<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000
REGISTRATION NO. 333-31396
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW FOCUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA
(PRIOR TO REINCORPORATION)
DELAWARE 3674 33-0404910
(AFTER REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
2630 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051-0905
(408) 980-8088
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH E. WESTRICK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2630 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051-0905
(408) 980-8088
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
JUDITH M. O'BRIEN, ESQ. NORA L. GIBSON, ESQ.
ALISANDE M. ROZYNKO, ESQ. LAURA M. DE PETRA, ESQ.
MARGO M. EAKIN, ESQ. LORA D. BLUM, ESQ.
EDWARD F. VERMEER, ESQ. BROBECK PHLEGER & HARRISON LLP
WILSON SONSINI GOODRICH & ROSATI ONE MARKET, SPEAR STREET TOWER
PROFESSIONAL CORPORATION SAN FRANCISCO, CALIFORNIA 94105
650 PAGE MILL ROAD (415) 442-0900
PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE(1)(2) REGISTRATION FEE(3)
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par
value.................. 5,750,000 $16.00 $92,000,000 $24,288
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 750,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of Rule 457(a) of the Securities Act of
1933 solely for the purpose of computing the amount of the registration fee.
(3) $22,770 of the registration fee was paid in connection with the initial
filing on March 1, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 6, 2000
5,000,000
Shares
Newfocus Logo
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $14.00 and $16.00 per share. We applied to have our common stock quoted
on The Nasdaq Stock Market's National Market under the symbol "NUFO."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEW FOCUS
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total.......................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 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
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
[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"
<PAGE> 4
------------------
TABLE OF CONTENTS
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PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 18
USE OF PROCEEDS....................... 19
DIVIDEND POLICY....................... 19
CAPITALIZATION........................ 20
DILUTION.............................. 21
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 23
</TABLE>
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PAGE
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BUSINESS.............................. 31
MANAGEMENT............................ 45
CERTAIN TRANSACTIONS.................. 58
PRINCIPAL STOCKHOLDERS................ 61
DESCRIPTION OF CAPITAL STOCK.......... 63
SHARES ELIGIBLE FOR FUTURE SALE....... 65
UNDERWRITING.......................... 67
NOTICE TO CANADIAN RESIDENTS.......... 69
LEGAL MATTERS......................... 70
EXPERTS............................... 70
ADDITIONAL INFORMATION................ 70
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
------------------
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.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
<PAGE> 5
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 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 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 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.
3
<PAGE> 6
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 intend to
reincorporate in Delaware prior to the completion of this offering. 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.
4
<PAGE> 7
THE OFFERING
Common stock offered.................. 5,000,000 shares
Common stock to be outstanding after
this offering......................... 49,639,108 shares
Use of proceeds....................... General corporate purposes, including
working capital, capital
expenditures, and potential
acquisitions.
Proposed Nasdaq National Market
symbol................................ NUFO
The total number of outstanding shares of our common stock is as of
December 31, 1999, and excludes:
- 9,239,000 shares issuable upon exercise of outstanding stock options as
of December 31, 1999, with a weighted average exercise price of $0.41 per
share;
- 5,882,000 shares reserved for future issuance under our stock option,
executive option and employee stock purchase plans, including amounts
authorized for issuance subsequent to December 31, 1999; and
- 140,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $1.00 per share.
Except as otherwise indicated, information in this prospectus:
- reflects the 2-for-1 stock split of our common and preferred stock in
October 1999 and the 2-for-1 stock split of our common and preferred
stock in February 2000 (all share and per share amounts have been
restated to reflect the stock splits), see note 8 of notes to
consolidated financial statements regarding these stock splits;
- assumes the exercise of warrants to purchase 121,140 shares of common
stock at an exercise price of $1.20 per share prior to this offering;
- reflects the conversion of the 41,939,144 outstanding shares of our
preferred stock into 41,939,144 shares of common stock immediately prior
to the closing of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
5
<PAGE> 8
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.
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NINE-MONTH
PERIOD
FISCAL YEAR ENDED MARCH 31, ENDED
---------------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
------- ------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues.......................... $10,394 $10,543 $15,482 $17,285 $18,101
Cost of net revenues.................. 5,095 5,946 8,186 9,225 12,525
Gross profit.......................... 5,299 4,597 7,296 8,060 5,576
Operating income (loss)............... 678 (1,449) 27 (4,666) (7,594)
Net income (loss)..................... 457 (1,661) (286) (4,971) (7,677)
Historical net income (loss) per
share:
Basic(1)............................ $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Diluted(1).......................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Weighted average shares:
Basic(1)......................... 1,011 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Diluted(1)....................... 18,768 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted (1)............... $ (0.24)
=======
Weighted average shares(1).......... 32,223
=======
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DECEMBER 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $28,067 $ 96,662
Working capital........................................... 29,026 97,621
Total assets.............................................. 44,852 113,447
Long term debt, less current portion...................... 368 368
Total stockholders' equity................................ 35,013 103,608
</TABLE>
- -------------------------
(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 pro forma as adjusted amounts above give effect to the sale of shares of
common stock in this offering at an assumed initial public offering price of
$15.00 per share, less estimated underwriting discounts and commissions and
estimated offering expenses and the exercise of warrants to purchase 121,140
shares of common stock at an exercise price of $1.20 per share prior to the
offering.
6
<PAGE> 9
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 $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 December 31, 1999, we
had an accumulated deficit of $15.5 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 A DECLINE 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 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.
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.
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.
7
<PAGE> 10
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 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 our gross margins, our
financial position may be harmed and our stock price may decline.
RISKS RELATED TO OUR BUSINESS
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY NOT SUCCEED.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to expand the scope of our operations domestically and
internationally and have increased the number of our employees substantially
8
<PAGE> 11
in the past year. At March 31, 1999, we had a total of 144 employees and at
January 31, 2000, we had a total of 390 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 and Madison, Wisconsin and are in
the process of establishing additional manufacturing facilities in San Jose,
California, Middleton, Wisconsin and Shenzhen, China. The growth in employee
headcount and in revenue, combined with the challenges of managing
geographically-dispersed operations, has placed, and our anticipated growth in
future operations will continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures and 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.
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 those 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 E-Tek Dynamics,
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. 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 and broader product
offerings than we have. These companies can leverage their customer bases and
broader product offerings and adopt aggressive pricing policies to gain market
share. Additional competitors may enter the market, and we are likely to compete
with new companies in the future. We expect to encounter potential customers
that, due to existing relationships with our competitors, are committed to the
products offered by these competitors. As a result of the foregoing factors, we
expect that competitive pressures may result in price reductions, reduced
margins and loss of market share. 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 nine-month period ended December 31, 1999, we
derived more than 15% of our net revenues from our tunable laser module
products. 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.
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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 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.
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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.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the quarter ended December 31, 1999, 19% 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
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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;
- 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 could choose to engage
in currency hedging activities.
RISKS RELATED TO MANUFACTURING OUR PRODUCTS
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, California. We plan to devote significant
resources to expand our manufacturing capacity at this facility and initiate
manufacturing at our facilities in San Jose, California, Middleton, Wisconsin
and Shenzhen, China. 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 facility,
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. 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 PLANS TO BEGIN 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 we expect
to become operational in 2000. This facility 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. Our manufacturing
facility in Shenzhen, China is located in a premise, on land leased from China's
government by Shenzhen New and High-Tech Village Development Co. under land use
certificates and agreements with terms of 50 years. We lease our manufacturing
facility 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. Our assets and facility
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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
facility in Shenzhen, 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 also required to pay income tax in
China, subject to certain tax holidays. We can not assure you that we will not
become subject to other taxes in China or will not be required to pay customs
duties in the future. In the event that we are required to pay 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 no 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 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. Lead times vary significantly and depend on numerous factors,
including the specific supplier, the size of the order, contract terms and
market demand for 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 profitability.
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 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, the
world's only commercial supplier of this type of garnet crystal. In addition,
Conet is our sole supplier of critical components used in several of our
products. We typically purchase our components and materials through purchase
orders and we have no guaranteed supply arrangements with any of these
suppliers. We may fail to obtain these supplies in a timely manner in the
future. We may experience
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difficulty identifying alternative sources of supply for certain components used
in our products. We would experience further delays from evaluating and testing
the products of these potential alternative suppliers. Furthermore, financial or
other difficulties faced by these suppliers or significant changes in demand for
these components or materials could limit the availability. Any interruption or
delay in the supply of any of these components or materials, or the inability to
obtain these components and materials from alternate sources at acceptable
prices and within a reasonable amount of time, would impair our ability to meet
scheduled product deliveries to our customers and could cause customers to
cancel orders.
IF WE 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.
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. Our manufacturing costs are relatively fixed,
and, thus, manufacturing yields are critical to our results of operations. We
have experienced problems related to product yields in the past, which resulted
in delays of customer shipments and lost revenue. We may experience similar
problems in the future, which could result in lower than expected production
yields, delayed product shipments and impaired gross margins. In some cases,
existing manufacturing techniques involve substantial manual labor. In addition,
we may experience manufacturing delays and reduced manufacturing yields upon
introducing new products to our manufacturing lines. In order to maintain 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 OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.
Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to qualification of the manufacturing line
for volume production. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through varying levels of qualification with our
customers. Customers may require that we be registered under international
quality standards, such as ISO 9001. This customer qualification process
determines whether our manufacturing lines meet the customers' quality,
performance and reliability standards. If there are delays in qualification of
our products, our customers may drop the product from a long-term supply
program, which would result in significant lost revenue opportunity over the
term of that program.
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. 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."
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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.
Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., filed a
complaint against us in December 1999 in the United States District Court,
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 Kaifa's complaint and
joined one of our employees named in the complaint in filing another motion to
dismiss Kaifa's complaint. On the same date, certain of our employees named in
the complaint also filed a motion to dismiss Kaifa's complaint. These motions
are scheduled to be heard on May 5, 2000. For more information about current
legal proceedings, see "Business -- Legal Proceedings."
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We are currently
defending a claim alleging that we are violating a third party's intellectual
property rights. In the future, we may be a party to litigation to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us to
do one or more of the following:
- stop selling, incorporating or using our products that use the challenged
intellectual property;
- obtain from the owner of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available
on reasonable terms, or at all; or
- redesign the products that use the technology.
If we are forced to take any of these actions, our ability to manufacture
and sell our products may be seriously harmed. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to indemnify us for all liability that may be imposed.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and the
diversion of our technical and management personnel. 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, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could seriously harm our ability to manufacture and sell
our products.
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RESIDUAL YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES
AND COSTS AND AFFECT THE TIMING OF OUR REVENUES.
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000, as a leap year date
as a result of an exception to the calculation of leap years that will occur in
the year 2000 and otherwise occurs only once every 400 years. This problem could
result in miscalculations, data corruption, system failures or disruptions of
operations.
Because our components are used in connection with products designed and
manufactured by others, residual Year 2000 problems affecting these products
could cause our products to fail. If residual Year 2000 problems cause the
failure of any of the technology, software or systems used with our products, we
could lose customers, suffer significant disruptions in our business, lose
revenues and incur substantial liabilities and expenses. We could also become
involved in costly litigation resulting from Year 2000 problems. This could
seriously harm our business, financial condition and results of operations.
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 believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may be required, or could elect,
to seek additional funding prior to that time. The development and marketing of
new products and the expansion of our manufacturing facilities and associated
support personnel and our sales and marketing organizations will require a
significant commitment of resources. In addition, if the market for our products
develops at a slower pace than anticipated, or if we fail to establish
significant market share and achieve a meaningful level of revenue, we may
continue to incur significant operating losses and utilize significant amounts
of capital. If cash from available sources is insufficient, or if cash is used
for acquisitions or other unanticipated uses, we may need additional capital. In
the event we are required to raise additional funds, we may not be able to do so
on favorable terms, or at all. Further, if we issue new equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of
common stock. 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. Any inability to
raise additional capital when we require it would seriously harm our business.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND A PUBLIC MARKET FOR OUR
SECURITIES MAY NOT DEVELOP OR BE SUSTAINED, WHICH COULD CAUSE OUR STOCK PRICE TO
FALL BELOW THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade upon completion
of this offering. The initial public offering price will be determined based on
negotiations between us and the representatives of the underwriters, based on
factors that may not be indicative of future market performance.
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, 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,
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approximately 64.5% of our outstanding common stock. As a result, these
stockholders will be able 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 Law
and Certain Provisions of Our Certificate of Incorporation and Bylaws." 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 in the near future. 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.
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 INITIAL PUBLIC OFFERING PRICE.
This initial public 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 initial public offering
price. The market price of our common stock may fluctuate:
- changes in financial estimates by securities analysts;
- changes in market valuations of other optical networking companies;
- any deviations in net revenues or in losses from levels expected by
securities analysts; and
- future sales of common stock or other securities.
The stock market has experienced extreme volatility that has often been
unrelated to the performance of particular companies. These market fluctuations
may cause our stock price to fall regardless of our performance.
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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:
- anticipated development and release of new products;
- anticipated sources of future revenues;
- the expansion of our manufacturing capacity;
- 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 $68,450,000 from the
sale of the 5,000,000 shares of common stock or approximately $78,900,000 if the
underwriters' over-allotment option is exercised in full, at an assumed initial
public offering price of $15 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 working capital and capital expenditures. 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.
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 during
fiscal 2000.
19
<PAGE> 22
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1999:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of 41,939,144
shares of preferred stock into 41,939,144 shares of common stock
automatically upon completion of this offering; and
- on pro forma as adjusted basis to give effect to the sale of 5,000,000
shares of common stock at an assumed initial public offering price of
$15.00 per share (less underwriting discounts and commissions and
estimated offering expenses payable by us), the conversion of 41,939,144
shares of preferred stock into 41,939,144 shares of common stock
automatically upon completion of this offering and assumes the exercise
of warrants to purchase 121,140 shares of common stock at an exercise
price of $1.20 per share prior to this offering.
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>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion...................... $ 368 $ 368 $ 368
Stockholders' equity:
Preferred stock, $0.001 par value: 44,083,326
authorized, 41,939,144 issued and outstanding
(actual); 44,083,326 authorized, no shares issued and
outstanding (pro forma); 10,000,000 authorized, no
shares issued and outstanding (pro forma as
adjusted)............................................ 42 -- --
Common stock, $0.001 par value: 80,000,000 authorized,
2,578,824 issued and outstanding (actual); 80,000,000
authorized, 44,517,968 issued and outstanding (pro
forma); 250,000,000 authorized, 49,639,108 shares
issued and outstanding (pro forma as adjusted)....... 2 44 50
Additional paid-in capital................................ 51,168 51,168 119,757
Deferred compensation..................................... (689) (689) (689)
Accumulated deficit....................................... (15,510) (15,510) (15,510)
-------- -------- --------
Total stockholders' equity......................... 35,013 35,013 103,608
-------- -------- --------
Total capitalization............................... $ 35,381 $ 35,381 $103,976
======== ======== ========
</TABLE>
The total number of outstanding shares of our common stock is as of
December 31, 1999, and excludes:
- 9,239,000 shares issuable upon exercise of outstanding stock options as
of December 31, 1999, with a weighted average exercise price of $0.41 per
share;
- 5,882,000 shares reserved for future issuance under our stock option,
executive option and employee stock purchase plans, including amounts
authorized for issuance subsequent to December 31, 1999; and
- 140,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $1.00 per share.
20
<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma net tangible book value per share of common
stock after this offering. Our pro forma net tangible book value as of December
31, 1999, including proceeds of $145,000 from the assumed exercise of warrants
to purchase 121,140 shares of common stock prior to this offering, was
$35,082,000 or $0.79 per share of common stock. Pro forma 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 December 31, 1999, and the assumed conversion of 41,939,144
shares of preferred stock into 41,939,144 shares of common stock and the
issuance of 121,140 shares of common stock from the assumed exercise of warrants
prior to this offering. 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 5,000,000 shares of common stock offered hereby at an
assumed initial public offering price of $15.00 per share less underwriting
discounts and commissions and estimated offering expenses, our pro forma net
tangible book value as of December 31, 1999, would have been $103,532,000 or
approximately $2.09 per share. This represents an immediate increase in net
tangible book value of $1.31 per share to existing stockholders and an immediate
dilution in net tangible book value of $12.91 per share to new investors, or
approximately 86% of the assumed initial public offering price of $15.00 per
share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Pro forma net tangible book value per share at December
31, 1999............................................... $0.78
Increase in net tangible book value per share attributable
to this offering....................................... 1.31
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.09
------
Dilution in net tangible book value per share to new
investors................................................. $12.91
======
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, based on an assumed initial public offering price of $15.00 per share,
and the issuance of 121,140 shares of common stock from the assumed exercise of
warrants prior to this offering, as of December 31, 1999, 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....................... 44,639,108 89.9% $ 51,205,000 40.6% $ 1.15
New investors............................... 5,000,000 10.1 75,000,000 59.4 15.00
----------- ----- ------------ -----
Total..................................... 49,639,108 100.0% $126,205,000 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering and excludes the following:
- 9,239,000 shares issuable upon exercise of outstanding stock options as
of December 31, 1999, with a weighted average exercise price of $0.41 per
share;
- 5,882,000 shares reserved for issuance under our stock option plan,
executive option plan and employee stock purchase plan including amounts
authorized for issuance subsequent to December 31, 1999; and
- 140,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $1.00 per share.
New investors will suffer additional dilution upon exercise of outstanding
options. At December 31, 1999, assuming exercise and payment of all outstanding
options, net tangible book value per share would be $1.82 representing dilution
of $13.18 per share to new investors. See "Capitalization," "Management -- Stock
Plans," "Description of Capital Stock" and note 8 of notes to consolidated
financial statements for more information about dilution.
21
<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.
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
PERIOD
FISCAL YEAR ENDED MARCH 31, ENDED
------------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
------- ------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.......................................... $10,394 $10,543 $15,482 $17,285 $18,101
Cost of net revenues.................................. 5,095 5,946 8,186 9,225 12,525
------- ------- ------- ------- -------
Gross profit....................................... 5,299 4,597 7,296 8,060 5,576
Operating expenses:
Research and development........................... 1,724 3,115 3,721 7,379 7,352
Sales and marketing................................ 1,289 1,662 2,193 2,987 2,982
General and administrative......................... 1,608 1,269 1,355 2,360 2,704
Deferred compensation.............................. -- -- -- -- 132
------- ------- ------- ------- -------
Total operating expenses...................... 4,621 6,046 7,269 12,726 13,170
------- ------- ------- ------- -------
Operating income (loss)............................... 678 (1,449) 27 (4,666) (7,594)
Interest expense and other income, net................ (200) (210) (303) (303) (81)
------- ------- ------- ------- -------
Income (loss) before provision for income taxes....... 478 (1,659) (276) (4,969) (7,675)
Provision for income taxes............................ 21 2 10 2 2
------- ------- ------- ------- -------
Net income (loss)..................................... $ 457 $(1,661) $ (286) $(4,971) $(7,677)
======= ======= ======= ======= =======
Historical net income (loss) per share:
Basic.............................................. $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Diluted............................................ $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Weighted average shares:
Basic............................................ 1,011 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Diluted.......................................... 18,768 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted.................................. $ (0.24)
=======
Weighted average shares............................ 32,223
=======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
------ ------ ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 376 $ 250 $ 196 $ 51 $28,067
Working capital......................................... 2,066 616 (1,166) 479 29,026
Total assets............................................ 5,186 5,564 8,197 8,240 44,852
Long-term debt, less current portion.................... 60 129 79 588 368
Total stockholders' equity (net capital deficiency)..... 1,229 (431) (702) (1,183) 35,013
</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.
22
<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 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, 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.
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, 30.9% of international sales
were from telecom products and 69.1% 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. As we expand
our manufacturing capacity to meet demand and introduce new products, we expect
our cost of net revenues as a percentage of net revenues to increase in the near
term.
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 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
23
<PAGE> 26
and development projects. For fiscal years 1998 and 1999 and the nine-month
period ended December 31, 1999, we received an aggregate of $5.2 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 $4.5 million. Under the terms of these contracts, we were
reimbursed for substantially all of our costs incurred under the related
project. Research and development funding from corporate customers provided $0.7
million of which Agilent Technologies, accounted for $0.5 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 $821,000 through December 31, 1999,
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. In addition, we have
issued stock options and restricted stock during the first quarter of fiscal
2000 at prices below deemed fair market value, which will result in additional
$34.6 million of deferred compensation.
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.
24
<PAGE> 27
<TABLE>
<CAPTION>
NINE-MONTH
FISCAL YEAR ENDED FISCAL YEAR ENDED PERIOD ENDED
MARCH 31, MARCH 31, DECEMBER 31,
1998 1999 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues............................. 100.0% 100.0% 100.0%
Cost of net revenues..................... 52.9 53.4 69.2
----- ----- -----
Gross profit............................. 47.1 46.6 30.8
----- ----- -----
Operating expenses:
Research and development.............. 24.0 42.7 40.6
Sales and marketing................... 14.2 17.3 16.5
General and administrative............ 8.8 13.6 14.9
Deferred compensation................. -- -- 0.7
----- ----- -----
Total operating expenses......... 47.0 73.6 72.7
----- ----- -----
Operating income (loss).................. 0.1 (27.0) (41.9)
Interest expense and other income, net... (2.0) (1.8) (0.5)
----- ----- -----
Net loss................................. (1.9)% (28.8)% (42.4)%
===== ===== =====
</TABLE>
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 Margins
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 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 in payroll costs for additional
manufacturing personnel, higher materials costs for manufacturing prototyping,
and higher depreciation costs related to increased investment in plant and
equipment. As we introduce additional new products and expand our manufacturing
capacity to meet anticipated demand, we expect our gross margin to decrease in
the near term.
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 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.
25
<PAGE> 28
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 14.9% of net
revenues, 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.
Amortization of Deferred Compensation
We recorded amortization of deferred compensation of $132,000 during the
nine-month period ended December 31, 1999, leaving an unamortized balance of
$689,000 on our December 31, 1999 consolidated balance sheet. The amortization
expense relates to options awarded to employees in all operating expense
categories.
Interest Expense and Other Income, Net
Interest expense and other income, net totalled $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 aggregating to $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.
26
<PAGE> 29
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>
QUARTER ENDED
-----------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $3,918 $4,251 $ 4,375 $ 4,741 $ 4,581 $ 6,675 $ 6,845
Cost of net revenues...................... 2,097 2,181 2,347 2,600 2,821 4,367 5,337
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 1,821 2,070 2,028 2,141 1,760 2,308 1,508
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development................ 1,233 1,633 2,384 2,129 1,592 2,259 3,501
Sales and marketing..................... 683 732 698 874 926 930 1,126
General and administrative.............. 569 605 550 636 605 940 1,159
Deferred compensation................... -- -- -- -- 9 29 94
------ ------ ------- ------- ------- ------- -------
Total operating expenses.............. 2,485 2,970 3,632 3,639 3,132 4,158 5,880
------ ------ ------- ------- ------- ------- -------
Operating income (loss)................... (664) (900) (1,604) (1,498) (1,372) (1,850) (4,372)
Interest expense and other income, net.... (92) (70) (45) (96) (95) 33 (19)
------ ------ ------- ------- ------- ------- -------
Loss before provision for income taxes.... (756) (970) (1,649) (1,594) (1,467) (1,817) (4,391)
Provision for income taxes................ -- -- -- 2 -- -- 2
------ ------ ------- ------- ------- ------- -------
Net loss.................................. $ (765) $ (970) $(1,649) $(1,596) $(1,467) $(1,817) $(4,393)
====== ====== ======= ======= ======= ======= =======
Net loss per share........................ $(0.38) $(0.41) $ (0.69) $ (0.66) $ (0.61) $ (0.74) $ (1.74)
====== ====== ======= ======= ======= ======= =======
Shares used in computing net loss per
share................................... 1,990 2,354 2,396 2,406 2,419 2,455 2,530
====== ====== ======= ======= ======= ======= =======
STATEMENT OF OPERATIONS DATA:
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues...................... 53.5 51.3 53.6 54.8 61.6 65.4 78.0
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 46.5 48.7 46.4 45.2 38.4 34.6 22.0
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development................ 31.5 38.4 54.5 44.9 34.8 33.8 51.1
Sales and marketing..................... 17.4 17.2 16.0 18.4 20.2 13.9 16.4
General and administrative.............. 14.5 14.2 12.6 13.4 13.2 14.1 16.9
Deferred compensation................... -- -- -- -- 0.2 0.4 1.4
------ ------ ------- ------- ------- ------- -------
Total operating expenses.............. 63.4 69.8 83.1 76.7 68.4 62.2 85.8
------ ------ ------- ------- ------- ------- -------
Operating income (loss)................... (16.9) (21.1) (36.7) (31.5) (30.0) (27.6) (63.8)
Interest expense and other income, net.... (2.2) (1.7) (1.0) (2.1) (2.0) 0.4 (0.3)
------ ------ ------- ------- ------- ------- -------
Loss before provision for income taxes.... (19.3) (22.8) (37.7) (33.6) (32.2) (27.2) (64.1)
Provision for income taxes................ -- -- -- (0.1) -- -- (0.1)
------ ------ ------- ------- ------- ------- -------
Net loss.................................. (19.3)% (22.8)% (37.7)% (33.7)% (32.0)% (27.2)% (64.2)%
====== ====== ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 30
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
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 seven quarters ended December 31, 1999.
Net revenues increased in each of the previous seven quarters, with the
exception of a decrease in the quarter 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 two most recent quarters. Net revenues from
our telecom products were $449,500, or 9.8% of net revenues, for the quarter
ended June 30, 1999, $2.0 million, or 30.3% of net revenues, for the quarter
ended September 30, 1999, and $2.5 million, or 36.9% of net revenues, for the
quarter ended December 31, 1999. We expect quarterly revenues from our telecom
products to continue to increase. Sales of our commercial photonics products
have fluctuated between $3.9 million and $4.7 million over the last seven
quarters.
Gross margins as a percentage of net revenues decreased in each of the
previous seven quarters, with the exception of an increase in the quarter ended
September 30, 1998. There has been a significant decrease in gross margins
during the most recent three quarters, which is due principally to the expansion
of our manufacturing facilities and operations for our telecom products.
Manufacturing overhead spending for telecom products increased during each of
the three quarters from the quarter ended March 31, 1999, to the quarter ended
December 31, 1999, as we added manufacturing employees, expanded production
facilities and invested in additional manufacturing equipment. We expect the
gross margin percentage to continue to decrease in the near term as we continue
to transfer new products from development to manufacturing and expand our
manufacturing capacity.
Research and development expenses increased in each of the previous seven
quarters, with the exception of a decrease in the quarter ended March 31, 1999,
and the quarter 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 seven
quarters, with the exception of a small decrease in the quarter ended December
31, 1998. 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 seven
quarters, with the exception of the quarters ended December 31, 1998, and June
30, 1999. During the quarters ended September 30, 1999, and December 31, 1999,
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 includes 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
Since inception, 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
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<PAGE> 31
board of directors.
Our cash and cash equivalents increased from $51,000 as of March 31, 1999,
to $28.1 million as of December 31, 1999. The increase 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 cash used in
operations, the purchase of equipment and the net repayment of debt. Net working
capital increased by $1.6 million for fiscal 1999 and increased by $28.5 million
in the nine-month period ended December 31, 1999.
Cash used in operating activities was $583,000 in fiscal 1998, $3.9 million
in fiscal 1999 and $5.7 million in the nine-month period ended December 31,
1999. 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 investing activities was $379,000 in fiscal 1998, $1.4 million
in fiscal 1999 and $5.7 million in the nine-month period ended December 31,
1999. In all three periods cash was used to acquire property and equipment.
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. 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 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 $5.3 million of repayments of our bank lending
facilities and promissory notes.
We entered into an equipment loan facility with Western Technology
Investment for a maximum of $2,000,000, under which our right to borrow expired
on December 31, 1999. 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. Under the terms of this loan facility we are
restricted from paying cash dividends, until the time we have completed a
qualified initial public offering of not less than $20,000,000. At March 31,
1999, we had borrowed $800,000 under this facility of which $750,000 and
$598,000 was outstanding at March 31, 1999 and December 31, 1999, respectively.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and borrowings under our current credit facility,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next twelve months. If cash generated from
operations is insufficient to satisfy our long-term liquidity requirements,
additional financing will be necessary. In that event, we may seek to sell
additional equity or debt securities or to obtain additional credit facilities.
If additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the terms of any debt facility could impose restrictions on
our operations. The sale of additional equity or debt securities could result in
additional dilution to our stockholders, and additional financing may not be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and marketing efforts, which could harm our
business, financial condition and operating results.
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<PAGE> 32
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 December 31, 1999,
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.
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). 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.
YEAR 2000 ISSUES
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries. For example, programs
may fail to recognize February 29, 2000, as a leap year date as a result of an
exception to the calculation of leap years that will occur in the year 2000 and
otherwise occurs only once every 400 years. This problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
Any difficulties of this kind could result in a decrease in sales of our
products, an increase in allocation of resources to address Year 2000 problems
of our customers without additional revenue commensurate with the dedication of
these resources, or an increase in litigation costs relating to losses suffered
by our customers due to the Year 2000 problems.
Because our internal systems utilize third party hardware and software,
residual Year 2000 problems affecting third parties' hardware and software could
cause our internal systems to fail. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to use our
products or operate our business, we could lose customers, suffer significant
disruptions in our business, lose revenues and incur substantial liabilities and
expenses. We could also become involved in costly litigation resulting from Year
2000 problems. This could harm our business, financial condition and results of
operations.
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<PAGE> 33
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> 34
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. 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
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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 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
33
<PAGE> 36
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 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 great opportunities to collaborate
with these companies to provide the required products, solve implementation
problems and aid in the design of future systems architecture.
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<PAGE> 37
In addition, 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 manufacturing capacity and
improve process efficiency. We expect to commence operations in our Shenzhen,
China facility in 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 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 Shipping
(C-Band) - Low loss counts
- Longer reach
- ----------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Beta testing
(L-Band) - Low loss counts
- 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
35
<PAGE> 38
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 - Cost-effectiveness
cooling
- ----------------------------------------------------------------------------------------------
WDM Couplers - Low loss - Longer reach Beta testing
- Cost-effective - Cost-effectiveness
all-fiber product - 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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<PAGE> 40
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 Shipping
opto-mechanics fiber optic
manufacturing
- ----------------------------------------------------------------------------------------------
Picomotors - Precise positioning - Enables development of Shipping
next-generation
products
- ----------------------------------------------------------------------------------------------
Photodetectors - High speeds - Enables development of Shipping
high 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
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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<PAGE> 41
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.
The following is a list of our telecom product customers that represented
more than $500,000 of revenue in the twelve months ended March 31, 2000 and a
list of our commercial photonics product customers that represented more than
$150,000 of revenue in the twelve months ended March 31, 2000:
TELECOM PRODUCTS:
Agilent Technologies
Alcatel USA
Avanex Corporation
Corning Incorporated
Corvis Corporation
JDS Uniphase Corporation
COMMERCIAL PHOTONICS PRODUCTS:
Applied Laser Technology
BFI Optilas
Corning Incorporated
ERIM International
GSI Lumonics
INDECO
Jet Propulsion Laboratory
KLA-Tencor Corporation
Optima Research
Positive Light
Sandia National Laboratories
Schlumberger Technology Corporation
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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<PAGE> 42
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. To date, we have experienced a
great deal of success with our tunable laser modules as well as with the
development of advanced tunable laser products. 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.
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
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<PAGE> 43
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. Our manufacturing operations
are presently centered at our facility in Santa Clara, California. We are
currently establishing a facility in Shenzhen, China. In Middleton, Wisconsin,
we intend to install a pilot production facility, which we anticipate occupying
in the near term. We are also expanding our operations in California to a second
facility in San Jose.
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 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, and $8.4 million for the nine-month period ended
December 31, 1999.
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<PAGE> 44
COMPETITION
Competition in the optical networking market in which we provide products
is intense. We face competition from companies, including E-Tek Dynamics, 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. These companies 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
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 we
have been granted 25 U.S. patents and one European patent. We currently have 30
U.S. utility filings, of which four have been allowed by the U.S. Patent and
Trademark Office, 10 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
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<PAGE> 45
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 Kaifa Technology, Inc., which
was recently acquired by E-Tek Dynamics, Inc., alleging, among other things,
that we have infringed some of their intellectual property rights. We cannot
make any 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, 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. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.
EMPLOYEES
At January 31, 2000, we had a total of 390 employees located in both the
United States and the People's Republic of China. Of the total, 71 were in
research and development, 27 were engaged in sales and marketing, 292 were in
administration, finance and operations. 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 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.
Our manufacturing facility in Shenzhen, China is located in a premise on
land leased from China's government by a Shenzhen New and High-Tech Village
Development Co. under land use certificates and agreements with terms of 50
years. We lease our manufacturing facility from this company 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 our facility in Shenzhen, China is
approximately 20,000 square feet.
LEGAL PROCEEDINGS
On December 8, 1999, Kaifa Technology, Inc., or Kaifa, recently acquired by
E-Tek Dynamics, Inc., filed a complaint against us for patent infringement in
the United States District Court, Northern District of California. In addition
to maintaining its original claim of patent infringement against us, Kaifa has
asserted claims against us of intentional and negligent interference with
contract, trade secret misappropriation, unfair competition and breach of
contract. Kaifa is seeking a declaratory judgment, damages, injunctive relief
and attorneys' fees. Discovery has not begun and we intend to defend the action
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vigorously. On February 23, 2000, we filed a motion to dismiss Kaifa's complaint
and joined one of our employees named in the complaint in filing another motion
to dismiss Kaifa's complaint. On the same date, certain of our employees named
in the complaint also filed a motion to dismiss Kaifa's complaint. These motions
are scheduled to be heard on March 31, 2000. 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, Ajay Mody, filed a lawsuit against the Company in Santa
Clara Superior Court on March 10, 2000 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. Mr. Mody's claims stem from the
termination of his employment with us in February 2000. Mr. Mody seeks
unspecified general and special damages, punitive damages, attorneys' fees and
costs. We plan to file a demurrer to two of the causes of action and have
initiated our first round of discovery, as part of our plan to vigorously defend
against Mr. Mody's 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 March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth E. Westrick.................. 42 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
Paul G. Smith........................ 41 Vice President, General Manager, Telecom
Dr. Bao-Tong Ma...................... 50 Vice President, General Manager, New Focus Pacific Co.
Dr. Robert A. Marsland............... 35 Vice President, Focused Research, Inc.
George Yule.......................... 61 Vice President, Operations
Dr. Milton Chang(2).................. 57 Chairman of the Board of Directors
Charles Boppell...................... 57 Director
John Dexheimer....................... 45 Director
Dr. Winston S. Fu(1)................. 34 Director
R. Clark Harris(1)................... 62 Director
Robert D. Pavey(2)................... 57 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.
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.
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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 joined us in January 1998 as our Vice President, Operations.
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 IRIDEX Corporation, 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.
Charles Boppell has served as one of our directors since April 1990. Since
March 1999, Mr. Boppell has served as the President, Chief Executive Officer and
Director of Sizzler International, Inc., a restaurant operator and franchiser
corporation. From November 1993 to March 1999, Mr. Boppell served as the
President and Chief Executive Officer of La Salsa Holding Co., an operator of
restaurants throughout the United States. He serves on the boards of directors
of Sizzler International, Inc. and Fresh Choice Restaurants, Inc., as well as
chairman of the board of his alma mater, Whitworth College. Mr. Boppell holds a
B.A. in business and economics from Whitworth College.
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 an associate at 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
program at Northwestern University. 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.
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<PAGE> 49
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, a leading 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. Upon
completion of this offering, our certificate of incorporation will provide 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 Law and Certain
Provisions of Our Certificate of incorporation and Bylaws."
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 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. Chang 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 the compensation committee
is currently, or has ever been at any time since our formation, one of our
officers or employees. 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.
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."
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<PAGE> 50
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, Operations
Paul Smith....................... $133,693(3) $22,917 -- -- -- --
Vice President, General
Manager, Telecom
Laurie Conner(4)................. $119,231(5) $ -- -- -- -- --
Dr. Timothy Day.................. $111,623(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 $227,093.69.
(2) George Yule's annual compensation for the twelve months ended December 31,
1999, was $182,055.53.
(3) Paul Smith's annual compensation for the twelve months ended December 31,
1999, was $192,758.16.
(4) Laurie Conner's employment relationship with us terminated on February 15,
2000. Under the severance package accepted by Laurie Conner, Ms. Conner
continued to receive salary until February 15, 2000.
(5) Laurie Conner's annual compensation for the twelve months ended December
31, 1999, was $144,224.72.
(6) Dr. Day's annual compensation for the twelve months ended December 31,
1999, was $163,173.71.
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
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<PAGE> 51
unexercised in-the-money options is based on an assumed initial offering price
of $15.00 per share 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 12,114,593 16,960,407
George Yule........................... 103,334 196,666 1,493,676 2,841,324
Paul G. Smith......................... 133,334 266,666 1,916,676 3,833,324
Laurie Conner......................... 85,000 215,000 1,221,875 3,090,625
Dr. Timothy Day....................... 527,334 162,666 7,845,164 2,352,336
</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 to be filed upon
completion of this offering 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.
We are entering 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.
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<PAGE> 52
STOCK PLANS
1990 Incentive Stock Option Plan
Our 1990 Incentive Stock Option 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 1990 Incentive Stock Option Plan was adopted by
our board of directors and approved by our stockholders in July 1990 and amended
on May 4, 1998.
We have reserved an aggregate of 9,900,000 shares of our common stock for
issuance under this plan. As of January 31, 2000, 6,151,312 shares had been
issued pursuant to the exercise of options, options to purchase 3,703,504 shares
of common stock were outstanding and 45,184 shares were available for future
grant.
Administration. Our board of directors or a committee of our board of
directors administers the 1990 Incentive Stock Option Plan. The administrator of
our 1990 Incentive Stock Option 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 1990 Incentive Stock Option 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 1990
Incentive Stock Option 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 1990 Incentive Stock Option Plan may not exceed 10
years.
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.
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 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
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<PAGE> 53
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.
Amendment and Termination of the 1990 Incentive Stock Option Plan. The
board will have the authority to amend, suspend or terminate the 1990 Incentive
Stock Option 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 1990
Incentive Stock Option Plan.
The 1990 Incentive Stock Option Plan expires in July 2000. We will not
grant any additional stock options under our 1990 Incentive Stock Option Plan
following the completion of this offering. Any shares reserved for issuance
under the 1990 Incentive Stock Option and any shares returned to the plan shall
be reserved for issuance under the 2000 Stock Plan following the completion of
this offering.
1998 Stock Plan
Our 1998 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 1998 Stock Plan was adopted by our board of directors and
approved by our stockholders in June 1999.
We have reserved an aggregate of 800,000 shares of our common stock for
issuance under this plan. As of January 31, 2000, 4000 shares had been issued
pursuant to the exercise of options, options to purchase 359,600 shares of
common stock were outstanding and 436,400 shares were available for future
grant.
Administration. Our board of directors or a committee of our board of
directors administers the 1998 Stock Plan. The administrator of our 1998 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 1998 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 1998 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 1998
Stock Plan may not exceed 10 years.
Options granted under the 1998 Stock Plan must generally be exercised
within 90 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.
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<PAGE> 54
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 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 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.
Amendment and Termination of the 1998 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 1998 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 1998 Stock Plan.
We will not grant any additional stock options under our 1998 Stock Plan
following the completion of this offering. Any shares reserved for issuance
under the 1998 Stock Plan and any shares returned to the plan shall be reserved
for issuance under the 2000 Stock Plan following the completion of this
offering.
1999 Stock Plan
Our 1999 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 1999 Stock Plan was adopted by our board of directors and
approved by our stockholders in February 2000.
We have reserved an aggregate of 5,400,000 shares of our common stock for
issuance under this plan. As of January 31, 2000, 1,200,000 shares had been
issued pursuant to the exercise of options and stock purchase rights, options to
purchase 829,200 shares of common stock were outstanding and 3,370,800 shares
were available for future grant.
Administration. Our board of directors or a committee of our board of
directors administers the 1999 Stock Plan. The administrator of our 1999 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 1999 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 1999 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 1999
Stock Plan may not exceed 10 years.
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<PAGE> 55
Options granted under the 1999 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 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.
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 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.
Amendment and Termination of the 1999 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 1999 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 1999 Stock Plan.
We will not grant any additional stock options under our 1999 Stock Plan
following the completion of this offering. Any shares reserved for issuance
under the 1999 Stock Plan and any shares returned to the 1999 Stock Plan shall
be reserved for issuance under the 2000 Stock Plan following the completion of
this 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 and
approved by our stockholders in July 1990. All options granted under this plan
have been for nonstatutory stock options.
As of February 25, 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.
No options have yet been issued pursuant to the 2000 Stock Plan. 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 of a lesser amount as our board of directors
may determine.
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;
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<PAGE> 56
- 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. 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
and approved by our stockholders in January 2000. A total of 1,000,000 shares of
our common stock has been reserved for
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<PAGE> 57
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 the date of this prospectus, no shares have been
issued under the 2000 Employee Stock Purchase 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 commences 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, 2001.
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 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
Non-employee directors are entitled to participate in our 2000 Director
Option Plan. The 2000 Director Option Plan was adopted by our board of directors
and approved by our stockholders in April 2000, but it will not become effective
until the date of this offering. The 2000 Director Option Plan has a
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<PAGE> 58
term of 10 years, unless terminated sooner by our board of directors. A total of
200,000 shares of our common stock have been reserved for issuance under the
2000 Director Option Plan.
Option Grants. The 2000 Director Option Plan generally provides for an
automatic initial grant of an option to purchase 5,000 shares of our common
stock to each non-employee director on the date which the later of the following
events occur:
- the effective date of the 2000 Director Option Plan; or
- the date when a person first becomes a non-employee director.
After the initial grant, each non-employee director will automatically be
granted subsequent options to purchase 40,000 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/or (b) have at 1,000 hours of service credited as of their
anniversary hire date with us and for every plan year thereafter. 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
United States tax 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 United States tax code, our
contributions will be deductible by us when made. Our employees may elect to
reduce their current 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.
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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.
Bao-Tong Ma. In October 1999, Bao-Tong Ma accepted our offer of employment.
The terms of Mr. Ma's employment provide that if we terminate his employment
without cause prior to the first anniversary of employment, Mr. Ma would receive
his salary until the earlier of 24 months or new employment. Mr. Ma's stock
options would cease to vest upon termination. If Mr. Ma's employment is
terminated after the first anniversary of employment, but prior to the second
anniversary, Mr. Ma would continue to receive his salary for 12 months. If Mr.
Ma's employment is terminated after the second anniversary, but prior to the
third anniversary, Mr. Ma would receive his salary six months. If Mr. Ma's
employment is terminated following the third anniversary of employment, he will
not receive any severance.
Charles Boppell. In January 1998, we entered into a change of control
agreement with Charles Boppell under which any unvested non-statutory stock
options granted to Mr. Boppell on July 29, 1990, March 1, 1992 and January 17,
1996, each vesting over five years at the rate of one-fifth after the first year
and one-sixtieth per month thereafter, will vest immediately upon a change of
control.
In January 2000, we amended our stock option agreements with Kenneth E.
Westrick, George Yule, Paul Smith 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.
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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 Operations 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 an associate.
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 an associate.
LOANS FROM SHAREHOLDER
From April 1991 to September 1997, Dr. Milton Chang loaned us a total of
$1,600,000. 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
(30) 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.
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 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 at $.462 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 Smith, our Vice President,
General Manager, Telecom, secured by a stock pledge, in connection with the
purchase of 600,000 shares of our common stock at $.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 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 at $.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,
Vice President, Operations, secured by a stock pledge, in connection with the
purchase of 100,000 shares of our common stock at $.625 and 200,000 shares of
our common stock at $.512 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 Rob Marsland, our Vice
President, Focused Research secured by a stock pledge, in connection with the
purchase of 70,000 shares of our common stock at $.625 per share and 400,000
shares of our common stock at $.0025 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 Timothy Day, our Chief
Technology Officer and Vice President, Operations, Telecom, secured by a stock
pledge, in connection with the purchase of 400,000 shares of our common stock at
$.0025 per share, 100,000 shares of our common stock at $.462 per share, 120,000
shares of our common stock at $.512 per share and 70,000 shares of our common
stock at $.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.
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<PAGE> 62
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 sale of 300,000 shares of our common stock 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.
On February 9, 2000 we loaned $125,000 to Paul G. Smith, our Vice
President, General Manager, Telecom, secured by a stock pledge, in connection
with the sale of 100,000 shares of our common stock 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.
On February 9, 2000 we loaned $125,000 to Dr. Robert A. Marsland, our Vice
President, secured by a stock pledge, in connection with the sale of 100,000
shares of our common stock 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.
On February 9, 2000 we loaned $375,000 to Dr. Timothy Day, our Chief
Technical Officer and Vice President Engineering, Telecom, secured by a stock
pledge, in connection with the sale of 300,000 shares of our common stock 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 $80,539, $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 warrants to
purchase 111,972 shares of Series E Preferred Stock at an exercise price of
$1.20 per share and a cash payment of $618,731.
INDEMNIFICATION
We will enter into indemnification agreements with each of our directors
and officers. These indemnification agreements will 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 "Limitation 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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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of January 31, 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 executive officers named in the compensation table above;
- each of our directors; and
- all directors and executive officers as a group.
As of January 31, 2000, there were 51,015,596 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock and the exercise of warrants to purchase 121,140 shares of
common stock. 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 January 31, 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)................................... 2,297,334 4.5% 4.1%
Timothy Day(2)........................................... 810,000 1.6 1.4
Robert A. Marsland(3).................................... 670,000 1.3 1.1
Paul Smith(4)............................................ 600,000 1.2 1.1
George Yule(5)........................................... 344,000 * *
Charles Boppell(6)....................................... 170,800 * *
Dr. Milton Chang(7)...................................... 13,101,456 25.7 23.4
John Dexheimer(8)........................................ 147,666 * *
Dr. Winston S. Fu(9)..................................... 6,384,614 12.5 11.4
R. Clark Harris(10)...................................... 57,334 * *
Robert Pavey(11)......................................... 6,384,614 12.5 11.4
All directors and officers as a group (12 persons)(12)... 31,564,742 60.4 56.3
5% STOCKHOLDERS
Chang Partners, A California Limited Partnership......... 8,000,000 15.7 14.3
Morgenthaler Venture Partners V, L.P..................... 6,384,614 12.5 11.4
U.S. Venture Partners(9)................................. 6,384,614 12.5 11.4
London Pacific Life & Annuity Company.................... 4,615,386 9.0 8.2
</TABLE>
- ------------------------
* Denotes less than one percent of the outstanding stock.
(1) Includes 1,133,332 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 157,834 shares subject to our right of repurchase, which lapses
over time.
(3) Includes 52,500 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 460,000 shares subject to our right of repurchase, which lapses
over time.
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<PAGE> 64
(5) Includes 95,834 shares subject to our right of repurchase, which lapses
over time.
(6) Includes 142,000 shares subject to options, which are exercisable within 60
days of January 31, 2000.
(7) Includes 8,000,000 shares held by Chang Partners, a California limited
partnership, of which Mr. Chang is a general partner.
(8) Includes 22,666 shares subject to an option, which is exercisable within 60
days of January 31, 2000.
(9) Includes 6,287,690 shares held by U.S. Venture Partners VI, L.P., 40,154
shares held by USVP VI Entrepreneurs Partners, L.P., 36,000 shares held by
USVP VI Affiliates Fund, L.P. and 20,770 shares held by 2180 Associates
Fund VI, L.P. Mr. Fu is an associate of U.S. Venture Partners. Mr. Fu
disclaims beneficial ownership of shares held by this entity, except to the
extent of his pecuniary interest in these entities.
(10) Includes 17,334 shares subject to an option exercisable within 60 days of
January 31, 2000.
(11) Includes 6,384,614 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 these entities.
(12) Includes an aggregate of 182,000 shares subject to options exercisable
within 60 days of January 31, 2000 and 1,899,500 shares subject to our
right of repurchase, which lapses over time.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
260,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
250,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be 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 included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
COMMON STOCK
As of January 31, 2000, and assuming the conversion of all outstanding
shares of preferred stock into common stock and the exercise of warrants to
purchase 121,140 shares of common stock, there were 51,015,596 shares of common
stock outstanding which were held of record by approximately 183 stockholders.
There will be 56,015,596 shares of common stock outstanding (assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options after January 31, 1999) after giving effect to the sale of
our common stock in this offering. In addition to 4,900,304 shares issuable upon
exercise of outstanding options under our 1990 Incentive Stock Option Plan, 1998
Stock Plan and 1999 Stock Plan, as of January 31, 2000, there are an aggregate
of 2,200,000 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 to be filed concurrently with completion
of this offering 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 filed in connection with this offering
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 (36,681,038 shares assuming conversion of all
outstanding shares of preferred stock), the holders of these shares are entitled
to certain registration rights regarding these shares. The registration rights
provide
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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
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 Action in any 90-day period.
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.
Section 203
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Equiserve LP.
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "NUFO."
64
<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
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 no
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public 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 56,015,596 shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock and the exercise of warrants to purchase 121,140
shares of common stock) based on shares outstanding as of January 31, 2000, and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. All of the 5,000,000 shares sold in this offering will
be freely transferable without restriction 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.
The remaining 51,015,596 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as other stockholders and optionholders have
entered into "lock-up agreements" with the underwriters. These lock-up
agreements provide that, except under limited exceptions, the stockholder or
optionholder 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 for a period of 180
days after the date of this prospectus. 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. Accordingly, of the remaining 51,015,596
shares, 41,663,728 shares will become eligible for sale 180 days after the
effective date subject to Rules 144 and 701.
As of January 31, 2000, there were a total of 4,900,304 shares of common
stock subject to outstanding options under our 1990 Incentive Stock Option Plan,
1998 Stock Plan and our 1999 Stock Plan, 1,461,836 of which were vested, and all
of which are subject to lock-up agreements. Immediately after the completion of
the offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or reserved
for future issuance under our 1998 Stock Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Director Option Plan. On the date 180 days after the effective
date of the offering, the date that the lock-up agreements expire, a total of
2,277,812 shares of our common stock subject to outstanding options will be
vested. After the effective dates of the registration statements on Form S-8,
shares purchased upon exercise of options granted pursuant to our 1998 Stock
Plan, our 1990 Incentive Stock Option Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Director Option Plan generally would be available for resale
in the public market.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, 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 shares immediately after this offering; or
65
<PAGE> 68
- 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.
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 90 days after
the effective date of this offering 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 the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, 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.
66
<PAGE> 69
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Chase Securities
Inc., Dain Rauscher Incorporated and U.S. Bancorp Piper Jaffray 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......................
Chase Securities Inc........................................
Dain Rauscher Incorporated..................................
U.S. Bancorp Piper Jaffray Inc..............................
--------
Total.............................................
========
</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 750,000 additional shares at the initial public 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 public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial 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................... $ $ $ $
Expenses payable by us..................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
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 our dividend reinvestment plan.
Our officers and directors and 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
67
<PAGE> 70
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 for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to 250,000 shares of the common stock for employees, directors and
certain of our customers and vendors who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
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.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NUFO".
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- 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.
- 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.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. 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.
68
<PAGE> 71
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.
69
<PAGE> 72
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, San Francisco, 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.
70
<PAGE> 73
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> 74
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
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, shareholders' 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.
ERNST & YOUNG LLP
San Jose, California
February 25, 2000, except as to Note 12,
as to which the date is April , 2000
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the Company's reincorporation in the state of Delaware.
/s/ ERNST & YOUNG LLP
San Jose, California
April 5, 2000
F-2
<PAGE> 75
NEW FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1999 1999
--------- ------------ --------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 51 $ 28,067
Accounts receivable, less allowance for doubtful accounts
of $135 at March 31, 1999 and $160 at December 31,
1999................................................... 2,064 3,102
Unbilled receivables...................................... 192 121
Inventories............................................... 3,654 6,217
Prepaid expenses and other current assets................. 141 243
------- --------
Total current assets................................. 6,102 37,750
Fixed assets, net........................................... 1,880 6,895
Other assets, net of accumulated amortization of $29 at
March 31, 1999 and $56 at December 31, 1999............... 258 207
------- --------
Total assets......................................... $ 8,240 $ 44,852
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Loans payable to bank..................................... $ 1,755 $ --
Accounts payable.......................................... 1,788 5,658
Accrued expenses.......................................... 1,567 2,540
Deferred research and development funding................. 250 250
Current portion of long-term debt......................... 263 276
------- --------
Total current liabilities............................ 5,623 8,724
Notes payable to stockholder/director....................... 2,305 --
Accrued interest to stockholder/director.................... 117 --
Long-term debt, less current portion........................ 588 368
Deferred rent............................................... 790 747
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Series A through G convertible preferred stock, $0.001 par
value:
Authorized shares -- 44,083,326
Issued and outstanding shares -- 20,737,000 at March
31, 1999 and 41,939,144 at December 31, 1999
(liquidation preference of $99,340 at December 31,
1999)................................................ 21 42 $ --
Common stock, $0.001 par value:
Authorized shares -- 80,000,000
Issued and outstanding shares -- 2,410,380 at March 31,
1999 and 2,578,824 at December 31, 1999, and
44,517,968 pro forma................................. 2 2 44
Additional paid-in capital................................ 6,627 51,168 51,168
Deferred compensation..................................... -- (689) (689)
Accumulated deficit....................................... (7,833) (15,510) (15,510)
------- -------- --------
Total stockholders' equity (net capital
deficiency)....................................... (1,183) 35,013 $ 35,013
------- -------- ========
Total liabilities and stockholders' equity (net
capital deficiency)............................... $ 8,240 $ 44,852
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 76
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------- ------------
1998 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Net revenues............................................... $15,482 $17,285 $18,101
Cost of net revenues(1).................................... 8,186 9,225 12,525
------- ------- -------
Gross profit............................................... 7,296 8,060 5,576
Operating expenses:
Research and development(2).............................. 6,188 9,115 8,386
Less funding received from research and development
contracts............................................. (2,467) (1,736) (1,034)
------- ------- -------
Net research and development............................. 3,721 7,379 7,352
Sales and marketing(3)................................... 2,193 2,987 2,982
General and administrative(4)............................ 1,355 2,360 2,704
Deferred compensation.................................... -- -- 132
------- ------- -------
Total operating expenses.............................. 7,269 12,726 13,170
------- ------- -------
Operating income (loss).................................... 27 (4,666) (7,594)
Interest expense........................................... (328) (327) (176)
Other income, net.......................................... 25 24 95
------- ------- -------
Loss before provision for income taxes..................... (276) (4,969) (7,675)
Provision for income taxes................................. 10 2 2
------- ------- -------
Net loss.............................................. $ (286) $(4,971) $(7,677)
======= ======= =======
Historical basic and diluted net loss per share............ $ (0.25) $ (2.18) $ (3.11)
======= ======= =======
Shares used to compute historical basic and diluted net
loss per share........................................... 1,148 2,284 2,468
======= ======= =======
Pro forma basic and diluted net loss per share............. $ (0.24)
=======
Shares used to compute pro forma basic and diluted net loss
per share................................................ 32,223
=======
</TABLE>
- -------------------------
(1) Excluding $62 in amortization of deferred stock based compensation
(2) Excluding $54 in amortization of deferred stock based compensation
(3) Excluding $10 in amortization of deferred stock based compensation
(4) Excluding $6 in amortization of deferred stock based compensation
See accompanying notes.
F-4
<PAGE> 77
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------ --------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997.......... 16,160,000 $16 1,127,180 $1 $ 2,128 $ -- $ (2,576) $ (431)
Issuance of common stock from
exercise of options............ -- -- 157,716 -- 16 -- -- 16
Repurchase of common stock....... -- -- (8,996) -- (1) -- -- (1)
Net loss......................... -- -- -- -- -- -- (286) (286)
---------- --- --------- -- ------- ----- -------- -------
Balance at March 31, 1998.......... 16,160,000 16 1,275,900 1 2,143 -- (2,862) (702)
Issuance of Series C preferred
stock, net of issuance cost of
$16............................ 600,000 1 -- -- 493 -- -- 494
Issuance of Series D preferred
stock, net of issuance cost of
$54............................ 3,977,000 4 -- -- 3,919 -- -- 3,923
Issuance of common stock from
exercise of options............ -- -- 1,443,444 1 187 -- -- 188
Repurchase of common stock....... -- -- (308,964) -- (193) -- -- (193)
Warrant issued to long-term
creditor....................... -- -- -- -- 78 -- -- 78
Net loss......................... -- -- -- -- -- -- (4,971) (4,971)
---------- --- --------- -- ------- ----- -------- -------
Balance at March 31, 1999.......... 20,737,000 21 2,410,380 2 6,627 -- (7,833) (1,183)
Issuance of Series E preferred
stock, net of issuance cost of
$489........................... 10,857,616 11 -- -- 12,526 -- -- 12,537
Issuance of Series F preferred
stock, net of issuance cost of
$28............................ 1,113,800 1 -- -- 1,307 -- -- 1,308
Issuance of Series G preferred
stock, net of issuance cost of
$160........................... 9,230,728 9 -- -- 29,832 -- -- 29,841
Issuance of common stock from
exercise of options............ -- -- 168,444 -- 55 -- -- 55
Deferred compensation............ -- -- -- -- 821 (821) -- --
Amortization of deferred
compensation................... -- -- -- -- -- 132 -- 132
Net loss......................... -- -- -- -- -- -- (7,677) (7,677)
---------- --- --------- -- ------- ----- -------- -------
Balance at December 31, 1999....... 41,939,144 $42 2,578,824 $2 $51,168 $(689) $(15,510) $35,013
========== === ========= == ======= ===== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 78
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED
---------------------- DECEMBER 31,
1998 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $ (286) $(4,971) $(7,677)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of fixed assets............................. 475 588 756
Amortization of intangibles.............................. 41 10 27
Amortization of deferred compensation.................... -- -- 132
Deferred rent............................................ 184 -- (43)
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables.......... (1,231) 372 (967)
Inventories........................................... (1,515) 184 (2,563)
Prepaid expenses and other current assets............. (78) 93 (102)
Accounts payable...................................... 1,137 (884) 3,870
Accrued expenses and accrued interest to
stockholder......................................... 440 697 856
Deferred research and development funding............. 250 -- --
------- ------- -------
Net cash used in operating activities...................... (583) (3,911) (5,711)
INVESTING ACTIVITIES
Acquisition of property and equipment...................... (396) (1,359) (5,771)
Decrease in other assets................................... 17 2 24
------- ------- -------
Net cash used in investing activities...................... (379) (1,357) (5,747)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders................ 400 200 --
Proceeds from bank loans................................... 1,395 1,755 1,245
Proceeds from issuance of preferred stock.................. -- 4,217 43,686
Proceeds from equipment loan............................... -- 800 --
Proceeds from capital lease obligations.................... -- 35 --
Payments on notes payable.................................. (19) (21) (2,305)
Payments on bank loan...................................... (828) (1,772) (3,000)
Payments on equipment loan................................. -- (50) (195)
Payments under capital lease obligations................... (55) (36) (12)
Proceeds from exercise of stock options.................... 16 188 55
Repurchase of common stock................................. (1) (193) --
------- ------- -------
Net cash provided by financing activities.................. 908 5,123 39,474
------- ------- -------
Increase (decrease) in cash................................ (54) (145) 28,016
Cash at beginning of period................................ 250 196 51
------- ------- -------
Cash at end of period...................................... $ 196 $ 51 $28,067
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 174 $ 155 $ 188
Promissory note payable converted to equity................ $ -- $ 200 $ --
Interest on note converted to principal.................... $ -- $ 680 $ --
Warrant issued to long-term creditor....................... $ -- $ 78 $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 79
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
New Focus, Inc. (the Company) was incorporated in California on April 17,
1990. 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 subsidiary, Focused Research, Inc. All intercompany transactions and
balances have been eliminated.
During 1999, the Company changed its year end to December 31, 1999 from
March 31, 2000.
Cash Equivalents
Cash equivalents consist of a money market fund. For purposes of the
accompanying statements of cash flows, the Company considers all such 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
and December 31, 1999.
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,
1999 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials........................................ $1,994 $3,247
Work in Progress..................................... 372 1,283
Finished Goods....................................... 1,288 1,687
------ ------
Total................................................ $3,654 $6,217
====== ======
</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. 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.
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.
F-7
<PAGE> 80
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and for the nine-month
period ended December 31, 1999 were approximately $316,000, $342,000, and
$256,967, 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 1998 and 1999, and the nine-month period
ended December 31, 1999 were $6,188,000, $9,115,000, and $8,386,000,
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, and $1,034,000 for the fiscal years ended March 31,
1998 and 1999, and for the nine-month period ended December 31, 1999,
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.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by the Company is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 41,939,144 shares of common stock based on the
shares of convertible preferred stock outstanding at December 31, 1999. The
unaudited pro forma stockholders' equity reflects this conversion.
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 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 and the nine months ended December 31, 1999.
F-8
<PAGE> 81
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
2. CONCENTRATION OF CREDIT RISK
The Company sells to a large number of companies and research laboratories
involved in the application of laser technology. 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 all money market funds are invested
in a single fund.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Manufacturing and development equipment..................... $ 2,250 $ 6,404
Computer software and equipment............................. 1,282 1,787
Office equipment............................................ 166 259
Leasehold improvements...................................... 213 1,120
Construction in Progress.................................... -- 91
------- -------
3,911 9,661
Less accumulated depreciation and amortization.............. (2,031) (2,766)
------- -------
$ 1,880 $ 6,895
======= =======
</TABLE>
4. DEBT
Note payable to stockholder/director
The Company had unsecured promissory notes payable to Dr. Milton Chang, one
of our founders and a member of our board of directors. On July 21, 1998, the
principal and interest outstanding was rolled over in 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 outstanding
during the nine-month period ended December 31, 1999.
F-9
<PAGE> 82
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, which 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. Under the terms of this agreement the Company
is restricted from paying cash dividends, until the time it has completed a
qualified initial public offering of not less than $20,000,000. At March 31,
1999, the Company had borrowed $800,000 under this loan facility of which
$750,000 and $598,000 was outstanding at March 31, 1999 and December 31, 1999,
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 throughout fiscal 2007.
Net rental expense for these leases aggregated $444,000, $440,000, and $383,000
for the fiscal years ended March 31, 1998 and 1999, and the nine-month period
ended December 31, 1999, respectively. These amounts are net of $230,000,
$255,000, and $91,000 of sublease income for the fiscal years ended March 31,
1998 and 1999, and the nine-month period ended December 31, 1999.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
(IN THOUSANDS)
<S> <C>
2000.......................................... $ 1,405
2001.......................................... 1,964
2002.......................................... 2,016
2003.......................................... 2,061
2004.......................................... 2,132
Thereafter.................................... 3,340
-------
Total minimum payments........................ $12,918
=======
</TABLE>
F-10
<PAGE> 83
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Litigation
On December 8, 1999, Kaifa Technology, Inc., recently acquired by E-Tek
Dynamics, Inc., filed a complaint against the Company for patent infringement in
the United States District Court, Northern District of California. In addition
to maintaining its original claim of patent infringement against the Company,
Kaifa has asserted claims against the Company of intentional and negligent
interference with contract, trade secret misappropriation, unfair competition
and breach of contract. Kaifa is seeking a declaratory judgment, damages,
injunctive relief and attorney's fees. On February 23, 2000, the Company filed a
motion to dismiss Kaifa's complaint and joined one of their employees named in
the complaint in filing another motion to dismiss Kaifa's complaint. On the same
date, certain of the employees named in the complaint also filed a motion to
dismiss Kaifa's complaint. These motions are scheduled to be heard on May 5,
2000. 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 fiscal year ended December 31, 1999, respectively.
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>
F-11
<PAGE> 84
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $3,078,000 during the nine-month
period ended December 31, 1999, and $2,016,000 for the period ended March 31,
1999. 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.
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.
F-12
<PAGE> 85
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock
Preferred stock consists of the following:
<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>
All preferred stock series are convertible into common stock at the option
of the stockholder on a one-for-one basis subject to antidilution adjustments.
Conversion is mandatory concurrent with a qualified initial public offering of
not less than $15,000,000 and a per share price of not less than $3.75. Such
conversion can occur for Series A, B and C convertible preferred stock upon the
consent of the holders of a majority of the then outstanding shares of
convertible preferred stock voting as a single class. Such conversion can occur
for Series D, E, F and G convertible preferred stock upon the consent of the
holders of a majority of the then outstanding shares of Series D, E, F and G
convertible preferred stock voting as a single class. The preferred stockholders
have voting rights equal to the voting rights of the common stockholders on an
as-if-converted basis.
The Series D, E, F, and G preferred stockholders are entitled to dividends,
prior and in preference to any other dividends payable, at the rate of $0.08,
$0.095, $0.095, and $0.26 per share, respectively. The dividends are
noncumulative until and unless the Company has not closed a qualified initial
public offering or the Series D, E, F, and G preferred stock has not been
converted into common stock by December 31, 2000. In this respect, the dividends
will begin to accumulate beginning January 1, 2002 at the same dividend rate and
will be due and payable quarterly in arrears. After payment of dividends to
Series D, E, F, and G preferred stockholders, Series A, B, and C preferred
stockholders are entitled to noncumulative dividends, when and if declared by
the Board of Directors, at an annual amount of $0.01, $0.02, and $0.0275 per
share, respectively. Such dividends have a preference over the payment of
dividends on common stock.
F-13
<PAGE> 86
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the event of liquidation, payment will be made to Series D, E, F, and G
preferred stockholders, prior and in preference to any other stockholders, for
the purchase price of $1.00, $1.20, $1.20, and $3.25 per share, respectively,
plus all declared and unpaid dividends. Subsequent to this payment, the Series
A, B, C, D, E, F, and G preferred stockholders are entitled to a liquidation
preference distribution of $0.125, $0.25, $0.85, $1.00, $1.20, $1.20, and $3.25
per share, respectively, plus all declared and unpaid dividends. Any amounts in
excess of this amount will be distributed to common stockholders.
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 year 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 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 and 1999 Stock
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
Repurchased............................................ -- --
---------- ----------
Balance at December 31, 1999............................. 5,882,000 8,439,000 $0.45
========== ==========
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-14
<PAGE> 87
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$.375 - $.4625 2,927,000 7.48 years $0.45 1,445,000 $0.45
$.5125 715,000 8.09 years $0.51 269,000 $0.51
$.625 3,396,000 8.79 years $0.63 775,000 $0.63
--------- ---------
$0.0025 - $.625 8,439,000 7.04 years $0.45 3,881,000 $0.33
========= =========
</TABLE>
In addition, nonplan 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
expire in April 2000 if not exercised.
Deferred Compensation
During the nine months ended December 31, 1999, the Company recorded
aggregate deferred compensation of $821,000 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, the Company
amortized $132,000 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 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>
F-15
<PAGE> 88
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 expected volatility of
0.27 to be $48,000. This amount was offset against the proceeds of the Series E
preferred stock. The warrant expires not earlier than February 9, 2005. The
warrant incorporates antidilution protection.
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
expires not earlier than February 9, 2005. The warrant incorporates antidilution
protection.
F-16
<PAGE> 89
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock
At December 31, 1999, common stock reserved for future issuance is as
follows:
<TABLE>
<S> <C>
Stock option plan:
Outstanding options....................................... 8,439,000
Reserved for future grants................................ 5,882,000
----------
14,321,000
Warrants for Series D preferred stock....................... 140,000
Warrants for Series E preferred stock....................... 121,000
Nonplan stock options granted............................... 800,000
Convertible preferred stock................................. 41,939,000
----------
57,321,000
==========
</TABLE>
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Through March 31, 1998, the Company operated as one segment. For the fiscal
period 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.
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
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>
F-17
<PAGE> 90
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
1999 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
PROFIT OR LOSS
Total profit or loss for reportable segments................ $(4,666) $(7,462)
Other income (expense), net................................. (303) (81)
Amortization of deferred compensation....................... -- (132)
------- -------
Income before income taxes.................................. $(4,969) $(7,675)
======= =======
</TABLE>
<TABLE>
<CAPTION>
REVENUES REVENUES
GEOGRAPHIC INFORMATION ----------- ------------
<S> <C> <C>
United States............................................... $12,445 $13,214
Asia........................................................ 2,247 1,629
Europe...................................................... 2,593 3,258
------- -------
Consolidated total........................................ $17,285 $18,101
======= =======
</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." Historical 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.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
MARCH 31, DECEMBER 31,
---------------- ------------
1998 1999 1999
------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss (numerator)........................................ $ (286) $(4,971) $(7,677)
====== ======= =======
Shares used in computing historical basic and diluted net
loss per share (denominator):
Denominator for historical basic and diluted net loss per
share -- weighted average common shares outstanding....... 1,148 2,284 2,468
====== =======
Conversion of preferred stock (pro forma)................... 29,755
-------
Denominator for pro forma basic and diluted net loss per
share..................................................... 32,223
=======
Historical basic and diluted net loss per share............. $(0.25) $ (2.18) $ (3.11)
====== ======= =======
Pro forma basic and diluted net loss per share.............. $ (0.24)
=======
</TABLE>
The Company has excluded the impact of all convertible preferred stock,
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 all periods presented. The total number
of shares excluded from the calculations of historical diluted net loss per
share was 22,960,000 and 27,351,000 for the years ended March 31, 1998 and 1999
and 38,193,000 for the nine months ended December 31, 1999.
F-18
<PAGE> 91
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INTERIM FINANCIAL RESULTS (UNAUDITED)
The following table provides financial information for the nine months
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
On January 12, 2000 the Company made full recourse loans aggregating
approximately $2.7 million to certain executive officers 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 us at the original exercise price if the officer's employment is
terminated.
On February 9, 2000, the Board of Directors adopted the 2000 Stock Plan
(2000 Plan), subject to stockholder approval, to provide for the grant of
incentive stock options to purchases shares of common stock to employees,
directors and consultants. The 2000 Plan is administered by the Board of
Directors, and may be delegated to a committee.
A total of 1,000,000 shares of common stock has been reserved for issuance.
The number of shares of common stock reserved for issuance will increase
annually beginning in fiscal 2001 subject to the Board of Directors to a maximum
of 6% of the outstanding share of common stock.
The exercise price is to be determined by the Board of Directors or the
committee. The Board of Directors or the committee reserve the right, under the
Restricted Stock Repurchase Agreement to repurchase options, at a price
determined by the same, upon the termination of an optionee,
On February 9, 2000, the Board of Directors adopted the 2000 Director
Option Plan (Directors' Plan), subject to stockholder approval, to provide for
the automatic grant of options to purchase shares of common stock to our
non-employee directors who are not any of the Company's affiliates' employees or
consultants. 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.
Under the terms of the Directors' Plan, as of the initial public offering, each
non-employee Director, and each person who is thereafter elected or appointed
for the first time to be a non-employee, or Director by the Board stockholder,
be granted an option to purchase 25,000 shares of common stock. In addition,
upon the date of each annual stockholders' meeting subsequent to the date of
each non-employee directors' 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.
On February 9, 2000, the Company's Board of Directors, subject to
stockholder approval, approved the 2000 Employee Stock Purchase Plan (Purchase
Plan). A total of 1,000,000 shares of common stock have been reserved for
issuance, plus annual increases equal to the lesser of (i) 1,000,000 shares of
common stock, (ii) 1.25% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board of Directors. 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
F-19
<PAGE> 92
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for any offering 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.
In the event of certain changes in control, the Board of Directors has
discretion to provide that each right to purchase common stock will be assumed
or an equivalent right will be substituted by the successor corporation. In the
event that the successor corporation does not assume or substitute each right to
purchase common stock, the Board of Directors may shorten the vesting period.
The Purchase Plan will terminate at the Board's discretion or when all of the
shares reserved for issuance under the Purchase Plan have been issued.
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. The par
value of the preferred and common stock is $0.001 per share. The Company's
Certificate of Incorporation will be 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 such series. 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
stock in connection with a business acquisition.
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. The Company plans to file a demurrer to two of the causes of action and
has initiated its first round of discovery, as part of its plan to vigorously
defend against these claims.
F-20
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by New Focus, Inc. in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 25,576
NASD filing fee............................................. 9,700
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving costs................................ 300,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 300,000
Blue Sky fees and expenses.................................. 3,000
Transfer Agent and Registrar fees........................... 30,000
Miscellaneous expenses...................................... 41,724
----------
Total....................................................... $1,300,000
==========
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
The Registrant's Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of the Registrant if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the Registrant, and, with respect to any criminal action
or proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited number
of persons as described below:
None of these transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
- -------------------------
(1) On April 18, 1990, we sold 400,000 shares of common stock to Milton Chang
at a purchase price of $.005 per share. On April 18, 1990, the Board of
Directors granted Milton Chang an option outside
II-1
<PAGE> 94
of our Stock Option Plan for 800,000 shares of our Common Stock at an
exercise price of $.0025. Mr. Chang exercised this option on January 19,
2000. Each transaction was exempt from registration in reliance on Section
4(2) of the Securities Act.
(2) From February 28, 1997 through January 31, 2000, (the most recent
practicable date) we granted stock options to acquire an aggregate of
5,826,000, 422,000 and 1,989,200 shares of our common stock at prices
ranging from $.46 to $1.25, $.62 to $.62 and from $.62 to $1.25 to
employees, consultants and directors pursuant to our 1990 Incentive Stock
Option Plan, 1998 Stock Plan and 1999 Stock Plan, respectively. Each
transaction pursuant to our 1990 Incentive Stock Option Plan and our 1999
Stock Plan, was exempt from registration requirements in reliance on Rule
701 promulgated under Section 3(b) under the Securities Act. Each
transaction pursuant to our 1998 Stock Plan was exempt from registration in
reliance on Section 4(2) of the Securities Act.
(3) From April, 1991 through February, 1992, we issued 8,640,000 shares of
Series A preferred stock to Milton Chang pursuant to a series of put-option
agreements at a price of $.1250. This transaction was exempt from
registration requirements in reliance on Section 4(2) of the Securities
Act.
(4) From May, 1990 through January 1991 we sold 15,160,000 shares of Series A
Preferred Stock for $.125 per share to a group of private investors for an
aggregate purchase price of $1,895,000. This transaction was exempt from
registration in reliance on Section 4(2) of the Securities Act.
(5) On December 10, 1993, we sold 1,000,000 shares of Series B Preferred Stock
for $0.25 per share to a group of private investors for an aggregate
purchase price of $250,000. This transaction was exempt from registration
in reliance on Section 4(2) of the Securities Act.
(6) On July 24, 1998, we sold 600,000 shares of Series C Preferred Stock
pursuant to a compensatory stock option plan established for the Company's
employees for $.85 per share for an aggregate purchase price of $510,000.
This transaction was exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as transactions
pursuant to a compensatory benefit plan or a written contract relating to
compensation.
(7) On July 31, 1998, and August 6, 1998, we sold 3,977,000 shares of Series D
Preferred Stock for $1.00 per share to a group of private investors for an
aggregate purchase price of $3,977,000. This transaction was exempt from
registration in reliance on Section 4(2) of the Securities Act.
(8) On February 9, 1999, in connection with a Loan and Security Agreement, we
issued a warrant to purchase 140,000 shares of Series D Preferred Stock at
an exercise price of $1.00 to Venture Lending and Leasing II, Inc. The
issuance of this warrant was exempt from registration in reliance on
Section 4(2) of the Securities Act.
(9) On June 14, 1999, we sold 10,857,616 shares of Series E Preferred Stock for
$1.20 per share to a group of private investors for an aggregate purchase
price of $13,029,139.20. This transaction was exempt from registration in
reliance on Regulation D promulgated under the Securities Act.
(10) We entered into a Technology Transfer Agreement dated June 24, 1999, with
Peter Chen pursuant to which we purchased certain technology from Mr. Chen
in consideration for options to purchase 230,000 shares of our common stock
at the fair market value and the sum of $220,000. Additional terms and
conditions are set forth in such Technology Transfer Agreement. The
issuance of the shares was exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as shares issued
pursuant to a compensatory benefit plan or a written contract relating to
compensation.
(11) On October 15, 1999, we sold 1,113,800 shares of Series F Preferred for
$1.20 per share to a group of private investors for an aggregate purchase
price of $1,336,560. This transaction was exempt from registration
requirements in reliance on Regulation D promulgated under the Securities
Act.
(12) On November 23, 1999, we sold 9,350,728 shares of Series G Preferred for
$3.25 per share to a group of private investors for an aggregate purchase
price of $30,389,866. This transaction was
II-2
<PAGE> 95
exempt from registration requirements in reliance on Regulation D
promulgated under the Securities Act.
(13) On March 3, 1999 and November 1, 1999, we entered into consulting
agreements with John Dexheimer, one of our directors, for services rendered
in connection with the Series E, Series F and Series G Preferred Stock
financings. Pursuant to these agreements, Mr. Dexheimer received warrants
to purchase 111,792 shares of Series E Preferred Stock at a price per share
of $1.20. The issuance of the warrants were exempt from registration
requirements in reliance on Section 4(2) of the Securities Act.
(14) On February 28, 2000, we issued 116,000 shares of our stock to six persons
in connection with a business acquisition. This transaction was exempt from
registration requirements in reliance on Section 4(2) of the Securities
Act.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
The sales of the above securities were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation, or in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about New Focus, Inc. or had access,
through employment or other relationships, to such information.
II-3
<PAGE> 96
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1* Form of stock certificates
4.2** Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing,
see Exhibit 10.15.
4.3** Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4** Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2** 2000 Stock Plan
10.3** 2000 Employee Stock Purchase Plan
10.4** 2000 Director Option Plan and form of agreement thereunder
10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock
Option Agreement, Restated Stock Purchase Agreement,
including Security Agreement and Promissory Note between
Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma,
George Yule, Robert Marsland, Timothy Day, dated January 12,
2000.
10.6** Premises Lease Contract between Registrant and Shenzhen New
and High-tech Village Development Company dated September
23, 1999.
10.7** Lease Agreement between Registrant and Silicon Valley
Properties dated December 23, 1999.
10.8+** Agreement on Terms and Conditions of Purchase and Sale of
Optical Components between Registrant and Corning,
Incorporated dated January 1, 2000.
10.9** Lease Agreement between Focused Research Inc. and University
Science Center Partnership, dated May 22, 1996, as amended,
June 19, 1997.
10.10** Fifth Amended and Restated Registration Rights Agreement
10.11+** Development Agreement between Registrant and Hewlett-Packard
GmbH dated December 23, 1996.
10.12+** Addendum to the Development Agreement between Registrant and
Hewlett-Packard GmbH dated November 6, 1997.
10.13+** Addendum No. 2 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 10, 1999.
10.14+** Memorandum of Agreement between Registrant and Alcatel USA
Sourcing, L.P. dated January 7, 2000.
10.15** Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
21.1** List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (see Exhibit 5.1)
24.1** Power of Attorney
27.1 Financial Data Schedules
</TABLE>
- -------------------------
+ The Registrant will request confidential treatment with respect to certain
portions of this Exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment.
** Previously filed.
II-4
<PAGE> 97
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<TABLE>
<CAPTION>
ADDITIONS-
BALANCES AT CHARGED TO BALANCES
BEGINNING COSTS AND DEDUCTIONS- AT END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1998...................... $ 70 $ 63 -- $$133
Year ended March 31, 1999...................... $133 $ 40 $(38) $135
Nine months ended December 31, 1999............ $135 $ 39 $(14) $160
</TABLE>
Schedules other than that listed above have been omitted since they are not
required or are not applicable or the required information is shown in the
financial statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Clara, State of California, on the 6th day of April, 2000.
NEW FOCUS, INC.
By: /s/ KENNETH E. WESTRICK
------------------------------------
Kenneth E. Westrick
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KENNETH E. WESTRICK President, Chief Executive April 6, 2000
- -------------------------------------------------------- Officer and Director
Kenneth E. Westrick (Principal Executive Officer)
WILLIAM L. POTTS, JR.* Chief Financial Officer April 6, 2000
- -------------------------------------------------------- (Principal Financial and
William L. Potts, Jr. Accounting Officer)
CHARLES BOPPELL* Director April 6, 2000
- --------------------------------------------------------
Charles Boppell
DR. MILTON CHANG* Director April 6, 2000
- --------------------------------------------------------
Dr. Milton Chang
JOHN DEXHEIMER* Director April 6, 2000
- --------------------------------------------------------
John Dexheimer
DR. WINSTON FU* Director April 6, 2000
- --------------------------------------------------------
Dr. Winston Fu
R. CLARK HARRIS* Director April 6, 2000
- --------------------------------------------------------
R. Clark Harris
ROBERT D. PAVEY* Director April 6, 2000
- --------------------------------------------------------
Robert D. Pavey
*By: /s/ KENNETH E. WESTRICK
------------------------------------------------
Kenneth E. Westrick
Attorney-in-fact
</TABLE>
II-6
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1* Form of stock certificates
4.2** Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing,
see Exhibit 10.15.
4.3** Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4** Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2** 2000 Stock Plan
10.3** 2000 Employee Stock Purchase Plan
10.4** 2000 Director Option Plan and form of agreement thereunder
10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock
Option Agreement, Restated Stock Purchase Agreement,
including Security Agreement and Promissory Note between
Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma,
George Yule, Robert Marsland, Timothy Day, dated January 12,
2000.
10.6** Premises Lease Contract between Registrant and Shenzhen New
and High-tech Village Development Company dated September
23, 1999.
10.7** Lease Agreement between Registrant and Silicon Valley
Properties dated December 23, 1999.
10.8+** Agreement on Terms and Conditions of Purchase and Sale of
Optical Components between Registrant and Corning,
Incorporated dated January 1, 2000.
10.9** Lease Agreement between Focused Research Inc. and University
Science Center Partnership, dated May 22, 1996, as amended,
June 19, 1997.
10.10** Fifth Amended and Restated Registration Rights Agreement
10.11+** Development Agreement between Registrant and Hewlett-Packard
GmbH dated December 23, 1996.
10.12+** Addendum to the Development Agreement between Registrant and
Hewlett-Packard GmbH dated November 6, 1997.
10.13+** Addendum No. 2 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 10, 1999.
10.14+** Memorandum of Agreement between Registrant and Alcatel USA
Sourcing, L.P. dated January 7, 2000.
10.15** Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
21.1** List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (see Exhibit 5.1)
24.1** Power of Attorney
27.1 Financial Data Schedules
</TABLE>
- -------------------------
+ The Registrant will request confidential treatment with respect to certain
portions of this Exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 25, 2000 (except Note 12, as to which the date
is April , 2000) in Amendment No. 3 to the Registration Statement (Form S-1
No. 333-31396) and related Prospectus of New Focus, Inc. for the registration of
5,750,000 shares of its common stock.
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
San Jose, California
April , 2000
- --------------------
The foregoing consent is in the form that will be signed upon the completion of
the Company's reincorporation in the state of Delaware.
San Jose, California
April 5, 2000
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,067
<SECURITIES> 0
<RECEIVABLES> 3,102
<ALLOWANCES> 160
<INVENTORY> 6,217
<CURRENT-ASSETS> 37,750
<PP&E> 9,661
<DEPRECIATION> 2,766
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<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 35,011
<TOTAL-LIABILITY-AND-EQUITY> 44,852
<SALES> 18,101
<TOTAL-REVENUES> 18,101
<CGS> 12,525
<TOTAL-COSTS> 12,525
<OTHER-EXPENSES> (95)
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<INTEREST-EXPENSE> 176
<INCOME-PRETAX> (7,675)
<INCOME-TAX> 2
<INCOME-CONTINUING> (7,677)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,677)
<EPS-BASIC> (3.11)
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