued and outstanding shares............................. 3,977,000 3,977,000
========== ============
Series E:
Authorized shares......................................... 10,978,756
============
Issued and outstanding shares............................. 10,857,616
============
Series F:
Authorized shares......................................... 1,113,800
============
Issued and outstanding shares............................. 1,113,800
============
Series G:
Authorized shares......................................... 9,230,770
============
Issued and outstanding shares............................. 9,230,728
============
</TABLE>
Stock Option Plans
Under its 1990 Incentive Stock Option Plan, the Company may grant incentive
stock options and nonstatutory stock options to employees, directors, and
consultants. Under its 1998 Stock Plan, the Company may grant options and stock
purchase rights to employees and consultants provided that incentive stock
options may only be granted to employees. During the nine months ended December
31, 1999, the Company established the 1999 Stock Option Plan. Under its 1999
Stock Plan, the Company may grant options and stock purchase rights to employees
and consultants provided that incentive stock options may only be granted to
employees. Options may be granted to purchase common stock at an
F-14
<PAGE> 91
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
exercise price of not less than 100% of the fair value of the stock at the date
of grant as determined by the Board of Directors. Generally, options vest
ratably over five years and expire after ten years.
The following table summarizes activity under the 1990, 1998, 1999, 2000
and Director Stock Option Plans:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Balance at March 31, 1997................................ 1,944,000 5,230,000 $0.21
Granted................................................ (2,948,000) 2,948,000 $0.48
Exercised.............................................. -- (158,000) $0.10
Canceled............................................... 1,220,000 (1,220,000) $0.37
Repurchased............................................ 8,000 -- $0.15
---------- ----------
Balance at March 31, 1998................................ 224,000 6,800,000 $0.30
Authorized............................................. 3,200,000 -- $ --
Granted................................................ (2,984,000) 2,984,000 $0.62
Exercised.............................................. -- (1,443,000) $0.13
Canceled............................................... 208,000 (208,000) $0.41
Repurchased............................................ 308,000 -- $0.63
---------- ----------
Balance at March 31, 1999................................ 956,000 8,133,000 $0.44
Authorized............................................. 5,400,000 -- --
Granted................................................ (692,000) 692,000 $0.63
Exercised.............................................. -- (168,000) $0.33
Canceled............................................... 218,000 (218,000) $0.55
---------- ----------
Balance at December 31, 1999............................. 5,882,000 8,439,000 $0.45
Authorized............................................. 1,200,000 -- $ --
Granted................................................ (6,215,000) 6,215,000 $8.04
Exercised.............................................. -- (8,916,000) $0.94
Cancelled.............................................. 488,000 (488,000) $0.92
Repurchased............................................ 500,000 -- $0.63
---------- ---------- -----
Balance at July 2, 2000.................................. 1,855,000 5,250,000 $8.57
========== ========== =====
Options exercisable at March 31, 1998.................... 3,076,000 $0.10
==========
Options exercisable at March 31, 1999.................... 2,660,000 $0.22
==========
Options exercisable at December 31, 1999................. 3,881,000 $0.33
==========
</TABLE>
The weighted average fair value of options granted in the fiscal years
ended March 31, 1998 and 1999 and for the nine-month period ended December 31,
1999 was $0.48, $0.55, and $0.56, respectively.
F-15
<PAGE> 92
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
The following summarizes option information relating to outstanding options
under the plans as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.0025 - $0.0125 1,236,000 .88 years $0.01 1,236,000 $0.01
$0.025 - $0.0625 165,000 4.93 years $0.04 156,000 $0.04
$0.375 - $0.4625 2,927,000 7.48 years $0.45 1,445,000 $0.45
$0.5125 715,000 8.09 years $0.51 269,000 $0.51
$0.625 3,396,000 8.79 years $0.63 775,000 $0.63
--------- ---------
$0.0025 - $0.625 8,439,000 7.04 years $0.45 3,881,000 $0.33
========= =========
</TABLE>
In addition, non-plan options to purchase 800,000 shares of common stock at
an exercise price of $0.0025 per share were granted to the Company's founder and
Chairman of the Board in fiscal 1991 and are fully exercisable. These options
were exercised during the six-month period ended July 2, 2000.
Deferred Compensation
During the nine-month period ended December 31, 1999, and the six-month
period ended July 2, 2000 the Company recorded aggregate deferred compensation
of $821,000 and $48,211,000 representing the difference between the exercise
price of stock options granted and the then deemed fair value of the Company's
common stock. These amounts are being amortized as charges to operations, using
the graded method, over the vesting periods of the individual stock options,
generally five years. Under the graded method, approximately 51.53%, 24.62%,
14.16%, 7.37% and 2.32%, respectively, of each options compensation expense is
recognized in each of the five years following the date of grant. For the nine-
month period ended December 31, 1999, and the six-month periods ended June 30,
1999 and July 2, 2000 the Company amortized $132,000, $9,000 and $13,056,000,
respectively, of deferred compensation.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, there is no compensation expense
recognized.
Pro forma information regarding net loss is required by FAS 123 which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the fiscal periods ended March 31,
1998 and 1999 and the nine-month periods ended December 31, 1999
F-16
<PAGE> 93
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the following
weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, NINE MONTHS ENDED
---------------------- DECEMBER 31,
1998 1999 1999
--------- --------- -----------------
<S> <C> <C> <C>
Risk-free interest rate...................... 5.9% 5.14% 6.0%
Dividend yield............................... 0% 0% 0%
Expected option life......................... 5.0 years 5.0 years 5.0 years
</TABLE>
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, under the
graded method. Because FAS 123 is applicable only to options granted subsequent
to March 31, 1995, its pro forma effect will not be fully reflected until
calendar year 2000 and thereafter.
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for awards under this
plan consistent with the method provided for under FAS 123, then the Company's
net loss would have been as indicated in the pro forma amount below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, NINE MONTHS ENDED
------------------------ DECEMBER 31,
1998 1999 1999
--------- ----------- -----------------
<S> <C> <C> <C>
Net loss as reported............................. $(286,000) $(4,971,000) $(7,677,000)
Pro forma net loss............................... $(349,000) $(5,116,000) $(7,845,000)
Net loss per share as reported, basic and
diluted........................................ $ (0.25) $ (2.18) $ (3.11)
Pro forma net loss per share, basic and
diluted........................................ $ (0.30) $ (2.24) $ (3.18)
</TABLE>
Warrants
During the year ended March 31, 1999 the Company issued a warrant for the
purchase of 140,000 shares of the Company's Series D preferred stock at $1.00
per share in connection with entering into an equipment loan agreement. The fair
value of the warrant was determined using the Black-Scholes method and the
following assumptions: expected life 5 years, exercise price $1.00, stock price
on date of grant $1.00, expected dividend yield of 0%, risk free rate of 5%, and
expected volatility of 0.30 to be $78,000. This amount was capitalized as debt
issuance costs and is being amortized over the life of the loan. The warrant
expires not earlier than December 31, 2004. The warrant incorporates
antidilution protection.
During the nine-month period ended December 31, 1999 the Company committed
to issue a warrant for the purchase of 112,000 shares of the Company's Series E
preferred stock at a price of $1.20 per share in return for fees associated with
issuance of Series E preferred stock. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 5 years, exercise price $1.20, stock price on date of grant $1.20,
expected dividend yield of 0%, risk free rate of 6%, and
F-17
<PAGE> 94
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
expected volatility of 0.27 to be $48,000. This amount was offset against the
proceeds of the Series E preferred stock. The warrant was exercised during the
six-month period ended July 2, 2000.
During the nine-month period ended December 31, 1999 the Company committed
to issue a warrant to purchase 9,000 shares of the Company's Series E preferred
shares at a price of $1.20 per share. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 5 years, exercise price $1.20, stock price on date of grant $1.20,
expected dividend yield of 0%, risk free rate of 6%, and expected volatility of
0.27 to be $4,000. This amount was expensed in the current period. The warrant
was exercised during the six-month period ended July 2, 2000.
Common Stock
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 2,
1999 2000
------------ ---------
<S> <C> <C>
Stock option plan:
Outstanding options................................. 8,439,000 5,250,000
Reserved for future grants.......................... 5,882,000 1,855,000
---------- ---------
14,321,000 7,105,000
Employee Stock Purchase Plan.......................... -- 1,000,000
Warrants for Series D preferred/common stock.......... 140,000 170,000
Warrants for Series E preferred stock................. 121,000 --
Nonplan stock options granted......................... 800,000 --
Convertible preferred stock........................... 41,939,000 --
---------- ---------
57,321,000 8,275,000
========== =========
</TABLE>
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Through March 31, 1998, the Company operated as one segment. For the year
ended March 31, 1999, the Company had two reportable segments: Telecom and
Commercial Photonics Group (CPG). 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 CPG 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. The accounting policies for the reportable
segments are consistent with those described in the summary of significant
accounting policies. There were no intercompany sales or transfers.
F-18
<PAGE> 95
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
The Company does not segregate assets or interest expense by segment.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 45 $17,240 $17,285
Depreciation expense........................................ $ 102 $ 486 $ 588
Operating segment profit (loss)............................. $(6,658) $ 1,992 $(4,666)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 5,002 $13,099 $18,101
Depreciation expense........................................ $ 289 $ 467 $ 756
Operating segment profit (loss)............................. $(9,087) $ 1,625 $(7,462)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
----------------------------
TELECOM CPG TOTAL
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 495 $8,827 $ 9,322
Depreciation expense........................................ $ 89 $ 251 $ 340
Operating segment profit (loss)............................. $(3,910) $1,049 $(2,861)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 2, 2000
-------------------------------
TELECOM CPG TOTAL
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 13,350 $10,883 $ 24,233
Depreciation expense........................................ $ 978 $ 436 $ 1,414
Operating segment profit (loss)............................. $(16,564) $ 2,097 $(14,467)
</TABLE>
Operating segment profit and loss excludes amortization of deferred stock
based compensation.
F-19
<PAGE> 96
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, JUNE 30, JULY 2,
1999 1999 1999 2000
----------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOSS
Total loss for reportable segments......... $(4,666) $(7,462) $(2,861) $(14,467)
Other income (expense), net................ (303) (81) (191) 935
Amortization of deferred compensation...... -- (132) (9) (13,056)
------- ------- ------- --------
Loss before income taxes................... $(4,969) $(7,675) $(3,061) $(26,588)
======= ======= ======= ========
GEOGRAPHIC INFORMATION
REVENUES
United States.............................. $12,445 $13,214 $ 6,463 $ 16,886
Asia....................................... 2,247 1,629 1,422 1,074
Europe..................................... 2,593 3,258 1,437 6,273
------- ------- ------- --------
Consolidated total....................... $17,285 $18,101 $ 9,322 $ 24,233
======= ======= ======= ========
</TABLE>
Revenues are attributed to countries based on the location of customers.
10. NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic and diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period less outstanding nonvested shares. Outstanding
nonvested shares are not included in the computation of basic net loss per share
until the time-based vesting restrictions have lapsed.
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS SIX MONTHS
YEARS ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, JUNE 30, JULY 2,
---------------- ------------ ---------- ----------
1998 1999 1999 1999 2000
------ ------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net loss (numerator)........................ $ (286) $(4,971) $(7,677) $(3,063) $(26,588)
====== ======= ======= ======= ========
Shares used in computing historical basic
and diluted net loss per share
(denominator):
Weighted average common shares
outstanding............................... 1,148 2,284 2,468 2,413 22,500
Less shares subject to repurchase........... -- -- -- -- (2,954)
------ ------- ------- ------- --------
Denominator for basic and diluted net loss
per share................................. 1,148 2,284 2,468 2,413 19,546
Conversion of preferred stock (pro forma)... 29,755 21,778 31,454
------- ------- --------
Denominator for pro forma basic and diluted
net loss per share........................ 32,223 24,191 51,000
======= ======= ========
Historical basic and diluted net loss per
share..................................... $(0.25) $ (2.18) $ (3.11) $ (1.27) $ (1.36)
====== ======= ======= ======= ========
Pro forma basic and diluted net loss per
share..................................... $ (0.24) $ (0.13) $ (0.52)
======= ======= ========
</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
historical diluted loss per common share because all such securities are
antidilutive for
F-20
<PAGE> 97
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
all periods presented. The total number of shares, including options and
warrants to purchase shares, excluded from the calculations of historical
diluted net loss per share was 22,960,000, 27,351,000, 38,193,000, 41,139,000
and 5,420,000 for the years ended March 31, 1998, 1999, the nine-month period
ended December 31, 1999, the six month periods ended June 30, 1999, and July 2,
2000, respectively.
11. INTERIM FINANCIAL RESULTS (UNAUDITED)
The following table provides financial information for the nine-month
period ended December 31, 1998, (in thousands, except per share amount) and
presents comparable information to the Company's nine-month period ended
December 31, 1999.
<TABLE>
<S> <C>
Net revenues................................................ $12,544
Gross profit................................................ $ 5,919
Net loss.................................................... $(3,375)
Historical basic and diluted net loss per share............. $ (1.50)
Shares used to compute historical basic and diluted net loss
per share................................................. 2,245
</TABLE>
12. SUBSEQUENT EVENTS
For the three-month period ended April 2, 2000 the Company made full
recourse loans aggregating approximately $4,500,000 to certain employees in
connection with their purchase of shares of common stock. Each of these loans
were made pursuant to a full recourse promissory note secured by a stock pledge.
The notes bear no interest but interest will be imputed and reported annually as
compensation on the officer's W-2. All unvested shares purchased by officers are
subject to repurchase by the Company at the original exercise price if the
officer's employment is terminated. At April 2, 2000, $4,100,000 of this amount
is included in stockholders' equity and the remaining $400,000 has been included
in "Other Assets".
In February 2000, the Board of Directors adopted the 2000 Stock Plan (2000
Plan), which was approved by the stockholders in April 2000. The Plan provides
for the grant of stock options to purchase shares of common stock to employees,
directors and consultants. A total of 1,000,000 shares of common stock has been
reserved for issuance plus any shares reserved for issuance under the 1998 and
1999 Stock Plans and any shares returned to the 1998 and 1999 Stock Plans. The
number of shares of common stock reserved for issuance will increase annually
beginning in fiscal 2001.
In February 2000, the Board of Directors adopted the 2000 Director Option
Plan (Directors' Plan), which was approved by the stockholders in April 2000, to
provide for the automatic grant of options to purchase shares of common stock to
non-employee directors who are not employees or consultants of the Company's
affiliates. The Directors' Plan is administered by the Board of Directors, and
may be delegated to a committee. A total of 200,000 shares of common stock have
been reserved for issuance. The Director's Plan generally provides for an
automatic initial grant of an option to purchase 25,000 shares of common stock
to each non-employee director on the date when the person first becomes a
non-employee director on, or after the closing of the initial public offering,
whether through election by the Company's stockholders or appointment by the
Company's Board of Directors to fill a vacancy. In addition, upon the date of
each annual stockholders' meeting subsequent to the date of each non-employee
director's initial grant under the directors' plan, each person who is then
serving as a non-employee director automatically shall be granted an option to
purchase 5,000 shares of common stock.
In February 2000, the Company's Board of Directors approved the 2000
Employee Stock Purchase Plan (Purchase Plan), which was approved by the
Company's stockholders in April 2000. A total of
F-21
<PAGE> 98
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
1,000,000 shares of common stock have been reserved for issuance. The number of
shares of common stock reserved for issuance will increase annually beginning in
fiscal 2001. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees in periodic offerings following the adoption
of the Purchase Plan. The offering period for any offering will be no more than
24 months except for the first purchase period for which the offering period
will be no more than 27 months. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
common stock on the commencement date of each offering period or the relevant
purchase date.
On February 9, 2000, the Company's Board of Directors, subject to approval
of the Amended and Restated Certificate of Incorporation by the state of
Delaware, authorized the reincorporation of the Company in Delaware. On May 8,
2000 the Company's reincorporation in the state of Delaware was completed. The
par value of the preferred and common stock is $0.001 per share. The Company's
Certificate of Incorporation was amended to authorize 10,000,000 shares of
preferred stock and 250,000,000 shares of common stock. The Board of Directors
has the authority to fix or alter the designations, powers, preferences, and
rights of the shares of each series of preferred stock. The Company's
reincorporation has been reflected in the consolidated financial statements for
all periods presented.
On February 28, 2000, the Company issued 116,000 shares of the Company's
common stock in connection with a business acquisition. A shareholder/employee
of the acquired company received approximately 100,000 of the shares which vest
20% after one year and 1/60 each month thereafter provided the
shareholder/employee is an employee of the Company. The unvested shares are
subject to repurchase by the Company at $5.00 per share if the employee is
terminated. Under Emerging Issues Task Force No. 95-8, "Accounting for
Contingent Consideration Paid to Shareholders of an Acquired Enterprise in a
Purchase Business Combination," this arrangement is, in substance, compensation
for post-combination services rather than additional purchase price. The
$1,300,000 value of approximately 100,000 shares issued was recorded in deferred
compensation and is being amortized into expenses over the vesting period. The
purchase price of $208,000, which is the fair market value of the remaining
approximately 16,000 shares resulted in intangible assets. The acquisition was
accounted for under the purchase method.
On March 10, 2000, a former employee filed a lawsuit against the Company in
Santa Clara Superior Court alleging three causes of action for wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. The 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
filed a motion to dismiss two of the causes of action for breach of contract and
fraud. The Company plans to vigorously defend against these claims. The Company
has not accrued any liability related to this lawsuit.
In April 2000, the Company entered into an agreement to acquire a
manufacturing facility in Shenzhen, China. Pursuant to the agreement, the
Company purchased approximately 43% of the facility in Shenzhen for
approximately US$3.7 million and leased the remainder of the facility for a term
of five years from the 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.
In April 2000, the Company entered into negotiations for a senior term loan
facility with Credit Suisse First Boston, New York branch and paid a
nonrefundable arrangement fee of $125,000. The facility was to provide for a
maximum borrowing of $10,000,000. The loan facility was never completed.
F-22
<PAGE> 99
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
In April 2000 the Company granted options to purchase 811,475 shares of
common stock. The deferred stock compensation related to these option grants was
approximately $8,900,000.
In May 2000, the Company entered into a three-year supply agreement with
Fuzhou Koncent Communication, Inc. ("Koncent"), formerly Fuzhou Conet
Communication, Inc., to supply the Company with yttrium vanadate crystals. Under
the agreement, the Company will purchase a portion of its requirements for this
crystal from Koncent and Koncent will commit specified production capacity to
the manufacture of the Company's orders. Additionally, the Company agreed to
advance a total of U.S.$3,500,000 (of which $2,500,000 had been advanced as of
July 2, 2000) to Koncent against future orders.
13. SUBSEQUENT EVENTS (UNAUDITED)
For the three-month period ended July 2, 2000 the Company made full
recourse loans aggregating approximately $4,300,000 to certain employees in
connection with their purchase of shares of common stock. Each of these loans
were made pursuant to a full recourse promissory note secured by a stock pledge.
The notes bear no interest but interest will be imputed and reported annually as
compensation on the officer's W-2. All unvested shares purchased by officers are
subject to repurchase by the Company at the original exercise price if the
officer's employment is terminated. At July 2, 2000, $3,300,000 of this amount
is included in stockholders' equity and the remaining $1,000,000 has been
included in "Other Assets".
In May 2000, the Company granted options to purchase 1,185,625 shares of
common stock. The deferred stock compensation related to these option grants was
approximately $6,020,000.
In May 2000, the Company entered into a lease for an additional 130,000
square feet of space. Future minimum lease payments under the lease will be
approximately $25,000,000 over the seven year lease term. In addition, under the
terms of the lease, the Company will provide an irrevocable letter of credit for
$4,000,000 as collateral for the performance of the Company's obligations under
the lease. In connection with the lease, the Company issued a two-year warrant
to the lessor to purchase 30,000 shares of the Company's common stock with an
exercise price of $20.00 per share. The warrant is non-forfeitable and
immediately exercisable. The fair value of the warrant was determined using the
Black-Scholes method and the following assumptions: expected life 2 years,
exercise price $20.00, stock price on date of grant $20.00, expected dividend
yield of 0%, risk free interest rate of 6%, and expected volatility 0.8 to be
$279,000. This amount was capitalized and is being amortized over the life of
the lease.
F-23
<PAGE> 100
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