<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ILX LIGHTWAVE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
3825
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
81-0438752
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
31950 EAST FRONTAGE ROAD
BOZEMAN, MONTANA 59715
(406) 586-1244
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LAWRENCE A. JOHNSON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ILX LIGHTWAVE CORPORATION
31950 EAST FRONTAGE ROAD
BOZEMAN, MONTANA 59715
(406) 586-1244
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JOHN W. MANNING
LAWRENCE T. MARTINEZ
MOLLY E. JOSEPH
DORSEY & WHITNEY LLP
507 DAVIDSON BUILDING
8 THIRD STREET NORTH
GREAT FALLS, MONTANA 59401
(406) 727-3632
CRAIG E. SHERMAN
MEGAN L. MUIR
MICHAEL J. BROWN
VENTURE LAW GROUP
A PROFESSIONAL CORPORATION
4750 CARILLON POINT
KIRKLAND, WASHINGTON 98033
(425) 739-8700
------------------------
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,
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,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share...................... $115,000,000 $30,360
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID 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 SEPTEMBER 1, 2000
PROSPECTUS
SHARES
[ILX LIGHTWAVE LOGO]
COMMON STOCK
This is an initial public offering of common stock by ILX Lightwave
Corporation. ILX Lightwave is selling shares of common stock. The
selling shareholders identified in this prospectus are offering an additional
shares of common stock. ILX Lightwave will not receive any of the
proceeds from the sale of common stock held by the selling shareholders. We
anticipate that the estimated initial public offering price will be between
$ and $ per share.
------------------
No public market currently exists for our common stock. We have applied for
quotation of our common stock on the Nasdaq National Market under the symbol
ILXL.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to ILX Lightwave, before expenses.................. $ $
Proceeds to the selling shareholders, before expenses....... $ $
</TABLE>
ILX Lightwave and certain of the selling shareholders have granted the
underwriters an option for a period of 30 days to purchase up to
and additional shares of common stock, respectively.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
, 2000
<PAGE> 3
[The inside front cover of the prospectus contains pictures of certain of our
products and will include our logo and the text "Innovative Optical Test and
Measurement Solutions; Flexible and Upgradeable Product Design; and Advanced
Technology and Features."]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 25
Management.................................................. 36
Principal and Selling Shareholders.......................... 44
Certain Transactions........................................ 47
Description of Capital Stock................................ 48
Shares Eligible for Future Sale............................. 50
Underwriting................................................ 52
Legal Matters............................................... 55
Experts..................................................... 55
Where You Can Find More Information......................... 55
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
making an investment decision. You should read the entire prospectus carefully,
including "Risk Factors" and our financial statements and related notes, before
making an investment decision.
ILX LIGHTWAVE CORPORATION
We develop, manufacture and market optical test and measurement equipment
designed to enable optical component vendors to increase unit production,
improve manufacturing yields, accelerate the development of innovative products
and reduce manufacturing costs. Our products are designed to test and measure
various optical component characteristics throughout the product development and
manufacturing processes. We introduced our first product in 1986 and currently
offer test and measurement equipment in 12 product families. We sell our
products to over 300 customers and distributors, including Corning Incorporated,
JDS Uniphase Corporation and Lucent Technologies, Inc.
The volume of traffic on telecommunications networks has increased
dramatically, largely due to the growth of the Internet. As a result, network
service providers are rapidly deploying optical networking systems to
significantly increase transmission capacity and provide greater network
functionality at a relatively lower cost. The increasing deployment of optical
networking systems has in turn fueled demand for optical components, which are
the building blocks of these systems. Ryan Hankin Kent, a telecommunications
industry research firm, estimates that the worldwide market for optical
components will grow to over $22.5 billion by 2003 from approximately $6.6
billion in 1999.
The growing demand for optical components has placed an increased focus on
optical component vendors' manufacturing processes and capacity. To address
competitive pressures and to meet the requirements of next generation optical
networking systems, component vendors must develop and manufacture innovative
optical components and subsystems. In response to the challenges facing them,
optical component vendors are increasingly turning to sophisticated test and
measurement equipment to develop innovative products, improve manufacturing
operations and ensure the quality of finished products. We believe the rapid
growth of the optical components market will create a significant opportunity
for manufacturers of optical test and measurement equipment.
Our products are designed to allow our customers to make quick, accurate
and reliable measurements to assess component functionality and diagnose
manufacturing faults. The modular design of many of our products allows our
customers to add functionality as their test needs grow and optical technology
advances. Because our products are designed for specific sub-segments of the
optical components market, they offer our customers a focused solution that
tests specific component characteristics and is closely aligned with their
manufacturing and product design needs. Our sales, customer service and
marketing engineers frequently solicit feedback from our customers to help focus
and direct our new development activities in order to keep pace with
technological advances in our industry.
Our objective is to be the leading provider of optical test and measurement
equipment for the optical components market. We leverage our 14 years of
experience in developing advanced optical test and measurement equipment to
provide our customers with innovative solutions designed to meet their complex
and rapidly changing requirements. We will continue to focus on high-growth
areas in the optical components market and to collaborate with leading optical
component vendors. In addition, we plan to expand our sales, marketing and
customer service resources, enhance our product development process and pursue
strategic acquisitions. We believe that this strategy will enable us to continue
to develop and introduce innovative optical test and measurement equipment that
will broaden our product lines and further establish our products as strategic
tools for the optical components market.
We were founded in 1986. Our principal executive offices are located at
31950 East Frontage Road, Bozeman, Montana 59715 and our telephone number is
(406) 586-1244.
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by ILX Lightwave Corporation........... shares
Common stock offered by the selling shareholders............ shares
Common stock to be outstanding after this offering.......... shares
Use of proceeds............................................. To repay approximately $1.3 million
of indebtedness and for working
capital and general corporate
purposes, including expansion of
our manufacturing facilities and
potential acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...................... ILXL
</TABLE>
-------------------------
Unless otherwise noted, the information in this prospectus:
- assumes 31,635,948 shares of common stock outstanding at June 30, 2000,
which reflects a three-for-one stock split on July 13, 2000 and a
four-for-one stock split on August 24, 2000;
- excludes approximately 7,680,000 shares of common stock reserved for
issuance under our stock option plans, 3,642,000 of which were covered by
outstanding options at June 30, 2000 with a weighted average exercise
price of $0.35 per share and 4,038,000 of which were available for future
grants;
- excludes 600,000 shares of common stock reserved for issuance under our
employee stock purchase plan; and
- assumes that the underwriters' over-allotment option will not be
exercised.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below sets forth summary financial information for the periods
indicated. It is important that you read this information together with the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------- -----------------
1997 1998 1999 1999 2000
------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.......................................... $7,566 $11,848 $17,404 $8,186 $16,601
Cost of sales.................................. 3,079 5,091 7,754 3,381 7,150
------ ------- ------- ------ -------
Gross margin................................ 4,487 6,757 9,650 4,805 9,451
Total operating expenses....................... 3,149 4,668 6,174 2,860 4,875
------ ------- ------- ------ -------
Operating income............................... 1,338 2,089 3,476 1,945 4,576
Other income (expense), net.................... 49 111 53 (31) (10)
------ ------- ------- ------ -------
Income before income taxes..................... 1,387 2,200 3,529 1,914 4,566
Income tax expense............................. 483 772 1,269 690 1,661
------ ------- ------- ------ -------
Net income..................................... $ 904 $ 1,428 $ 2,260 $1,224 $ 2,905
====== ======= ======= ====== =======
Net income per share(1):
Basic....................................... $ 0.02 $ 0.03 $ 0.06 $ 0.03 $ 0.08
====== ======= ======= ====== =======
Diluted..................................... $ 0.02 $ 0.03 $ 0.05 $ 0.03 $ 0.08
====== ======= ======= ====== =======
Shares used in computing net income per
share(1):
Basic....................................... 44,136 42,383 39,933 41,204 34,344
====== ======= ======= ====== =======
Diluted..................................... 44,477 43,317 41,341 42,553 36,888
====== ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 617
Working capital........................................ 6,887
Total assets........................................... 11,661
Long-term debt, less current portion................... 856
Shareholders' equity................................... 7,310
</TABLE>
------------------------------
(1) See note 1 of the notes to our financial statements for an explanation of
the determination of the number of weighted average shares used to compute
basic and diluted net income per share.
(2) The as adjusted information in the above balance sheet data table is
adjusted to reflect the sale of shares of common stock offered by us
in this offering at an assumed initial public offering price of $ per
share, after deducting the estimated underwriting discounts and commissions
and the estimated offering expenses.
3
<PAGE> 8
RISK FACTORS
Before investing in our common stock, you should be aware that various
risks are involved, including those described below. The occurrence of any of
the following risks could have a material adverse effect on our business,
financial condition and results of operations. In that case, the trading price
of our common stock could decline, and you may lose all or part of your
investment. Before making a decision to buy our common stock, you should
carefully consider the risks described below as well as the other information in
this prospectus, including our financial statements and the related notes.
RISKS RELATING TO OUR BUSINESS
WE FACE INTENSE COMPETITION IN OUR MARKETS, AND IF WE FAIL TO COMPETE
SUCCESSFULLY, OUR OPERATING RESULTS WILL SUFFER.
The markets for our products are intensely competitive. We expect the
intensity of competition to increase in the future from both existing and new
competitors. We compete in specialized market segments against a relatively
limited number of companies. We also face competition in some of our markets
from our existing and potential customers who have developed or may develop
products that are competitive to ours. Many of our current and potential
competitors, such as Agilent Technologies, Inc., Ando Electric Co., Ltd., EXFO
Electro-Optical Engineering Inc. and Newport Corporation, may have longer
operating histories, greater name recognition and substantially greater
financial, technical, marketing, management, service, support and other
resources than we do. In addition, many of our competitors have well-established
relationships with our current or potential customers and have an extensive
knowledge of our industry. Therefore, they may be able to respond more quickly
than we can to new or changing opportunities, technologies, standards or
customer requirements. Other competitors are smaller and highly specialized
companies that focus on only one aspect of our markets or in selected geographic
regions. We may not be able to compete successfully in the future against
existing or new competitors. Competitive pressures may force us to reduce our
prices, which could negatively affect our operating results. Consolidation in
the optical test and measurement or in the optical component industries could
also intensify the competitive pressures that we face. If we do not respond
adequately to competitive challenges, our business and results of operations
would be harmed.
WE ARE DEPENDENT ON A FEW KEY CUSTOMERS FOR A SIGNIFICANT AMOUNT OF OUR SALES
AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS, OR A SIGNIFICANT REDUCTION IN
ORDERS BY ANY OF THESE CUSTOMERS, COULD SIGNIFICANTLY REDUCE OUR SALES.
In the six months ended June 30, 2000, Corning Incorporated and JDS
Uniphase Corporation accounted for approximately 22% and 11% of our sales,
respectively. In the year ended December 31, 1999, Corning Incorporated and
Lucent Technologies, Inc. accounted for approximately 26% and 11% of our sales,
respectively. None of our customers are presently obligated to purchase a
specific amount of our products or to provide us with binding forecasts of
purchases for any period. We anticipate that a significant amount of our sales
will continue to come from a relatively small number of customers. The loss of
any of these customers or a significant reduction in sales to these customers
could adversely affect our sales and operating results. In addition, if our
customers consolidate, they may reduce purchases of our products.
4
<PAGE> 9
WE RELY ON A LIMITED NUMBER OF SUPPLIERS FOR, AND MAY EXPERIENCE DIFFICULTY IN
OBTAINING, CERTAIN KEY COMPONENTS AND MATERIALS USED TO MANUFACTURE OUR
PRODUCTS.
We depend on a limited number of suppliers for some of the key components
and materials used to manufacture our products. Substantially all our orders are
placed through individual purchase orders and, therefore, our suppliers may stop
supplying materials to us at any time. We have experienced shortages and delays
in obtaining key components in the past and we may continue to experience
shortages and delays in the future. We are unable to predict the length of any
shortages or delays. Our inability to obtain from current or alternative
suppliers sufficient quantities of the materials used in our products in a
timely manner could interrupt or slow the manufacture of our products and could
result in the cancellation of orders for our products. We may not be able to
identify, qualify and integrate alternative sources of supply in a timely
fashion, or at all. Any transition to alternative suppliers may result in delays
in shipment and increased costs and may limit our ability to deliver products to
our customers in a timely manner.
THE CURRENT WORLDWIDE SHORTAGE OF LASERS MAY ADVERSELY AFFECT OUR ABILITY TO
OBTAIN AN ADEQUATE SUPPLY OF LASERS, WHICH COULD ADVERSELY IMPACT OUR
MANUFACTURING OPERATIONS, SALES AND OPERATING RESULTS.
The recent rapid growth in demand for optical networking products has
caused a worldwide shortage of lasers, which are the key component in a number
of our products. Our inability to obtain an adequate and timely supply of lasers
or other key components from our existing suppliers or any future suppliers
could interrupt or slow our manufacturing process and increase our manufacturing
costs, which would harm our business and adversely affect our operating results.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE PERFORMANCE.
From time to time, we have experienced significant fluctuations in our
operating results. Our quarterly operating results may fluctuate as a result of
a variety of factors, including those listed below, many of which are outside of
our control. If our quarterly results fall below the expectations of investors
or securities analysts, the price of our common stock could decline
substantially. Factors that could cause fluctuations in our quarterly operating
results include the following:
- demand in the optical networking industry;
- market acceptance of any new or enhanced versions of our products;
- changes in our pricing policies or in the pricing policies of our
competitors or suppliers;
- the availability and cost of key components and materials we use to
manufacture our products;
- the size and timing of customer and distributor orders within a given
quarter and our ability to fulfill these orders on a timely basis;
- the degree to which our customers have allocated and spent their yearly
budgets;
- variations in the mix of products we sell;
- the timing of our new product introductions or those of our competitors;
- the relative percentages of our products sold domestically and
internationally;
- the relative percentages of our products sold by our direct sales force
and our distributors; and
- the length of our product sales cycle.
Most of our operating expenses are relatively fixed in the short term and
our expense levels are based in part on our expectations regarding future sales.
As a result, if sales for a particular quarter
5
<PAGE> 10
were below our expectations, we would not be able to proportionally reduce
operating expenses for that quarter. This revenue shortfall would have a
disproportionate effect on our expected operating results for that quarter.
IF WE FAIL TO RESPOND EFFECTIVELY TO RAPIDLY CHANGING TECHNOLOGY AND EVOLVING
INDUSTRY STANDARDS, OUR BUSINESS AND OPERATING RESULTS WILL SUFFER.
The markets for our products are characterized by rapid technological
change, evolving industry standards, changes in customer requirements and new
product introductions and enhancements. Competing products based on new
technologies or emerging industry standards may perform better or cost less than
our products and could render our products obsolete or unmarketable. If we are
unable to develop new and enhanced products on a timely basis that respond to
changing technology and standards and satisfy the needs of our customers, our
business and operating results will suffer. We depend to a significant extent
upon our ability to enhance our existing products and introduce new products, to
address the demands of the marketplace and to be price competitive. We cannot be
certain that we will be successful in developing, manufacturing and marketing
product enhancements or new products on a timely or cost-effective basis, or
that these products, if developed, will achieve market acceptance.
WE ARE HIGHLY DEPENDENT ON THE GROWTH OF THE OPTICAL NETWORKING MARKET AND OUR
CUSTOMERS WHO SERVE THIS MARKET.
Most of our current and expected future business comes from sales to
companies that manufacture components for optical networking systems. The
majority of the remainder comes from sales to companies that manufacture optical
networking systems. The rapid deployment of optical networking systems is
causing increased demand for optical components, which has led to increased
demand for optical test and measurement equipment. Because our customers face
uncertainties with regard to the rate of growth and changing requirements of the
optical networking market, their products and components may not achieve, or
continue to achieve, anticipated levels of market acceptance. If our customers
are unable to deliver products that gain market acceptance, it is likely that
these customers will not purchase our products or will purchase smaller
quantities of our products. A failure of our customers' products to gain market
acceptance, or a failure of the optical networking market as a whole to grow
significantly, would have a negative effect on our business and results of
operations.
IF WE FAIL TO PROPERLY MANAGE AND SUPPORT OUR EXPANDING OPERATIONS, WE MAY NOT
BE ABLE TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGY AND TAKE ADVANTAGE OF
MARKET OPPORTUNITIES.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires effective management and business
planning. We have substantially expanded our business and operations since June
30, 1999. We have increased our number of employees from 99 at June 30, 1999 to
173 at June 30, 2000. We also plan to significantly expand our manufacturing and
office facilities in Bozeman, Montana and Boulder, Colorado by the middle of
2001. Our business expansion has placed, and is expected to continue to place, a
significant strain on our managerial, administrative, operational, financial and
other resources. Our executive officers have limited experience operating a
public company. To manage our anticipated growth and execute our business
strategy effectively, we will need to expand and improve our financial,
operational and information systems, procedures and controls; and to hire, train
and integrate new personnel. Our failure to effectively manage our growth could
adversely impact our ability to take advantage of market opportunities.
6
<PAGE> 11
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS AND
OPERATING RESULTS WILL SUFFER.
Our success depends largely upon our ability to attract, train, motivate
and retain highly skilled employees. Competition for engineers, sales and other
personnel in the technology industry is intense, particularly for employees with
expertise in optical networking and manufacturing. If we fail to retain and
recruit sufficient numbers of employees with the experience and skills we need,
our business and operating results will suffer. Because our headquarters and
primary manufacturing facility are located in Bozeman, Montana, we must often
recruit qualified employees from outside the vicinity of our headquarters, which
may also put us at a competitive disadvantage.
In addition, we must provide significant training for our growing employee
base due to the highly specialized nature of our products. Our current
engineering personnel may be inadequate and we may fail to integrate and train
new employees. Highly skilled employees with the education and training that we
require, especially employees with significant experience in optical networking,
are in high demand. Once trained, our employees may be hired by our competitors.
IF WE LOSE MEMBERS OF OUR MANAGEMENT TEAM, PARTICULARLY LAWRENCE A. JOHNSON, OUR
FOUNDER, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT, OUR BUSINESS
OPERATIONS COULD BE SEVERELY DISRUPTED.
Our success depends to a significant degree upon the skills, experience and
performance of our senior management, engineering, sales, marketing, service,
support and other key personnel. Specifically, we believe that our future
success is highly dependent on Lawrence A. Johnson, our founder, Chairman, Chief
Executive Officer and President. If we lose the services of Dr. Johnson or other
key personnel, our business would be severely disrupted and seriously harmed. We
do not have employment agreements with any of our employees. We do not maintain
"key person" life insurance policies on any of our employees except Dr. Johnson.
This life insurance policy is not sufficient to compensate us for the loss of
his services.
THE GROSS MARGINS OF OUR EXISTING PRODUCTS COULD DECLINE.
Our industry is intensely competitive and prices for optical test and
measurement equipment will likely decline in the future. These price declines
will result from factors such as:
- increased competition for business;
- a limited number of potential customers;
- competition from companies with lower labor and production costs;
- introduction of new products by competitors; and
- greater economies of scale for higher-volume manufacturers.
We may have to increase our manufacturing capacity and our unit volume sold
in order to maintain our existing margins. If we add capacity, our fixed costs
will increase the level of sales necessary to maintain operating margins. If we
are unable to continuously reduce our manufacturing costs or introduce new
products with higher margins, our gross margins could decline.
7
<PAGE> 12
FUTURE ACQUISITIONS COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION.
In order to remain competitive, we may find it necessary to acquire
additional businesses, products and technologies. In the event that we do
complete an acquisition, we could be required to do one or more of the
following:
- issue equity securities, which would dilute current shareholders;
- incur substantial debt;
- assume contingent liabilities;
- incur a one-time charge; or
- amortize goodwill and other intangible assets.
We may not be able to successfully integrate the technologies, products,
personnel or operations of companies that we acquire. These difficulties could
disrupt our business, divert management resources and increase our expenses.
OUR PRODUCTS HAVE IN THE PAST AND MAY IN THE FUTURE HAVE UNFORESEEN DEFECTS THAT
COULD HARM OUR OPERATING RESULTS.
As a result of their complexity, our products have in the past and may in
the future contain undetected errors or compatibility problems. Despite our
internal testing and quality assurance procedures, errors may exist in our
products and may not be found until they have been fully deployed and operated
under peak stress conditions. As a result, we could incur substantial expenses
in repairing any defects or undetected errors. In addition, any errors or
defects in our products could harm our reputation, divert management and other
resources, impede market acceptance of our products and adversely affect our
operating results.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS.
Our products are designed to help optical component vendors and network
system providers ensure product functionality and network reliability. The
failure of our products to perform to customer expectations could give rise to
warranty or product liability claims. We generally provide a limited one-year
warranty on all of our products. We carry product liability insurance that we
consider adequate. However, a successful claim against us for an amount
exceeding our policy limit would force us to use our own resources to pay the
claim, which could harm our reputation, result in a reduction of our working
capital available for other uses, increase our expenses and have a negative
effect on our operating results.
IF WE FAIL TO PREDICT OUR MATERIAL REQUIREMENTS ACCURATELY, WE COULD HAVE EITHER
INSUFFICIENT INVENTORY OR EXCESS INVENTORY, BOTH OF WHICH COULD CAUSE US TO
INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
We generally provide forecasts of our requirements to some of our major
suppliers up to six months prior to scheduled delivery of products to our
customers. If we underestimate our requirements, we may have an inadequate
inventory of materials. Inadequate inventory could interrupt the manufacture of
our products and result in delays in shipments. If we overestimate our
requirements, we may have excess inventory, which could increase our costs, harm
our relationships with our suppliers due to reduced future orders and, in our
rapidly changing market, leave us with inventory that is obsolete. In addition,
lead times for some components and materials that we procure can vary
significantly and may depend on factors such as the procedures of, or our supply
terms with, a specific supplier, as well as industry-wide demand for each
component at a
8
<PAGE> 13
given time. In the case of some materials in short supply, suppliers have
imposed strict allocations that limit the number of these components that they
will supply to a given customer in a specific time period. In the past,
suppliers have made selective allocations that adversely affected us and these
suppliers may choose, in the future, to increase allocations to larger, more
established companies, which could reduce our allocations and impact our ability
to manufacture our product.
WE FACE SIGNIFICANT RISKS FROM DOING BUSINESS IN FOREIGN COUNTRIES.
Our business is subject to risks inherent in conducting business
internationally. In the six months ended June 30, 2000, and the years ended
December 31, 1999, 1998 and 1997, our international sales accounted for
approximately 31%, 29%, 22% and 34%, respectively, of our sales. We expect that
our international sales will continue to account for a significant percentage of
our sales for the foreseeable future. Our international sales will be limited if
we cannot maintain and establish relationships with international distributors
and expand and manage our international sales channels. As a result of our
international operations, we face various risks, which include:
- adverse currency fluctuations;
- challenges of administering our business globally, including difficulties
in staffing and managing our offices in the United Kingdom and Japan;
- reliance on third party distributors;
- compliance with multiple and potentially conflicting regulatory
requirements, including export requirements, tariffs and other trade
barriers;
- adverse changes in the economic or political conditions in countries or
regions where we sell our products;
- longer accounts receivable cycles;
- overlapping or differing tax structures; and
- differing protection of intellectual property.
As a result of our international operations, fluctuations in currency
exchange rates could affect the sales price in local currencies of our products
in international markets, potentially making our products less competitive. In
addition, exchange rate fluctuations could increase the costs and expenses of
our international operations or require us to modify our current business
practices. Our failure to manage any of these risks could significantly harm our
business and results of operations.
OUR PRODUCTS MAY BE REQUIRED TO CONFORM TO NEW AND UNFORESEEN REGULATORY OR
CUSTOMER REQUIREMENTS, WHICH COULD INCREASE OUR COSTS AND CAUSE OUR OPERATING
RESULTS TO SUFFER.
Our products are designed to conform to the regulatory requirements of the
countries in which they are marketed. For example, all of our products shipped
to Europe must bear the CE mark. In the event that the technical regulations
applicable in a given country are in any way changed, we may be required to
modify, redesign or recall some of our products in order to continue
participating in that market. In addition, our products must meet our customers'
requirements which, given the rapid pace of technological change in our
industry, may change frequently. These changes could increase manufacturing
costs and could create technical advantages for products marketed by our
competitors.
9
<PAGE> 14
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR
BUSINESS.
We rely on trade secrets and confidentiality agreements with employees and
third parties to protect our intellectual property, both of which offer only
limited protection. None of our technology is currently patented and we hold no
copyrights or trademarks. In addition, the laws of other countries in which we
market our products may afford little or no effective protection of our
proprietary technology. Third parties may infringe our intellectual property
rights or devise designs that circumvent our intellectual property. We may not
be able to detect unauthorized use of our intellectual property or effectively
enforce our rights. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management resources, either of
which could harm our business.
IF ANY THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY
RIGHTS, WE COULD FACE SUBSTANTIAL LICENSING OR LITIGATION COSTS, OR COULD BE
FORCED TO STOP SELLING SOME OF OUR PRODUCTS.
Our products are complex and include substantial amounts of technology.
Third parties who believe that our products infringe upon their intellectual
property may assert such rights, which could result in litigation. Any
litigation over intellectual property rights, whether with or without merit,
would be time consuming, expensive and distracting to our management. Litigation
could also subject us to extensive liabilities, including monetary damages and
injunctions preventing us from selling some of our products. Moreover, we could
be forced to enter into licensing agreements or sell the rights to our products
or technology on unfavorable terms, in order to avoid claims of infringement.
Unfavorable outcomes regarding claims of infringement of the intellectual
property rights of third parties could harm our business.
RISKS RELATED TO THIS OFFERING
THE SIGNIFICANT CONTROL OVER SHAREHOLDER VOTING MATTERS THAT MAY BE EXERCISED BY
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL DEPRIVE YOU OF THE ABILITY TO
INFLUENCE CORPORATE ACTIONS.
After this offering, our executive officers and directors and their family
members will control approximately % of the outstanding common stock.
Lawrence A. Johnson, our founder, Chairman, Chief Executive Officer and
President, and members of his family, will control approximately % of the
outstanding common stock after this offering. This concentration of ownership
may have the effect of delaying, preventing or deterring a change in our
control, could deprive our shareholders of an opportunity to receive a premium
for their common stock as part of a sale of our company and might affect the
market price of shares of our common stock.
OUR SHARE PRICE MAY BE HIGHLY VOLATILE AND COULD DECLINE UNEXPECTEDLY.
Following this offering, the price for shares of our common stock could be
highly volatile and subject to wide fluctuations in response to the following
factors:
- quarterly variations in our operating results;
- announcements of new product introductions by us or our competitors;
- changes in investor perception of us or the market for our products;
- changes in financial estimates by securities analysts; and
- changes in general economic and market conditions.
10
<PAGE> 15
The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to the operating performance of these companies. In particular,
following initial public offerings, the market prices for stocks of technology
companies often reach unsustainable levels that bear no established relationship
to the operating performance of these companies. These broad market and industry
factors may significantly affect the market price of our common stock,
regardless of our actual operating performance. Declines in the market price of
our common stock could also harm employee morale and retention, limit our access
to capital and affect other aspects of our business.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND MINNESOTA LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.
Provisions of our articles of incorporation and bylaws and Minnesota law
may discourage, delay or prevent a merger or acquisition that a shareholder may
consider favorable and may limit the market price of our common stock. These
provisions include the following:
- establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
- authorizing the board to issue preferred stock;
- prohibiting cumulative voting in the election of directors; and
- limiting the persons who may call special meetings of shareholders.
In addition, the Minnesota Control Share Acquisition Act and the Minnesota
Business Corporation Act may make it more difficult for third parties to secure
control of the company or to complete an acquisition. These acts may discourage
unsolicited takeover offers, which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
FUTURE SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK.
If our existing shareholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly.
Moreover, the perception in the public market that our existing shareholders
might sell shares of common stock could depress the market price of our common
stock. Immediately after this offering, approximately shares held
by our existing shareholders will be outstanding. All of these shares are
subject to lock-up agreements restricting their sale for 180 days after the
effective date of the registration statement, of which this prospectus is a
part. Thereafter, virtually all of these shares will be available for resale in
the public market subject to volume restrictions.
After this offering, we intend to register approximately 8,280,000 shares
of our common stock that we have issued or may issue under our stock plans. Once
we register these shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements, if applicable, described above.
11
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, level of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
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. Moreover, neither we nor any other person
assume responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.
12
<PAGE> 17
USE OF PROCEEDS
We will receive net proceeds of approximately $ million from the sale
of shares of common stock by us in this offering at the assumed initial public
offering price of $ per share after deducting underwriting commissions and
discounts and estimated offering expenses. We will not receive any of the
proceeds from the sale of shares by the selling shareholders.
The principal purposes of this offering are to obtain additional working
capital for the expansion of our manufacturing capacity and the pursuit of other
growth opportunities, to create a public market for our common stock and to
facilitate future access to public markets. We will use approximately $1.3
million of the net proceeds of this offering to repay a note issued to finance
the repurchase of shares of our common stock from a third party in the first
quarter of 2000. The note matures in April 2003 and bears interest at a rate
equal to prime plus 1.5%, or 11% at June 30, 2000.
In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses. We currently have no
commitments or agreements and are not involved in any negotiations to make any
such acquisitions. 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 currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Our current loan agreement limits the
payment of cash dividends on our common stock.
13
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis; and
- on a pro forma as adjusted basis to give effect to our receipt of the net
proceeds from the sale of shares of common stock in this offering
by us at an assumed initial public offering price of $ per share.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes that appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------
ACTUAL AS ADJUSTED
------- ------------
(IN THOUSANDS EXCEPT
SHARE DATA, UNAUDITED)
<S> <C> <C>
Long-term debt, less current portion........................ $ 856 $
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 31,635,948 shares issued and outstanding
actual, shares issued and outstanding as
adjusted.............................................. 316
Additional paid-in capital............................. --
Retained earnings...................................... 7,071
Notes receivable secured by common stock............... (77)
------ --------
Total shareholders' equity........................ 7,310
------ --------
Total capitalization............................ $8,166 $
====== ========
</TABLE>
This table excludes the following shares:
- 3,642,000 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $0.35
per share;
- 4,038,000 shares of common stock available for future grant under our
stock option plans; and
- 600,000 shares of common stock available for issuance under our employee
stock purchase plan.
14
<PAGE> 19
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding.
Our net tangible book value as of June 30, 2000 was $7.3 million, or
approximately $0.23 per share. After giving effect to our sale of the
shares by us of common stock in this offering at an assumed initial public
offering price of $ per share, less estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma net tangible book
value as of June 30, 2000 would have been approximately $ million, or
$ per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing shareholders and an immediate dilution
in pro forma net tangible book value of $ per share to purchasers of common
stock in this offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of June 30,
2000............................................ $0.23
Increase per share attributable to new
investors.......................................
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table sets forth, on a pro forma as adjusted basis as of June
30, 2000 the differences between the number of shares of common stock purchased,
the total consideration paid and the average price per share paid by the
existing shareholders and the new investors purchasing shares of common stock in
this offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
---------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 31,635,948
New public investors........
Total.............
</TABLE>
The above tables exclude the following shares:
- 3,642,000 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $0.35 per share;
- 4,038,000 shares of common stock available for future grant under our
stock option plans; and
- 600,000 shares of common stock available for issuance under our employee
stock purchase plan.
To the extent that any of these options are exercised or shares are issued,
there will be further dilution to new investors. See "Capitalization" and
"Management -- Employee Benefit Plans."
15
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31,
1997, 1998, and 1999 and the balance sheet data as of December 31, 1998 and
1999, are derived from our audited financial statements included elsewhere in
this prospectus. The statements of income data for the years ended December 31,
1995 and 1996, and the balance sheet data as of December 31, 1995, 1996, and
1997 are derived from our audited financial statements, which are not included
in this prospectus. The selected financial data as of June 30, 2000, and for the
six months ended June 30, 1999 and 2000 are derived from unaudited financial
statements which, in the opinion of our management, reflect all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and results of operations for
these periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------ ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales............................... $ 5,131 $ 5,104 $7,566 $11,848 $17,404 $8,186 $16,601
Cost of sales....................... 2,057 2,283 3,079 5,091 7,754 3,381 7,150
------- ------- ------ ------- ------- ------ -------
Gross margin................... 3,074 2,821 4,487 6,757 9,650 4,805 9,451
------- ------- ------ ------- ------- ------ -------
Operating expenses:
Marketing and sales............ 1,165 1,107 1,452 1,934 2,474 1,226 1,654
Research and development....... 804 1,012 1,057 1,888 2,322 1,076 2,157
General and administrative..... 450 510 640 846 1,378 558 1,064
------- ------- ------ ------- ------- ------ -------
Total operating
expenses................ 2,419 2,629 3,149 4,668 6,174 2,860 4,875
------- ------- ------ ------- ------- ------ -------
Operating income.................... 655 192 1,338 2,089 3,476 1,945 4,576
Other income (expense), net......... 18 11 49 111 53 (31) (10)
------- ------- ------ ------- ------- ------ -------
Income before income taxes.......... 673 203 1,387 2,200 3,529 1,914 4,566
Income tax expense.................. 250 65 483 772 1,269 690 1,661
------- ------- ------ ------- ------- ------ -------
Net income.......................... $ 423 $ 138 $ 904 $ 1,428 $ 2,260 $1,224 $ 2,905
======= ======= ====== ======= ======= ====== =======
Net income per share:(1)
Basic.......................... $ 0.01 $ -- $ 0.02 $ 0.03 $ 0.06 $ 0.03 $ 0.08
======= ======= ====== ======= ======= ====== =======
Diluted........................ $ 0.01 $ -- $ 0.02 $ 0.03 $ 0.05 $ 0.03 $ 0.08
======= ======= ====== ======= ======= ====== =======
Shares used in computing net income
per share:(1)
Basic.......................... 44,462 44,178 44,136 42,383 39,933 41,204 34,344
======= ======= ====== ======= ======= ====== =======
Diluted........................ 44,462 44,178 44,477 43,317 41,341 42,553 36,888
======= ======= ====== ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $1,116 $ 842 $2,000 $1,889 $1,041 $ 617
Working capital.............................. 2,591 2,583 3,348 3,714 4,689 6,887
Total assets................................. 3,786 3,611 5,299 6,200 7,228 11,661
Long-term debt, less current portion......... 99 56 12 -- -- 856
Shareholders' equity......................... 3,106 3,148 3,971 4,614 5,835 7,310
</TABLE>
------------------------------
(1) See note 1 of the notes to our financial statements for an explanation of
the determination of the number of weighted average shares used to compute
basic and diluted net income per share.
16
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes appearing elsewhere in this
document.
OVERVIEW
We develop, manufacture and market optical test and measurement equipment
designed to enable optical component vendors to increase unit production,
improve manufacturing yields, accelerate the development of innovative products
and reduce manufacturing costs. We introduced our first product in 1986 and
currently offer test and measurement equipment in 12 product families. We are
able to leverage our 14 years of experience in developing advanced optical test
and measurement equipment to provide our customers with innovative solutions
designed to meet their complex and rapidly changing requirements.
We sell our products primarily to optical component vendors in the
telecommunications market and also to optical systems vendors as well as other
companies. We sell our products to over 300 customers and distributors,
including Agilent Technologies, Inc., Corning Incorporated, Corvis Corporation,
JDS Uniphase Corporation, Lucent Technologies, Inc. and Nortel Networks
Corporation. In the six months ended June 30, 2000, Corning Incorporated and JDS
Uniphase Corporation accounted for approximately 22% and 11% of our sales,
respectively. In the year ended December 31, 1999, Corning Incorporated and
Lucent Technologies accounted for approximately 26% and 11% of our sales,
respectively.
We market and sell our products through our direct sales force in North
America and primarily through distributors in international markets. For the six
months ended June 30, 2000 and the year ended December 31, 1999, 69% and 71%,
respectively, of our sales were in North America, with the remainder primarily
in Europe and Japan. Substantially all of our sales are made on the basis of
purchase orders rather than long-term agreements or requirements contracts. As a
result, we commit resources to development and production of products without
receiving advance or long-term purchase commitments from customers. We recognize
sales when the product is shipped to the customer. We generally provide a
limited one-year warranty on all of our products and accrue estimated warranty
costs at the time of sale.
Most of our executive, finance and administrative personnel are located at
our headquarters in Bozeman, Montana. We opened our Boulder, Colorado facility
in August 1998. We operate manufacturing facilities in Bozeman and in Boulder
and continue to expand our research and development and manufacturing capacities
in both locations. As of June 30, 2000, we had 139 employees in Bozeman, 30
employees in Boulder and 4 employees in our international sales offices.
Our cost of sales consists primarily of raw materials, wages and related
expenses of production personnel and other manufacturing overhead. Costs of
materials and lead times may increase in future periods due to limited supply or
shortages of key materials in our industry, including lasers. To address these
long lead times and material shortages, we are beginning to purchase larger
quantities of some materials. We believe that expanding our manufacturing
facilities is critical to our success, and we expect fixed manufacturing costs
to increase in absolute dollars as we operate expanded facilities.
Marketing and sales expenses consist primarily of salaries and related
expenses for personnel, sales commissions, travel expenses, advertising, trade
shows, marketing materials and sales support. We intend to significantly expand
our field sales force with an emphasis on placing additional sales engineers
near our key customers throughout North America, Europe and Japan and to open
additional sales and service centers. We also intend to expand our marketing and
sales capabilities
17
<PAGE> 22
with additional personnel and training. We anticipate that our marketing and
sales expenses will continue to increase in absolute dollars in the future.
Research and development expenses consist primarily of salaries and related
expenses for engineers and other technical personnel, fees paid to third party
consultants and the cost of materials related to new product development. We
expense our research and development costs as they are incurred. We believe that
continued investment in research and development is an important part of our
business strategy and we expect that research and development expenses will
continue to increase in absolute dollars in the future.
General and administrative expenses consist primarily of salaries, wages
and related expenses for personnel, travel expenses, professional services,
management information systems, human resources and other corporate expenses. We
expect general and administrative expenses to increase in absolute dollars as we
continue to expand our business operations.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- ----------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF SALES:
Sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 40.7 43.0 44.6 41.3 43.1
----- ----- ----- ----- -----
Gross margin............................ 59.3 57.0 55.4 58.7 56.9
----- ----- ----- ----- -----
Operating expenses:
Marketing and sales..................... 19.2 16.3 14.2 15.0 10.0
Research and development................ 14.0 15.9 13.3 13.1 13.0
General and administrative.............. 8.4 7.1 7.9 6.8 6.4
----- ----- ----- ----- -----
Total operating expenses................ 41.6 39.3 35.4 34.9 29.4
----- ----- ----- ----- -----
Operating income............................. 17.7 17.7 20.0 23.8 27.6
Other income (expense), net.................. 0.6 0.9 0.3 (0.4) (0.1)
----- ----- ----- ----- -----
Income before income taxes................... 18.3 18.6 20.3 23.4 27.5
Income tax expense........................... 6.4 6.5 7.3 8.4 10.0
----- ----- ----- ----- -----
Net income.............................. 11.9% 12.1% 13.0% 15.0% 17.5%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Sales. Sales increased approximately 102.8% from $8.2 million for the six
months ended June 30, 1999 to $16.6 million for the six months ended June 30,
2000. Our increased sales were due primarily to the overall growth in demand for
optical test and measurement products, our introduction of new products, an
increase in our international sales and the implementation of our key account
sales process, which resulted in increased sales to our key account customers.
Gross Margin. Gross margin decreased from approximately 58.7% in the six
months ended June 30, 1999 to 56.9% in the six months ended June 30, 2000. The
decrease in gross margin of approximately 1.8% was attributable to several
factors, including increased sales of products with a relatively higher material
cost, an increase in manufacturing overhead associated with increased staffing
of our Boulder manufacturing facility and a decrease in the sales prices in one
of our
18
<PAGE> 23
product lines to meet competitive pressures. Competitive pricing pressures in
the optical networking industry may impact our gross margins in future quarters.
Marketing and Sales. Marketing and sales expenses increased approximately
34.9% from $1.2 million, or 15.0% of sales, in the six months ended June 30,
1999 to $1.7 million, or 10.0% of sales, in the six months ended June 30, 2000.
Marketing and sales expenses decreased as a percentage of sales as a result of
the significant increase in sales in the six months ended June 30, 2000.
Increases in marketing and sales expenses were related to the hiring and
training of additional direct sales personnel to manage and expand our customer
base. We increased the number of our sales personnel from 12 as of June 30, 1999
to 22 as of June 30, 2000.
Research and Development. Research and development expenses increased
approximately 100.4% from $1.1 million, or 13.1% of sales, in the six months
ended June 30, 1999 to $2.2 million, or 13.0% of sales, in the six months ended
June 30, 2000. While research and development expenses remained constant as a
percentage of sales, our research and development spending increased in absolute
dollars as we added personnel and incurred other expenses and as we continued to
invest in new product development. We increased the number of our research and
development personnel from 18 as of June 30, 1999 to 40 as of June 30, 2000.
General and Administrative. General and administrative expenses increased
approximately 90.7% from $558,000, or 6.8% of sales, in the six months ended
June 30, 1999 to $1.1 million, or 6.4% of sales, in the six months ended June
30, 2000. The increase in general and administrative expenses was due primarily
to additional staffing, increased professional services, administration of our
Boulder facility and other expenses necessary to manage and support our
increased business operations.
Other Income (Expense), Net. Interest and other expense, net was $31,000
for the six months ended June 30, 1999 compared with an expense of $10,000 for
the six months ended June 30, 2000.
Income Tax Expense. Our provision for income taxes of $690,000 for the six
months ended June 30, 1999 and $1.7 million for the six months ended June 30,
2000 consisted of estimated federal and state income taxes. The effective tax
rate for the six months ended June 30, 1999 was 36.0% and the estimated
effective tax rate for the six months ended June 30, 2000 was 36.4%. The
effective rates differ from our expected tax rate of 38.5% due primarily to
research and development tax credits.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Sales. Sales increased approximately 46.9% from $11.8 million in 1998 to
$17.4 million in 1999. This increase was due primarily to the overall growth in
demand for optical test and measurement products, our focus on key accounts and
sales from the introduction of our new modular products. In addition, our
international sales increased approximately 93.5% from $2.6 million in 1998 to
$5.0 million in 1999 as we focused efforts on key account opportunities in
Europe.
Gross Margin. Gross margin decreased from 57.0% in 1998 to 55.4% in 1999.
The decrease in gross margin of approximately 1.6% was due to pricing
adjustments made to meet competitive pressures, increased sales of products with
relatively higher material costs and increased costs related to the opening of
our manufacturing facility in Boulder, Colorado.
Marketing and Sales. Marketing and sales expenses increased approximately
27.9% from $1.9 million, or 16.3% of sales, in 1998 to $2.5 million, or 14.2% of
sales, in 1999. The increase in absolute dollars was related to the expansion of
our marketing and sales efforts, including the hiring of additional marketing
and sales personnel, increased travel, the establishment of our key account
management process and our continued expansion into international markets.
19
<PAGE> 24
Research and Development. Research and development expenses increased
approximately 23.0% from $1.9 million, or 15.9% of sales, in 1998 to $2.3
million, or 13.3% of sales, in 1999. While research and development expenses
declined as a percentage of sales, our research and development spending
increased in absolute dollars as we hired additional personnel to support new
product development efforts.
General and Administrative. General and administrative expenses increased
approximately 62.9% from $846,000, or 7.1% of sales, in 1998 to $1.4 million, or
7.9% of sales, in 1999. The increase was due to additional staffing,
professional services and other expenses associated with the expansion of our
business.
Other Income (Expense), Net. Interest and other income, net was $111,000 in
1998, compared with $53,000 in 1999. The difference was due primarily to foreign
exchange gains of $50,000 in 1998 compared with foreign exchange gains of $8,000
in 1999.
Income Tax Expense. Our provision for income taxes of $772,000 for 1998 and
$1.3 million for 1999 consisted of estimated federal and state income taxes. The
effective tax rate for 1998 was 35.1% and the effective tax rate for 1999 was
36.0%. The effective tax rates differ from our expected tax rate of 38.5% due
primarily to research and development tax credits.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Sales. Sales increased approximately 56.6% from $7.6 million in 1997 to
$11.8 million in 1998. The increase was due primarily to the growth in sales
resulting from an increased focus on optical manufacturing market opportunities.
Gross Margin. Gross margin decreased from 59.3% in 1997 to 57.0% in 1998.
The decrease in gross margin of approximately 2.3% was due primarily to a change
in our product mix with an increase in sales of products with a higher material
cost.
Marketing and Sales. Marketing and sales expenses increased approximately
33.2% from $1.5 million, or 19.2% of sales, in 1997 to $1.9 million, or 16.3% of
sales, in 1998. The increase in absolute dollars was related to additional staff
hired in 1998 to respond to the overall growth in demand for optical test and
measurement products.
Research and Development. Research and development expenses increased
approximately 78.7% from $1.1 million, or 14.0% of sales, in 1997 to $1.9
million, or 15.9% of sales, in 1998 as we continued to increase our new product
development efforts.
General and Administrative. General and administrative expenses increased
approximately 32.2% from $640,000, or 8.4% of sales, in 1997 to $846,000 or 7.1%
of sales in 1998. The increase was due primarily to increased administrative
costs related to the opening of our Boulder facility.
Other Income (Expense), Net. Interest and other income, net was $49,000 for
1997, compared to $111,000 in 1998. The increase was due primarily to foreign
exchange losses in 1997 of $28,000 compared to foreign exchange gains of $50,000
in 1998.
Income Tax Expense. The provision for income taxes of $483,000 for 1997 and
$772,000 for 1998 consisted of estimated federal and state income taxes. The
effective tax rate for 1997 was 34.8% and the effective tax rate for 1998 was
35.1%. The effective rates differ from our expected tax rate of 38.5% due
primarily to research and development tax credits.
20
<PAGE> 25
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statement of operations
data for the eight quarters ended June 30, 2000 as well as this data expressed
as a percentage of our sales for the periods indicated. Our quarterly results
have varied in the past and may significantly vary in the future. We believe
that quarter-to-quarter comparisons will not be meaningful and should not be
used as an indication of our future performance. This data has been derived from
unaudited financial statements that, in our opinion, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for periods presented. This
information should be read in conjunction with our financial statements and the
related notes included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................................ $3,173 $3,390 $3,200 $4,986 $4,148 $5,070 $6,624 $9,977
Cost of sales........................ 1,337 1,474 1,339 2,042 1,874 2,499 2,897 4,253
------ ------ ------ ------ ------ ------ ------ ------
Gross margin..................... 1,836 1,916 1,861 2,944 2,274 2,571 3,727 5,724
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Marketing and sales................ 467 585 544 682 552 696 772 882
Research and development........... 473 618 562 514 573 673 872 1,285
General and administrative......... 199 330 269 289 324 496 443 621
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses......... 1,139 1,533 1,375 1,485 1,449 1,865 2,087 2,788
------ ------ ------ ------ ------ ------ ------ ------
Operating income..................... 697 383 486 1,459 825 706 1,640 2,936
Other income (expense), net.......... 15 90 (7) (24) 80 4 15 (25)
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes........... 712 473 479 1,435 905 710 1,655 2,911
Income tax expense................... 282 133 172 518 324 255 607 1,054
------ ------ ------ ------ ------ ------ ------ ------
Net income....................... $ 430 $ 340 $ 307 $ 917 $ 581 $ 455 $1,048 $1,857
====== ====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF SALES:
Sales................................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales........................ 42 43 42 41 45 49 44 43
------ ------ ------ ------ ------ ------ ------ ------
Gross margin..................... 58 57 58 59 55 51 56 57
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Marketing and sales................ 15 17 17 14 13 14 12 9
Research and development........... 15 18 18 10 14 13 13 13
General and administrative......... 6 10 8 6 8 10 6 6
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses......... 36 45 43 30 35 37 31 28
------ ------ ------ ------ ------ ------ ------ ------
Operating income..................... 22 12 15 29 20 14 25 29
Other income, (expense) net.......... -- 2 -- -- 2 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes.................. 22 14 15 29 22 14 25 29
Income tax expense................... 9 4 5 11 8 5 9 10
------ ------ ------ ------ ------ ------ ------ ------
Net income....................... 13% 10% 10% 18% 14% 9% 16% 19%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Sales increased in each of the previous eight quarters with the exception
of the three months ended March 31, 1999 and September 30, 1999. We experience
fluctuations in sales as a result of the timing of large volume customer orders.
This occurred in both the three months ended March 31, 1999 and September 30,
1999. In addition, the decrease in sales in the three months ended September 30,
1999 was partially due to competitive pricing pressures.
Gross margins were negatively affected in the second half of 1999 due
primarily to reductions in the price of certain products, including greater
price reductions for sales to high volume customers, to meet competitive
pressures.
Marketing and sales expenses have generally increased in each of the past
eight quarters. The increase in the three months ended December 31, 1998 was due
primarily to a one-time charge of approximately $80,000 in connection with a
product that did not perform to our or our customers'
21
<PAGE> 26
expectations. The increase in the three months ended June 30, 1999 was due
primarily to increases in travel, hiring and relocation costs, salaries and
catalog expenses.
Research and development expenses increased in each of the past eight
quarters with the exception of a decrease in the three months ended June 30,
1999. Research and development expenses increased in the three months ended
December 31, 1998 due primarily to increased salaries, third party consulting
fees and materials related to a major initiative to release an upgrade of one of
our modular products. Research and developments expenses decreased in the three
months ended June 30, 1999 due to temporary decreases in project materials and
use of third party consultants.
General and administrative expenses have generally increased in each of the
eight previous quarters. In the three months ended December 31, 1998 the
increase in our expenses primarily related to the opening of our Boulder
facility. General and administrative expenses in the three months ended December
31, 1999 were impacted by a charge related to separation agreements entered into
with two of our former employees.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations and met our capital
expenditure requirements primarily through cash flows from operations and
private sales of our common stock.
Cash flows from operating activities were $1.5 million in 1997, $1.1
million in 1998, $709,000 in 1999 and $93,000 for the six months ended June 30,
2000. The decrease in cash flow for the six months ended June 30, 2000 was due
primarily to increases in receivables and inventory. Our need for increased
working capital is consistent with our increased sales during this period. As of
June 30, 2000, we had cash and cash equivalents of $617,000 and working capital
of $6.9 million.
Net cash used in investing activities was $259,000 in 1997, $338,000 in
1998, $490,000 in 1999 and $411,000 for the six months ended June 30, 2000.
Substantially all of the cash used in investing activities has been for the
purchase of capital equipment used to support the expansion of our business.
Net cash used in financing activities was $125,000 in 1997, $829,000 in
1998, $1.1 million in 1999 and $107,000 for the six months ended June 30, 2000.
The cash was used in 1997 for debt repayments and the payment of a dividend in
the amount of $92,000. In 1998, 1999 and the six months ended June 30, 2000,
$720,000, $1.1 million and $1.4 million, respectively, were used to repurchase
stock from a former shareholder. In conjunction with the stock repurchase in the
six months ended June 30, 2000, we entered into a loan agreement for $1.4
million, maturing in April 2003. This term loan requires monthly payments of
principal of $39,000 plus interest. Interest is paid at a rate equal to one and
a half percent above prime rate, or 11% at June 30, 2000. As of June 30, 2000,
approximately $1.3 million was outstanding on this loan. The loan agreement has
placed certain restrictions on us, including the payment of cash dividends.
We also have a $2.0 million revolving working capital line of credit that
expires in March 2001. As of June 30, 2000, we did not have any advances under
the line of credit. Advances under the line of credit are limited to a
percentage of outstanding accounts receivable. The line of credit bears
interest, payable monthly, at a rate equal to three-quarters of a percent above
prime rate, or 10.25% as of June 30, 2000.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to fund our operations for
at least the next 18 months. We could, however, need or choose to raise
additional funds or seek additional financing prior to or after the end of this
period. Our future financing needs will depend on many factors, including
potential strategic acquisitions of complementary businesses, products or
technology, the rate of our sales
22
<PAGE> 27
growth and our need to invest in personnel and infrastructure to facilitate
growth. We cannot assure you that such additional financing would be available
on acceptable terms, if at all.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Sensitivity
Our products are sold internationally. As a result, volatile movements in
currency exchange rates may affect financial results. Most of our overseas sales
are made in U.S. dollars except for sales in Japan, which are made in yen. A
strengthening of the U.S. dollar could result in our products being less
competitive in foreign markets.
Interest Rate Risk
Our exposure to interest rate risk is limited to our term loan, which bears
interest at one and half percent above the prime rate and our line of credit,
which bears interest at three quarters of a percent above the prime rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, will
be required to be implemented on January 1, 2001. SFAS No. 133 requires that
derivatives be reported on the balance sheet at fair value and, if the
derivative is not designated as a hedging instrument, changes in fair value must
be recognized in earnings in the period of change. Currently, we do not hold any
derivative instruments, so we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on revenue recognition issues in the
absence of authoritative literature addressing a specific arrangement or a
specific industry. SAB 101 has been amended by SAB 101A and SAB 101B, which
delays the implementation date of SAB 101 until no later than the fourth fiscal
quarter of 2000. We are currently assessing the impact of SAB 101. Its impact is
not expected to have a material impact on our financial position.
In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25." FIN 44 provides guidance for issues that
have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to
Employees." FIN 44 applies prospectively to new awards, exchanges of awards in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000, except for the provisions
related to repricings and the definition of an employee which apply to awards
issued after December 15, 1998. We do not expect FIN 44 to have an impact on our
financial position.
In May 2000, the FASB Emerging Issues Task Force, or EITF, reached a
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," or the
sales incentive consensus. The consensus requires the reduction in or refund of
the selling price of the product or service resulting from any cash sales
incentive to be classified as a reduction of revenue. The sales incentive
consensus, which requires reclassification of prior period amounts, is effective
upon the adoption of SAB 101. We currently classify sales discounts as a
reduction of sales. Accordingly, our application of this consensus will not have
an impact on our reported sales, reported earnings or financial position.
23
<PAGE> 28
In July 2000, the EITF reached a consensus on Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs," the shipping consensus. The shipping
consensus requires that amounts billed to a customer in a sale transaction
related to shipping and handling be classified as revenue. The shipping
consensus, which requires reclassification of prior period amounts, is effective
upon the adoption of SAB 101. We currently classify shipping revenues as a
reduction of shipping costs. We do not expect the application of this consensus
to have a material impact on our reported sales, cost of sales or operating
expenses. The application of this consensus will not have an impact on our
reported earnings or financial position.
24
<PAGE> 29
BUSINESS
OVERVIEW
We develop, manufacture and market optical test and measurement equipment
designed to enable optical component vendors to increase unit production,
improve manufacturing yields, accelerate the development of innovative products
and reduce manufacturing costs. We introduced our first product in 1986 and
currently offer test and measurement equipment in 12 product families. We sell
our products directly to customers in North America and we primarily use a
network of distributors to sell our products internationally. Our customers
include some of the largest companies in the optical industry, including Corning
Incorporated, JDS Uniphase Corporation and Lucent Technologies, Inc. Our
objective is to be the leading provider of optical test and measurement
equipment for the optical components market.
INDUSTRY BACKGROUND
Increased Demand for Network Capacity
In recent years the volume of traffic on communications networks has
increased dramatically due to the growth of the Internet and related
bandwidth-intensive applications. Ryan Hankin Kent, Inc., or RHK, a
telecommunications industry research firm, estimates that Internet traffic,
which was 350,000 terabytes per month in 1999, will increase to more than 15
million terabytes per month in 2003. This growth in traffic has created
significant demand for increased capacity in communications networks and has
driven network service providers to rapidly deploy optical networking systems to
significantly increase network transmission capacity and provide greater network
functionality at a lower cost.
Rapid Deployment of Optical Networks
Optical networks transmit data using pulses of light transmitted through
glass fibers while traditional digital networks are based on electrical signals
transmitted over copper wires. Advances in optical networking technology have
led to greater network capacity and higher transmission speed than traditional
digital technologies. For example, dense wavelength division multiplexing, or
DWDM, can split signals into different wavelengths of light and transmit
multiple signals through a single fiber, which multiplies fiber capacity.
Recently introduced DWDM systems can carry as many as 160 wavelength channels
per optical fiber. As a result of these significant advances in optical
networking technology and the related increases in transmission capacity,
optical networks are being rapidly deployed worldwide. According to RHK, the
global DWDM and optical networking market is expected to increase from $13
billion in 2000 to $41 billion in 2003.
The proliferation of optical networks has led to a growth in demand for the
optical networking systems that manage them. In addition, the need for optical
networking systems with enhanced features and capabilities has placed increased
pressure on established and emerging optical system vendors to develop
innovative products while also increasing their production volumes. In order to
meet these competitive pressures, system vendors are concentrating on their core
areas of expertise such as system integration and network management software
design. To maintain this focus, system vendors are requiring optical component
vendors to innovate and develop new components with greater functionality.
Optical Components and Subsystems
The rapid deployment of optical networking systems has increased demand for
optical components. Optical components are the building blocks of optical
networking systems and include active and passive components. Active components
require electricity and are used to generate,
25
<PAGE> 30
control or amplify optical signals. Passive components do not require
electricity and are used to guide, filter, isolate, combine or split optical
signals. Subsystems consist of several components integrated into a single
package and offer the advantage of a more complete solution from a single
supplier rather than a combination of several components from multiple
suppliers. In addition, subsystems often also provide better performance at a
lower total cost.
DWDM optical networking systems are comprised of a number of components and
subsystems, including transmitters, multiplexers, optical amplifiers,
demultiplexers and receivers. Transmitters incorporate source lasers that
generate the optical signal, which has been converted from electronic digital
data. Multiplexers combine signals from multiple source lasers onto a single
fiber. Optical amplifiers are inserted in DWDM systems at periodic intervals to
boost signal strength, which becomes weaker and more dispersed as it travels
through the fiber. Optical amplifiers are capable of boosting the signal
strength of all wavelength channels simultaneously without converting them into
electrical signals and without splitting the signal into its separate wavelength
channels. The receiving end of the system uses a demultiplexer to split the
optical signal into its constituent wavelength channels and a receiver to
convert the optical signal into its underlying electronic digital data. More
advanced DWDM systems include additional optical components, such as optical
add/drop multiplexers, or OADMs, that add flexibility and functionality to the
network by allowing optical signals to be added to or dropped from the fiber.
[The description in the preceding paragraph is illustrated using a diagram
showing components of a DWDM system. The diagram shows multiple optical signals
being combined using a multiplexer, the optical signal passing through an
optical amplifier and an optical add/drop multiplexer and the optical signal
being separated into its separate wavelength channels by a demultiplexer.]
[GRAPHIC]
RHK estimates that the worldwide market for optical components will grow to
over $22.5 billion by 2003 from approximately $6.6 billion in 1999. To meet this
growing demand, optical component vendors are being required to supply greater
volumes of their components and subsystems, which places an increased emphasis
on their manufacturing processes and capacity. In addition, competitive
pressures are forcing optical component vendors to improve their manufacturing
yields and reduce their costs of manufacturing. Finally, in order to meet the
requirements of next generation DWDM systems, which are moving to higher channel
counts, higher speeds, longer transmission distances and increased
functionality, component vendors must develop and manufacture innovative optical
components and subsystems.
Challenges Facing Optical Component Vendors
Optical component vendors seeking to keep pace with rapidly growing demand
and to develop and introduce innovative components face significant challenges,
which include:
Improving Yield and Increasing Production Volume. Optical component vendors
must significantly increase their yields and production volume to meet market
demand and remain competitive. Current optical component manufacturing is
time-consuming and is characterized by low yields due to the precision required
by, and the largely manual nature of, the manufacturing process. These low
manufacturing yields result in a higher total costs of manufacturing. Optical
component vendors need to invest in processes and equipment that will improve
yields, help manage capital equipment expenditures and reduce their overall
manufacturing costs.
26
<PAGE> 31
Conforming to Complex Component Specifications. Optical components must
conform to stringent performance and functionality specifications established by
system vendors. As optical components become more complex, the number of
individual tests that must be performed and the required level and difficulty of
conformity increases.
Achieving High Rate of Innovation. Optical component technology is changing
rapidly as component vendors introduce innovative products such as DWDM source
lasers with higher power and the ability to tune to different wavelengths,
multiplexers and demultiplexers that can accommodate more wavelength channels
and wider bandwidth optical amplifiers. In addition, there is a growing demand
for subsystems that integrate several of these components. To research and
develop innovative components and subsystems and to verify their functionality,
optical component vendors require increasingly complex and evolving test
methodologies.
Accelerating Product and Manufacturing Process Qualification. Once optical
component vendors have completed the design of a new product and implemented a
manufacturing process, system vendors must qualify both the product and the
manufacturing process before they will purchase the product. Increasing
component complexity and integration is making this qualification process more
difficult and time-consuming. Optical component vendors are increasingly seeking
solutions to help expedite their product qualification process and improve time
to market.
OPTICAL TEST AND MEASUREMENT EQUIPMENT MARKET OPPORTUNITY
Optical component vendors must measure and control their components and
subsystems throughout the manufacturing process. Optical test and measurement
equipment is used to precisely measure, verify and optimize component and
subsystem performance. Additionally, optical test and measurement equipment is
used to precisely generate and control optical signals during the test
operations that component vendors perform to assess their manufacturing
processes and to develop new products. Key requirements of test and measurement
equipment include high levels of stability, repeatability, accuracy, measurement
speed and ease of use. Optical component vendors use optical test and
measurement equipment during their manufacture, assembly and performance
verification processes and to conduct advanced experiments and develop
prototypes of next generation products.
In response to the challenges facing them, optical component vendors are
increasingly turning to sophisticated test and measurement equipment in order to
improve their manufacturing processes, improve quality and develop innovative
products. To meet these challenges, established and emerging optical component
vendors are rapidly increasing their investment in capital equipment. We believe
this trend will cause the optical test and measurement equipment market to grow
along with the market for optical components and evolve rapidly as innovative
optical components and subsystems are introduced. The continuing growth of the
optical networking market combined with the increasing demand for sophisticated
test and measurement solutions has created a significant opportunity for
manufacturers of optical test and measurement equipment.
THE ILX LIGHTWAVE SOLUTION
We develop, manufacture and market optical test and measurement equipment
designed to enable optical component vendors to increase unit production,
improve manufacturing yields, accelerate the development of innovative products
and, reduce manufacturing costs. We are able to leverage our 14 years of
experience in developing advanced optical test and measurement equipment to
provide our customers with innovative solutions designed to meet their complex
and
27
<PAGE> 32
rapidly changing requirements. We believe our products provide our customers the
following key benefits:
Improved Manufacturing Process. Our products are designed to allow our
customers to make fewer, more accurate measurements to assess component
functionality, diagnose manufacturing faults and identify inefficiencies.
Greater test speed, reliability and accuracy reduce the calibration time of
production equipment and optimize the manufacturing process to improve yields
and increase production volume. By supporting increasingly complex product tests
and by expediting testing times, our solutions enable optical component vendors
to shorten optical system vendors' qualification processes.
Flexible and Upgradeable Product Design. The modular design of many of our
products enables component vendors to extend their test capabilities by adding
new test and measurement functionality in a pay-as-you-grow fashion as
production demands increase and test requirements change. This modular design
enables component vendors to manage their capital expenditures, protect their
initial capital equipment investments and conserve manufacturing floor space.
Application-Focused Solutions. Because our products are designed for
specific sub-segments of the optical components market, they offer our customers
a focused solution that tests specific component characteristics and is closely
aligned with their manufacturing and product design needs. In addition, many of
our products integrate multiple test and measurement functions, allowing our
customers to avoid combining multiple test products from different vendors. For
example, the verification testing of laser diodes requires the control or
measurement of current, voltage, temperature, optical power and wavelength. Our
Laser Diode Parameter Analyzers family integrates these functions into a single
product.
Advanced Technology and Features. Our products are designed to offer our
customers advanced technology and features that provide enhanced test
functionality and enable the acceleration of the development and manufacture of
innovative optical components. For example, our multi-channel fiber optic source
product family is designed to offer the highest levels of wavelength stability
available in the manufacturing process, which lengthens the time between test
system calibrations and provides a controlled environment to facilitate new
product development.
Responsive Customer Service. We support our customers with a technically
qualified sales and service staff trained to quickly understand our customers'
technical requirements and recommend optimum test and measurement solutions. In
order to minimize our customers' production downtime, we offer repair and
calibration services at out customers' sites or at our service centers. Through
frequent interaction with our key customers, our sales and customer service
engineers are also able to help focus and direct our new product development
activities to keep pace with rapidly changing customer requirements.
STRATEGY
Our objective is to be the leading provider of optical test and measurement
equipment for the optical components market. We intend to continue to develop
and introduce innovative optical test and measurement solutions that will
broaden our product lines and offer optical component vendors increased
manufacturing yields, improved quality and reduced overall cost of ownership of
their test and measurement equipment. Key elements of our strategy include:
Continue to Focus on High-Growth Segments of the Optical Components
Market. We plan to continue to focus on selected, high-growth market segments
such as optical amplifier test, passive component test and DWDM laser test. We
believe that by focusing on these application-specific segments, we will be able
to offer highly differentiated test and measurement products and enhance our
position as a market and technology leader. As these market segments mature and
common test methodologies become widely accepted, we intend to incorporate new
functionality into our products.
28
<PAGE> 33
Collaborate with Leading Optical Component Vendors. We intend to expand our
existing relationships with leading optical component vendors. We believe that
by expanding these relationships and developing relationships with emerging
optical component vendors, we will gain market and technology insights, maintain
our customer responsiveness and establish ourselves as the preferred provider of
optical test and measurement equipment.
Expand Sales, Marketing and Customer Service Capabilities. We believe that
the highly technical nature and rapid evolution of our market requires a
customer-focused, technically knowledgeable sales, marketing and customer
service staff. We intend to significantly expand our field sales force with an
emphasis on placing sales engineers near our key customers throughout North
America, Europe and Japan. We also intend to expand our marketing and product
management capabilities with additional staff and training. In order to meet our
customers' service needs, we also plan to expand our on-site calibration and
repair services in North America, Europe and Japan.
Decrease Product Development Cycle Time. We believe our fast product
development cycle times have provided us with a competitive advantage by
allowing us to be first to market with innovative products and features. We
intend to continue to invest in, improve and refine our new product development
process by hiring additional engineering and support personnel, increasing
training and implementing advanced development tools.
Pursue Strategic Acquisitions. We believe that market fragmentation in the
test and measurement industry creates opportunities for consolidation. We intend
to pursue acquisitions that allow us to gain access to key technologies,
expanded channels of distribution, skilled personnel, complementary products and
additional market segments.
PRODUCTS
We believe that the history of our products has been characterized by
innovation. In 1986, shortly after our founding, we introduced our LDX-3207,
which we believe was the industry's first precision, low noise current source
for laser diode control. Since then, we have leveraged our extensive experience
to develop many advanced test and measurement solutions. In February 2000 we
introduced our SSB-9200, which we believe is the industry's first high-density
fiber optic source with an integrated wavelength division multiplexer for
optical amplifier test. Our products are also designed to be reliable, accurate
and easy-to-use. Most of our products offer fast, computer-controlled interfaces
for automated test in manufacturing environments. Our products may be divided
into the following product families:
Fiber Optic Sources. Our fiber optic sources generate laser signals that
mimic the optical signals in optical networking systems. Our fiber optic source
instruments precisely control the optical power and wavelength of the signals
they generate. We offer our fiber optic sources in both single channel and
modular multi-channel versions. The modular versions of our products are
designed to
29
<PAGE> 34
allow our customers to easily add functionality or additional wavelength
channels as their test requirements evolve.
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------------------------------
PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS
-----------------------------------------------------------------------------------------------
Multi-Channel Fiber Optic Modular instruments capable - Test of optical network
Sources of generating precisely systems, optical amplifiers
controlled optical signals and passive components
with up to 48 wavelength
channels. A greater number of
wavelength channels can be
accommodated by linking
several instruments together
-----------------------------------------------------------------------------------------------
Single Channel Fiber Optic Instruments capable of - Passive component test
Sources generating precisely - Research and development
controlled optical signals
based on a variety of laser
types
-----------------------------------------------------------------------------------------------
</TABLE>
Laser Diode Instruments. Laser diodes used in optical networking systems
are typically complex devices that incorporate several sub-components including
a semiconductor laser chip, thermoelectric cooler and output monitoring
photodiode. Our laser diode instruments are designed to precisely measure and
control the operating parameters of these devices during test procedures.
Parameters that can be measured and controlled include current, voltage and
temperature for lasers, and current and voltage for thermoelectric coolers. In
addition, our laser diode instruments also monitor photodiode output current.
Our laser diode instruments offer low-noise, high stability outputs and multiple
laser protection features. In order to meet a variety of application
requirements, we offer our laser diode instruments in several versions including
single-output and modular, multi-channel output versions. The modular versions
of our instruments are designed to allow our customers to easily add
functionality or additional laser diode control outputs as their test
requirements evolve.
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------------------------------
PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS
-----------------------------------------------------------------------------------------------
Modular Laser Diode Modular instruments capable - Optical amplifier test
Controllers of precisely controlling up
to 16 laser diodes
simultaneously
-----------------------------------------------------------------------------------------------
Single Output Laser Diode Instruments that combine both - Controlling laser diodes
Controllers current source and during assembly
temperature control functions - Research and development
for a single laser diode
-----------------------------------------------------------------------------------------------
Single Output Current Instruments capable of - Controlling laser diodes
Sources precisely measuring and during assembly
controlling the current, - Research and development
voltage and monitoring
photodiode output of a laser
diode
-----------------------------------------------------------------------------------------------
Single Output Temperature Instruments capable of - Controlling component
Controllers precisely measuring and temperature during assembly
controlling the temperature - Research and development
of a laser diode or other
optical components
-----------------------------------------------------------------------------------------------
Pulsed Current Sources Instruments capable of - Testing unpackaged laser
generating short pulses of diodes during the
current to power laser diodes manufacturing process
- Research and development
-----------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 35
Laser Diode Parameter Analyzers. Our family of laser diode parameter
analyzers and associated software tools are designed to quickly and accurately
measure the operating characteristics of laser diodes.
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------------------------------
PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS
-----------------------------------------------------------------------------------------------
Laser Diode Parameter Integrated instrument that - Testing laser diodes during
Analyzer and Software combines laser diode control the manufacturing process
and optical power measurement - Optical amplifier test
functions. PC based software - Incoming inspection of
used for instrument control laser diodes
and allows fast, accurate - Research and development
compilation of data
-----------------------------------------------------------------------------------------------
</TABLE>
Power/Wavelength Meters. Our optical power/wavelength meters are designed
to accurately measure the power and/or wavelength of an optical signal from a
variety of sources. Some meters couple to our family of optical measurement
heads in order to accommodate a wide variety of test applications. Our recently
introduced Fiber Optic Power Meter, FPM-8210, is designed to allow operators to
quickly make accurate optical power measurements with the unterminated, or bare,
optical fiber that is commonly used during optical component assembly.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Optical Power Meter Instrument capable of - Optical amplifier test
accurately measuring power - Passive component test
of an optical signal - Testing laser diodes
during the manufacturing
process
- Incoming inspection of
laser diodes
- Research and development
-------------------------------------------------------------------------------------------------
Optical Power/Wavelength Instrument capable of - Passive component test
Meter and Measurement simultaneously measuring the - Testing laser diodes
Heads power and wavelength of an during manufacture
optical signal - Incoming inspection of
laser diodes
- Research and development
-------------------------------------------------------------------------------------------------
</TABLE>
Component Mounting Fixtures. We offer a line of laser diode mounting
fixtures designed to meet the demands of a wide range of test and measurement
applications. These fixtures incorporate both mechanical and electrical
connections and can accommodate many different laser diode package styles. Some
of our mounting fixtures also incorporate built-in temperature control
capability.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Multiple Device Mounting Component mounting fixtures - Optical amplifier test
Fixtures that can accommodate up to - Passive component test
16 laser diodes - Research and development
-------------------------------------------------------------------------------------------------
Single Device Mounting Component mounting fixtures - Laser diode test
Fixtures that accommodate a single - Research and development
laser diode
-------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 36
CUSTOMERS
We sell our products to more than 300 customers and distributors around the
world. We market and sell our products primarily to optical component vendors.
The majority of our remaining sales are made to optical networking system
vendors. We work closely with our key customers to determine their needs and to
focus and direct our new development activities to keep pace with their rapidly
changing requirements. We consider both our strategic collaboration with our
customers and our ability to respond to emerging industry trends to be critical
to our success. The following is a list of our 20 largest customers and
distributors, in terms of sales, in the six months ended June 30, 2000:
Customers
Alcatel
Agilent Technologies, Inc.
Corning Incorporated
Corvis Corporation
JDS Uniphase (includes E-TEK)
Lucent Technologies, Inc.
(includes Ortel)
Marconi Communications
Nortel Networks Corporation (includes
Qtera Corporation)
New Focus, Inc.
OASys Technologies, Inc.
SDL, Inc. (includes Photonic Integration
Research Incorporated (PIRI))
Sycamore Networks, Inc.
Tyco Submarine Systems
Distributors
AG Electro-Optics
BBT Svenska AB
BFI Optilas SA
Laser 2000 GmbH
Meisho Corporation
Opto Science
Suruga Seiki Co.
In the six months ended June 30, 2000, Corning Incorporated and JDS
Uniphase Corporation accounted for approximately 22% and 11% of our sales,
respectively. In the year ended December 31, 1999, Corning Incorporated and
Lucent Technologies accounted for approximately 26% and 11% of our sales,
respectively. No other customer represented more than 10% of our sales in either
the six months ended June 30, 2000 or the year ended December 31, 1999.
RESEARCH AND DEVELOPMENT
We continually seek to improve our competitive technological position and
our product breadth and performance through research and product development. We
believe that continued investment in this area will be very important to our
success. We have assembled a team of physicists and engineers with significant
experience in the optical industry. As of June 30, 2000, we had 40 employees
engaged in research and development, including 10 with advanced degrees. Our
engineers are located in our research and development facilities located in
Bozeman, Montana and Boulder, Colorado. We maintain a long-term cooperative
research effort with the Optical Technology Center at Montana State University
and also engage in mutual development arrangements with leading component
vendors to enable us to incorporate innovative technology into our test and
measurement solutions. Our research and development expenses for the six months
ended June 30, 2000 were $2.2 million and for the years ended December 31, 1999,
1998 and 1997 were $2.3 million, $1.9 million and $1.1 million, respectively.
We believe our development process has been and will continue to be a key
contributor to our ability to continuously offer new product introductions. Our
product development teams follow an established product development process. We
have used this process for approximately 10 years and we continuously review and
seek to improve it. Our new product development process allows for a systematic
progress review at each of the market and research feasibility, design
optimization,
32
<PAGE> 37
prototype design, product development, pilot manufacturing and market launch
stages. At each stage, our management reviews the technical progress of the
product, its schedule and cost, and reassesses market conditions to determine
how to continue the development process. We believe that by following an
established product development process, we can accelerate product development,
ensure high quality new product introductions and control our development costs.
SALES, MARKETING AND CUSTOMER SERVICE
We sell our products in North America through a direct sales force
consisting of nine field sales people as of June 30, 2000. We sell
internationally primarily through distributors as well as through direct sales
personnel. As of June 30, 2000, we had one sales manager in the United Kingdom
and one sales manager and one sales assistant in Japan. Our international sales
efforts also include approximately 22 independent distributors located in
several countries in Europe and the Pacific Rim where we do not have a direct
presence.
As of June 30, 2000, our direct sales account managers address our markets
on an assigned and target account basis. Our sales force includes our technical
sales engineers who provide customers and prospective customers with answers to
technical and product related questions as well as application support relating
to the use of our products in customers' applications. These engineers also help
to monitor changing customer requirements and to define the features that are
required for our products to be successful in specific applications.
As of June 30, 2000, our marketing group consisted of eight market
managers, product managers and communications specialists. In order to build
awareness of our products and enhance our reputation as one of the technology
leaders in our industry, we employ a vertically focused marketing strategy. The
three market segments that we focus on are optical amplifier test, laser diode
test and passive component test. Our marketing teams are responsible for
strategic planning, new product launches and promotional activities. In
addition, our marketing teams frequently interact with clients to incorporate
their feedback into our product development cycle and to provide technical
support.
As of June 30, 2000, our customer service group consisted of seven
employees in Bozeman, Montana, and one employee in Japan. We currently have
service facilities in Bozeman, Montana, Boulder, Colorado, Japan and, through a
third party, the United Kingdom. We believe our ability to provide customer
service and technical support is essential to our business. Our technical
support personnel are trained in the use of the hardware and software
incorporated in our products, as well as the components manufactured by our
customers. We generally offer a one-year limited warranty on our products.
MANUFACTURING
Our manufacturing group is responsible for material planning and
procurement, manufacturing engineering, validation testing, production,
assembly, test and calibration, and shipping to customers. As of June 30, 2000,
we had 90 employees involved in our manufacturing operations, 77 in our Bozeman,
Montana facility and 13 in our Boulder, Colorado facility. We currently have
approximately 14,000 square feet for manufacturing purposes and we plan to
expand to approximately 30,000 square feet in the first half of 2001.
Quality. Our quality system is based on the ISO 9001 standard. We use a
quality manual and 15 documented procedures.
Production. Our production areas are primarily organized by cells, which
build families of products. Each cell is led by an experienced technician.
Activities in our production areas include all aspects of assembly, firmware
loading, testing and calibration.
33
<PAGE> 38
Manufacturing Engineering. Our manufacturing engineers are responsible for
production technical support, test systems, integration of new products into
manufacturing and validation of new products prior to their release.
Materials. Our materials groups are responsible for our supply-chain
management activities. We currently purchase certain key components, such as
lasers, from limited sources. Lead times can vary widely. The inability of our
suppliers to deliver components in a timely manner could have an adverse effect
on our ability to manufacture and ship our products. We seek to manage the risk
associated with industry-wide supply shortages or long lead times through
established relationships with most of our suppliers.
In general, there are multiple suppliers for the types of materials we
purchase. Although there are several suppliers for the materials we require,
there are industry-wide shortages of some items such as lasers. We have not
entered into long-term supply agreements. If we are unable to procure supplies
at acceptable prices and within a reasonable time frame, our business and
results of operations would suffer.
We forecast product demand on a monthly basis, based on anticipated product
sales and generally order materials and components based on these forecasts. We
have experienced in the past, and expect to continue to experience, significant
fluctuations in the size of orders we receive. It is sometimes difficult for us
to predict the timing of these orders. Large or unexpected orders may impact our
ability to satisfy all customers. If we overestimate forecasted sales, we may
have excess inventory.
COMPETITION
We believe the principal competitive factors in our industry include:
- product performance;
- price;
- our ability to manufacture and deliver our products on a timely basis;
- our ability to introduce new products with improved features; and
- customer support and service.
The markets for our products are intensely competitive. We expect the
intensity of competition to increase in the future from both existing and new
competitors. We compete in specialized market segments against a relatively
limited number of companies. We also face competition in some of our markets
from our existing and potential customers who have developed or may develop
products that are competitive to ours. Many of our current and potential
competitors, such as Agilent Technologies, Inc., Ando Electric Co., Ltd., EXFO
Electro-Optical Engineering Inc. and Newport Corporation, may have longer
operating histories, greater name recognition and substantially greater
financial, technical, marketing, management, service, support and other
resources than we do. In addition, many of our competitors have well-established
relationships with our current or potential customers and have an extensive
knowledge of our industry. Therefore, they may be able to respond more quickly
than we can to new or changing opportunities, technologies, standards or
customer requirements.
Other competitors are small and highly specialized companies that focus on
only one aspect of our markets or in selected geographic regions. We may not be
able to compete successfully in the future against existing or new competitors.
Competitive pressures may force us to reduce our prices, which could negatively
affect our operating results. Consolidation in the optical test and measurement
or in the optical component industry could also intensify the competitive
pressures
34
<PAGE> 39
that we face. If we do not respond adequately to competitive challenges, our
business and results of operations would be harmed.
INTELLECTUAL PROPERTY
We rely on trade secrets and confidentiality agreements with employees and
third parties, all of which offer only limited protection. None of our
technology is currently patented and we hold no copyrights or trademarks. In
addition, the laws of other countries in which we market our products may afford
little or no effective protection of our proprietary technology. Third parties
may infringe our intellectual property rights or devise designs that circumvent
our intellectual property, and we may not be able to detect this unauthorized
use or effectively enforce our rights. Litigation may be necessary in the future
to enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of management
resources, either of which could harm our business.
EMPLOYEES
As of June 30, 2000, we had 173 employees, 139 in our Bozeman, Montana
facility and 30 in our Boulder, Colorado office. We also had one employee in our
London, England office and three in our Saitama, Japan office. Of the total
employees, 90 were in manufacturing, 40 were in research and development, 22
were in sales and marketing, and 21 were in finance and administration. None of
our employees is represented by a union. We believe that our relations with our
employees are good.
FACILITIES
Our corporate headquarters, together with one of our manufacturing
facilities, is located in Bozeman, Montana. At this location, we lease
approximately 21,500 square feet under a lease that expires in April 2004. We
have contracted to lease a new 21,500 square foot facility adjoining our current
Bozeman facility to accommodate our need for an increase in manufacturing
capacity and employees. The new facility is scheduled for completion in the
first half of 2001. We also lease approximately 10,600 square feet of office and
manufacturing space in Boulder, Colorado under a lease that expires in September
2001. We plan to lease additional space in Boulder to accommodate our need for
an increase in manufacturing capacity and employees in our Boulder facility. We
plan to move to this facility in the fourth quarter of 2000. We also lease
approximately 900 square feet of office space in London, England and
approximately 900 square feet in Saitama, Japan. We believe that these existing
and planned facilities are adequate to meet our current, foreseeable
requirements or that suitable additional or substitute space will be available
on commercially reasonable terms.
LEGAL PROCEEDINGS
We currently are not subject to any material legal proceedings. However, we
may from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
35
<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of September 1,
2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lawrence A. Johnson.................. 48 Chairman, President and Chief Executive Officer
Randall T. Dugger.................... 51 Vice President of Finance and Administration and Chief
Financial Officer
James A. Schreiner................... 38 Vice President and General Manager of Boulder Division
Robin A. Bequet-Sharber.............. 40 Vice President of Worldwide Sales
Nancy L. Quist....................... 45 Vice President of Marketing and Business Development
Glenden F. Johnson................... 74 Director
James C. Wyant(1)(2)................. 57 Director
Steven M. Quist...................... 54 Director
Frederick R. Hume(1)(2).............. 57 Director
</TABLE>
------------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
Lawrence A. Johnson is the Founder of ILX Lightwave and has served as
President, Chief Executive Officer and Chairman of the Board since our inception
in 1986. From 1983 to 1986, Dr. Johnson was an engineering group supervisor at
Rosemount Inc. where he was responsible for the development of new technology
related to fiber optic sensors for industrial applications. From 1981 to 1983,
he worked as a Member of Technical Staff at Ball Aerospace Systems Division in
the development of advanced electro-optical systems and technology for military
aerospace applications. From 1978 to 1981, Dr. Johnson worked for the National
Oceanic and Atmospheric Administration as a Staff Scientist in the development
of laser remote sensing technology. Dr. Johnson holds a PhD and MS in Optical
Sciences from the University of Arizona and a BS in Engineering Physics from the
Colorado School of Mines. Dr. Lawrence Johnson is the son of Mr. Glenden
Johnson, a director of our company
Randall T. Dugger has been our Vice President of Finance and Administration
and Chief Financial Officer since July 2000. From 1998 to 2000, Mr. Dugger was
an independent consultant and worked with us on a project by project basis.
Prior to that, Mr. Dugger served as our Chief Financial Officer from 1990 to
1998. Mr. Dugger was Chief Financial Officer of Prime Cable Corp., a
multi-system cable television operator, from 1979 to 1985 and was with Coopers &
Lybrand from 1973 to 1979. Mr. Dugger holds a BBA degree from the University of
Texas.
James A. Schreiner joined ILX Lightwave in June 1989 and was appointed Vice
President and General Manager of the Boulder Division in September 1999. Prior
to this appointment, Mr. Schreiner held positions as Product Line Director,
Director of Manufacturing, Manufacturing Manager and Manufacturing Engineer.
From 1988 to 1989, Mr. Schreiner worked as a Manufacturing Engineer for
Liquipak, Inc. supporting the production of automated packaging equipment. From
1984 to 1988, Mr. Schreiner worked as an Instrumentation Design engineer for
Minnesota Mining and Manufacturing Co. He holds a BS in Electrical Engineering
from Montana State University and is a Registered Professional Engineer in the
state of Minnesota.
Robin A. Bequet-Sharber joined ILX Lightwave in July 1998 as Marketing and
Sales Manager and was promoted to her current position as Vice President of
Worldwide Sales in June 2000. From 1982 to 1997, Ms. Bequet-Sharber worked with
the Medical Products Division of W.L. Gore & Associates, a developer and
manufacturer of GORE-TEX(R) Medical Products and surgically implantable devices.
In her tenure at Gore, Ms. Bequet-Sharber worked as a Product Manager,
36
<PAGE> 41
International Sales & Marketing Manager, Sales Trainer and Technical Field Sales
Associate. Ms. Bequet-Sharber holds a BS in Biology from the State University of
New York at StonyBrook.
Nancy L. Quist joined ILX Lightwave in July 2000 as Vice President of
Marketing and Business Development. Prior to joining ILX Lightwave, she worked
as Vice President and General Manager for MTS Systems Corp., a manufacturer of
material testing systems, from 1999 to July 2000. From 1997 to 1999, Ms. Quist
worked as vice president of marketing and strategic planning at Detector
Electronics, Inc., a manufacturer of industrial optical detection equipment.
From 1990 to 1997, Ms. Quist held various sales and marketing positions at
Fisher-Rosemount, a process controls equipment supplier. Ms. Quist holds a BS in
Chemistry and Biology from Davidson College in North Carolina. Ms. Quist is the
wife of Steven M. Quist, a director of our company.
Glenden F. Johnson has served on our board of directors since our inception
in 1986. Prior to retiring in 1981 as Mobil Oil Corporation Senior Exploration
Operations Advisor and Coordinator, Worldwide. Mr. Johnson held various
exploration, supervisory and management assignments for Mobil Oil Corp. in the
United States and Canada from 1948 to 1981. Mr. Glenden Johnson is the father of
Dr. Lawrence Johnson, the President, Chief Executive Officer and Chairman of our
company.
James C. Wyant has served on our board of directors since April 1989. Dr.
Wyant has been the Director of the Optical Sciences at the University of Arizona
since 1999. From 1984 to 1997, Dr. Wyant was the founder and President of Wyko
Corporation, a manufacturer of precision optical based measurement
instrumentation.
Steven M. Quist has served on our board of directors since July 1989. He
has been Chief Executive Officer of CyberOptics Corporation, a designer and
manufacturer of laser sensors and systems for high precision, non-contact
dimensional measurement, since 2000, President since February 1998 and a
director since 1991. Prior to that, Mr. Quist held various positions at
Rosemount Inc. from 1970 to 1998, including President of the Rosemount
Measurement Division of Emerson Electric Co. Mr. Quist is a director of Rimage
Corporation, a manufacturer of CD recordable and computer disc duplication and
production equipment. Mr. Quist is the husband of Nancy L. Quist, our Vice
President of Marketing and Business Development.
Frederick R. Hume has served on our board of directors since March 1999.
Mr. Hume has been the President and Chief Executive Officer of Data I/O
Corporation, a provider of programming solutions for programmable semiconductor
devices, since February 1999. Mr. Hume has also served on Data I/O Corporation's
board of directors since January 1999. Prior to joining Data I/O, Mr. Hume was
Vice President and General Manager of Keithley Instruments, a maker of precision
instrumentation, from 1988 to 1998. Mr. Hume was retired from 1998 until joining
Data I/O. Mr. Hume is a director of IFR Systems, Inc. a manufacturer of
communications, test and measurement and avionics test instruments.
Prior to the closing of our initial public offering, we intend to add an
additional director to our board of directors.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Prior to the closing of our initial public offering, we intend to amend our
articles of incorporation to 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. For more information on the classified board, see "Description of Capital
Stock -- Anti-Takeover Effects of Our Articles of Incorporation and Bylaws and
Minnesota Law."
Our board of directors has established an audit committee and a
compensation committee. The audit committee consists of Mr. Hume and Dr. Wyant.
Prior to the closing of our initial public
37
<PAGE> 42
offering, we will add an additional director to our audit committee. The audit
committee makes recommendations to the board of directors regarding the
selection of independent auditors, reviews the results and scope of audit and
other services provided by our independent auditors and reviews and evaluates
our audit and control functions.
The compensation committee consists of Mr. Hume and Dr. Wyant. The
compensation committee administers our stock plans and makes recommendations to
the board of directors regarding executive compensation matters.
DIRECTOR COMPENSATION
We currently pay our directors $400 for each board meeting they attend as
compensation for their time. We do not pay any other compensation to our
directors for serving in that capacity. We reimburse directors for out-of-pocket
expenses incurred in attending board meetings. Our board of directors has the
discretion to grant options to non-employee directors pursuant to our stock
option plan. Messrs. Hume, G. Johnson and Quist and Dr. Wyant each currently
hold options to purchase 120,000 shares of our common stock.
38
<PAGE> 43
EXECUTIVE COMPENSATION
The following table provides information regarding compensation paid or
earned for services rendered to us in all capacities during the year ended
December 31, 1999, by our Chief Executive Officer and the other executive
officer who earned more than $100,000 in 1999. These individuals are referred to
in this prospectus as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS
--------------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Lawrence A. Johnson............ 1999 $132,038 $74,758 $2,927 --
Chairman, President and Chief
Executive Officer
James A. Schreiner............. 1999 76,126 25,195 2,109 252,000
Vice President and General
Manager of Boulder
Division(3)
</TABLE>
-------------------------
(1) Includes the 1999 management bonus and the 1999 employee incentive bonus.
(2) Reflects amounts contributed to our 401(k) Plan.
(3) Mr. Schreiner served as our Product Line Director before being appointed to
the position of Vice President and General Manager of Boulder Division in
September 1999.
In the year ended December 31, 1999, we granted options to purchase up to
an aggregate of 1,218,000 shares to employees, directors and consultants. No
stock appreciation rights were granted during this period. All options were
granted under our 1998 Long-Term Incentive and Stock Option Plan, or "1998
Option Plan," at exercise prices no less than the fair market value of our
common stock on the date of grant, as determined in good faith by the board of
directors. Incentive options granted under the 1998 Option Plan generally have a
term of 10 years. Nonincentive options granted under the 1998 Option Plan
generally have a term of seven years. However, in the event of the optionee's
death or disability, the option will terminate one year after the optionee's
death or disability. In the event of the optionee's termination of employment
with us, with or without cause, the option will terminate immediately upon the
optionee's termination. Optionees may pay the exercise price by cash, check, or,
with the approval of the committee, delivery of already owned shares of our
common stock.
The following table provides information concerning the stock option grants
we made in 1999 to each of the named executive officers, including the potential
realizable value over the 10-year term of the options, based on assumed rates of
stock appreciation of 5% and 10%, compounded annually. These assumed rates of
appreciation comply with the rules of the Securities and Exchange
39
<PAGE> 44
Commission and do not represent our estimate of future stock price. Actual
gains, if any, on stock option exercises will be dependent on the future
performance of our common stock.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION -------------------
GRANTED (#) 1999 ($) DATE 5% 10%
----------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Johnson...... -- -- -- -- -- --
James A. Schreiner....... 252,000 24.6% $.27 10/11/09 $110,830 $176,478
</TABLE>
The following table provides information concerning shares of common stock
represented by the number and value of unexercised stock options held by the
named executive officers as of December 31, 1999. The value of unexercised
in-the-money options is based on the value of our common stock as of December
31, 1999 of $0.67 per share minus the actual exercise prices. No options have
been exercised by the named executive officers.
AGGREGATED 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lawrence A. Johnson......... -- -- -- --
James A. Schreiner.......... 878,400 201,600 $467,280 $80,640
</TABLE>
EMPLOYEE BENEFIT PLANS
1988 Stock Option Plan
Our 1988 Long-Term Incentive and Stock Option Plan, or "1988 Option Plan,"
was adopted by the board of directors in October 1988 and received shareholder
approval in December 1988. The 1988 Option Plan expired in September 1998 and no
further options were granted after that date. Under the 1988 Option Plan, we
were authorized to grant to officers and other employees options to purchase
shares of common stock intended to qualify as incentive stock options, as
defined under Section 422 of the Internal Revenue Code of 1986, and options not
intended to qualify as incentive stock options. Stock options granted under the
1988 Option Plan are generally exercisable for seven years. Options granted
under the 1988 Option Plan are not transferable by the recipient except by will
or by the laws of descent and distribution. Options to purchase 2,124,000 shares
of our common stock remain outstanding as of June 30, 2000, exercisable at
prices ranging from $0.13 per share to $0.23 per share. Of that amount, options
to purchase 1,538,640 shares of our common stock were exercisable as of June 30,
2000.
1998 Long-Term Incentive and Stock Option Plan
Our 1998 Option Plan was adopted by the board of directors in September
1998 and received shareholder approval in March 1999. The 1998 Option Plan was
amended in May 2000. A total of 5,556,000 shares of common stock have been
reserved for issuance under the 1998 Option Plan. Under the 1998 Option Plan, we
are authorized to grant to officers and other employees options to
40
<PAGE> 45
purchase shares of common stock intended to qualify as incentive stock options,
as defined under Section 422 of the Internal Revenue Code of 1986, and options
that do not qualify as incentive stock options under the Internal Revenue Code.
Options granted prior to July 15, 2000 generally vest over five years from the
date of grant with 40% vesting two years from the date of the grant and 20% in
each of the subsequent three years. Options granted after July 15, 2000
generally vest over four years from the date of grant in equal annual
installments of 25%. Options granted under the 1998 Option Plan are not
transferable by the recipient except by will or by the laws of descent and
distribution. As of June 30, 2000, 1,518,000 shares of our common stock remain
outstanding and are exercisable at prices ranging from $.27 per share to $1.08
per share. Of that amount, options to purchase 242,400 shares of our common
stock were exercisable as of June 30, 2000.
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan, or "2000 Stock Incentive Plan," will be
approved by our board of directors and shareholders prior to the completion of
the offering contemplated by this prospectus. The 2000 Stock Incentive Plan
provides for the granting of:
- stock options, including incentive stock options and non-qualified stock
options;
- stock appreciation rights, or "SARs";
- restricted stock and restricted stock units;
- performance awards; and
- other stock-based awards.
We will reserve shares of common stock for issuance under
the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan is administered by
our compensation committee. The compensation committee has the authority:
- to establish rules for the administration of the 2000 Incentive Plan;
- to select the persons to whom awards are granted;
- to determine the types of awards to be granted and the number of shares
of common stock covered by awards; and
- to set the terms and conditions of awards.
The compensation committee also may determine whether the payment of any
amounts received under any award shall be deferred. Awards may provide that upon
grant or exercise, the holder will receive shares of common stock, cash or any
combination, as the compensation committee shall determine.
In order to meet the requirements of Section 162(m) of the Internal Revenue
Code, the 2000 Stock Incentive Plan limits the number of options that may be
granted to any single person in any one calendar year.
The exercise price per share under any incentive stock option or the grant
price of any SAR cannot be less than 100% of the fair market value of our common
stock on the date of grant of that incentive stock option or SAR. In the event
that a proposed optionee owns more than 10% of our common stock, any incentive
stock option granted to that optionee must have an exercise price not less than
110% of the fair market value of our common stock on the grant date and may not
have a term longer than five years. Options may be exercised by payment in full
of the exercise price, either in cash or, at the discretion of the compensation
committee, in whole or in part by the tendering of shares of common stock or
other consideration having a fair market value on the date
41
<PAGE> 46
the option is exercised equal to the exercise price. Determinations of fair
market value under the 2000 Stock Incentive Plan are made in accordance with
methods and procedures established by the compensation committee.
The holder of an SAR is entitled to receive the excess of the fair market
value on the date of exercise of a specified number of shares over the grant
price of the SAR.
The holder of restricted stock may have all of the rights of a shareholder
of our company, including the right to vote the shares subject to the restricted
stock award and to receive any dividends, or these rights may be restricted.
Restricted stock may not be transferred by the holder until the restrictions
established by the compensation committee lapse. Holders of restricted stock
units have the right, subject to any restrictions imposed by the compensation
committee, to receive shares of common stock, or a cash payment equal to the
fair market value of such shares, at some future date. Upon termination of the
holder's employment during the restriction period, restricted stock and
restricted stock units will be forfeited, unless the compensation committee
determines otherwise.
If any shares of common stock subject to any award or to which an award
relates are not purchased or are forfeited, or if any award terminates without
the delivery of shares or other consideration, the shares previously used for
these awards become available for future awards under the 2000 Stock Incentive
Plan. Except as otherwise provided under the procedures adopted by the
compensation committee to avoid double counting with respect to awards granted
in tandem with or in substitution for other awards, all shares relating to
awards granted are counted against the aggregate number of shares available for
granting awards under the 2000 Stock Incentive Plan.
Our board of directors may amend, alter or discontinue the 2000 Stock
Incentive Plan at any time, except that shareholder approval must be obtained
for any change that, absent shareholder approval:
- would cause Rule 16b-3 of the Exchange Act or Section 162(m) of the
Internal Revenue Code to become unavailable with respect to the 2000
Stock Incentive Plan;
- would violate any rules or regulations of the National Association of
Securities Dealers, Inc., The Nasdaq National Market or any securities
exchange applicable to us; or
- would cause us to be unable under the Internal Revenue Code to grant
incentive stock options under the 2000 Stock Incentive Plan.
Under the 2000 Stock Incentive Plan, the compensation committee may permit
participants receiving or exercising awards to surrender shares of common stock
to us to satisfy federal and state withholding tax obligations. In addition, the
compensation committee may grant a bonus to a participant in order to provide
funds to pay all or a portion of federal and state taxes due as a result of the
receipt, exercise or lapse of restrictions relating to an award.
Employee Stock Purchase Plan
Our board of directors and shareholders adopted our Employee Stock Purchase
Plan, or the "Stock Purchase Plan," in 2000. The Stock Purchase Plan becomes
effective September 1, 2000 and is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code of
1986. The Stock Purchase Plan covers an aggregate of 600,000 shares of common
stock. In order to participate in the Stock Purchase Plan, employees must meet
certain eligibility requirements. Participating employees will be able to direct
the company to make payroll deductions of up to 10% of their compensation during
a purchase period for the purchase of shares of common stock. The maximum amount
that an employee may deduct during any purchase period is $2,500. Each purchase
period, with the exception of the initial offering period, will be six months.
42
<PAGE> 47
The Stock Purchase Plan will provide participating employees with the right,
subject to certain limitations, to purchase our common stock at a price not less
than 85% of the lesser of the fair market value of our common stock on the first
day or the last day of the applicable purchase period. The Stock Purchase Plan
will terminate on a date that our board of directors may determine, or
automatically as of the date on which all of the shares of common stock reserved
for purchase under the Stock Purchase Plan have been sold.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan,
or "401(k) Plan," for all of our employees who satisfy eligibility requirements,
including requirements relating to age and length of service. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the lower of 1% or the statutorily prescribed limit and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits us to make
additional discretionary matching contributions, and we currently match 100% of
employees' contributions up to a maximum of 2% of their annual compensation. The
employer contribution vests annually over a six-year period in four equal
installments beginning two years after employment commences. The 401(k) Plan is
intended to qualify under Section 401 of the Internal Revenue Code so that
contributions by employees or by us to the 401(k) Plan, and income earned on
plan contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that our contributions, if any, will be deductible by us when made.
INDEMNIFICATION MATTERS AND LIMITATION OF LIABILITY
Minnesota law and our bylaws provide that we will, subject to limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that persons' former or present official capacity with us. We will
indemnify that person against judgments, penalties, fines, settlements and
reasonable expenses, and, subject to limitations, we will pay or reimburse
reasonable expenses before the final disposition of the proceeding.
As permitted by Minnesota law, our articles of incorporation provide that
our directors will not be personally liable to us or our shareholders for
monetary damages for a breach of fiduciary duty as a director, subject to the
following exceptions:
- any breach of the director's duty of loyalty to us or our shareholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- liability for illegal distributions under section 302A.559 of the
Minnesota Business Corporation Act or for civil liabilities for state
securities law violations under section 80A.23 of the Minnesota statutes;
- any transaction from which the director derived an improper personal
benefit; and
- any act or omission occurring prior to the effective date of Article 7 of
our articles of incorporation.
43
<PAGE> 48
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information concerning beneficial ownership of
our common stock as of June 30, 2000, by:
- each shareholder that we know owns more than 5% of our outstanding common
stock;
- each of our named executive officers;
- each of our directors;
- all of our directors and executive officers as a group; and
- each of the selling shareholders.
The following table lists the applicable percentage of beneficial ownership
based on 31,635,948 shares of common stock outstanding as of June 30, 2000. The
table also lists the applicable percentage beneficial ownership based on
shares of common stock outstanding upon completion of this
offering, assuming no exercise of the underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting power and/or
investment power with respect to the securities held. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of June
30, 2000, are deemed outstanding for purposes of computing the percentage
beneficially owned by the person holding the options but are not deemed
outstanding for purposes of computing the percentage beneficially owned by any
other person. Except as otherwise noted, the persons or entities named have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
44
<PAGE> 49
Unless otherwise indicated, the principal address of each of the
shareholders below is c/o ILX Lightwave Corporation, 31950 East Frontage Road,
Bozeman, Montana 59715.
<TABLE>
<CAPTION>
NUMBER OF SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED AFTER
OWNED(1) NUMBER OF OFFERING(1)
NAME AND ADDRESS OF BENEFICIAL -------------------- SHARES --------------------
OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------------ ---------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Lawrence A. Johnson(2)............ 15,599,916 49.3%
--------(3)(9)
Glenden F. Johnson(4)............. 10,329,384 32.5
--------
5355 Turney Groce Road
Byrdstown, TN 38549
Mary I. Johnson(5)................ 10,329,384 32.5
5355 Turney Groce Road
Byrdstein, TN 38549
James C. Wyant and Louise A.
Wyant........................... 2,963,640 9.3
1630 East University Boulevard
Tucson, AZ 85721
Randall T. Dugger................. 1,188,000 3.8
--------(6)(9)
David L. Morrow................... 1,080,000 3.4
--------
Route 3
Cisco, TX 76439
James A. Schreiner................ 878,400 2.7
--------(7)(9)
Steven M. Quist................... 228,000 *
5900 Golden Hills Drive
Minneapolis, MN 55416
Fredrick R. Hume.................. 120,000 *
10525 Willows Road NE
Redmond, WA 98073
All directors and officers as a
group (8 persons)(8)............ 31,408,140 94.7
</TABLE>
-------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes the following shares underlying options exercisable as of or within
60 days of June 30, 2000: Mr. G. Johnson, 120,000 shares; Dr. Wyant, 120,000
shares; Mr. Quist 120,000 shares; Mr. Hume, 120,000 shares; Mr. Schreiner,
878,400 shares; and Ms. Bequet-Sharber, 100,800 shares.
(2) Includes 711,288 shares held by Dr. L. Johnson's wife and children, as to
which he has no voting or investment power and disclaims beneficial
ownership.
(3) Dr. Johnson has granted the underwriters an option to purchase up to
shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full, Dr. Johnson would own
shares or % of the outstanding shares.
(4) Includes 5,104,692 shares held by Mr. G. Johnson's wife, as to which he has
no voting or investment power and disclaims beneficial ownership.
(5) Includes 5,104,692 shares and 120,000 shares underlying exercisable options
held by Ms. Johnson's husband, as to which she has no voting or investment
power and disclaims beneficial ownership.
(6) Mr. Dugger has granted the underwriters an option to purchase up to
shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full,
45
<PAGE> 50
Mr. Dugger would own shares or % of the outstanding shares.
(7) Mr. Schreiner has granted the underwriters an option to purchase up to
shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full, Mr. Schreiner would own
shares or % of the outstanding shares.
(8) Includes 1,459,200 shares underlying options exercisable as of or within 60
days of June 30, 2000.
(9) None of our executive officers will sell more than 5% of the shares they
beneficially own.
We will pay all costs and expenses of the offering, other than the
underwriting discount relating to shares sold by the selling shareholders, the
fees and disbursements of legal counsel to the selling shareholders and stock
transfer and other taxes attributable to the sale of shares by the selling
shareholders, which will be paid by the selling shareholders.
46
<PAGE> 51
CERTAIN TRANSACTIONS
As of June 30, 2000, Randall T. Dugger, our Vice President of Finance and
Administration and Chief Financial Officer, owed us $76,900, in the form of
promissory notes issued December 30, 1996, June 9, 1997 and January 28, 1998 and
due December 30, 2003, June 9, 2004 and January 28, 2003, respectively. The
notes bear interest between 5.75% and 6.25% per annum. The notes were issued in
connection with loans made to Mr. Dugger to allow him to exercise stock options
to purchase 648,000 shares of common stock. The notes are secured by a pledge of
the shares of common stock received upon exercise of the options.
In 1991, we and several of our shareholders sold 12,855,852 shares of our
common stock to Newport Corporation at a price of $0.18. In April 1998, we
repurchased 3,240,000 shares of our common stock held by Newport for $720,000,
or $0.22 per share. At that time, we also entered into an agreement with Newport
granting us an option to repurchase the remaining shares owned by Newport at a
purchase price of $0.22 per share, which price increased at a compounded rate of
0.72% per month for each month subsequent to March 31, 1998. In September 1999,
we repurchased 4,200,000 shares of our common stock held by Newport for
$1,054,397, or $0.25 per share. On April 4, 2000, we repurchased the remaining
5,415,852 shares of our common stock held by Newport for $1,429,656, or $0.26
per share.
47
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, we expect our authorized capital
stock to consist of 150,000,000 shares of common stock, par value $.01 per
share, and 15,000,000 shares of preferred stock, par value $.01 per share.
Unless otherwise designated by our board of directors, all issued shares shall
be deemed common stock with equal rights and preferences.
COMMON STOCK
As of June 30, 2000, there were 31,635,948 shares of common stock
outstanding, held by 13 shareholders of record.
Holders of our common stock do not have cumulative voting rights and are
entitled to one vote for each share held of record on all matters submitted to a
vote of the shareholders, including the election of directors. Holders of our
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor,
subject to the prior rights of any preferred stock then outstanding.
Upon a liquidation, dissolution or winding up of ILX Lightwave, the holders
of our common stock will be entitled to share ratably in the net assets legally
available for distribution to shareholders after the payment of all debts and
other liabilities. These rights are subject to the prior rights of any preferred
stock then outstanding. Holders of our common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and the common stock outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, we expect that our board of
directors will have the authority, without further action by the shareholders,
to issue from time to time, 15,000,000 shares of preferred stock in one or more
series and to fix for each series the number of shares, designations,
preferences, powers and relative, participating, optional or other special
rights and the qualifications or restrictions thereof. The preferences, powers,
rights and restrictions of different series of preferred stock may differ with
respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions, purchase
funds and other matters.
The issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to holders of common stock or adversely affect
the rights and powers, including voting rights, of the holders of common stock.
It may have the effect of delaying, deferring or preventing a change in our
control. We currently do not plan to issue shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND MINNESOTA
LAW
The existence of authorized but unissued preferred stock, described above,
and specific provisions of Minnesota law, described below, could have an
anti-takeover effect. These provisions are intended to provide management with
flexibility, to enhance the likelihood of continuity and stability in the
composition of our board of directors and the policies of our board and to
discourage an unsolicited takeover of our company if our board of directors
determines that the takeover is not in the best interests of our company and our
shareholders. However, these provisions could have the effect of discouraging
attempts to acquire us, which could deprive our shareholders of opportunities to
sell their shares of common stock at prices higher than prevailing market
prices.
48
<PAGE> 53
Upon the closing of this offering, our board of directors will be divided
into three classes serving staggered three-year terms. As a result of this
division, generally at least two shareholder meetings will be required for
shareholders to effect a change in control of the board of directors. In
addition, our bylaws will contain provisions that establish specific procedures
for calling meetings of shareholders and appointing and removing members of the
board of directors.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in connection with specific types of mergers and exchanges to
which we are a party, that results in the beneficial ownership of 20% or more of
the voting stock then outstanding. Section 302A.671 requires approval of these
acquisitions by a majority vote of our shareholders to accord full voting rights
to the acquired shares. In general, shares acquired in the absence of this
approval are denied voting rights and are redeemable at their then fair market
value by us within 30 days after the acquiring person has failed to give a
timely information statement to us or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by us, or by any of our subsidiaries, with
any shareholder that purchases 10 percent or more of our voting shares within
four years following this interested shareholder's share acquisition date. The
business combination may be permitted if it is approved by a committee of all of
the disinterested members of our board of directors before the interested
shareholder's share acquisition date.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "ILXL."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be ____________.
49
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot assure you that a significant public market for our common
stock will develop or be sustained after this offering. As described below, no
shares currently outstanding will be available for sale immediately after this
offering due to certain contractual and securities law restrictions on resale.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could cause the prevailing market price to decline and limit
our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options to purchase common stock. Of these
shares, the shares offered for sale through the underwriters will be freely
tradable without restriction under the Securities Act unless purchased by our
affiliates or covered by a separate lock-up agreement.
The remaining shares of common stock held by existing
shareholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rule 144, 144(k) or 701 under the Securities
Act. These provisions are described below.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701, these restricted shares will be available for sale in the public
market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- shares will have been held long enough to be sold under
Rule 144 or Rule 701 beginning 181 days after the date of this
prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
LOCK-UP AGREEMENTS
Our officers, directors and shareholders have agreed not to transfer or
dispose of, directly or indirectly, any shares of our common stock, or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the effective date of the
registration statement to which this prospectus relates. Transfers or
dispositions can be made sooner with the prior written consent of Chase
Securities Inc.
RULE 144
In general, under Rule 144, a person who has beneficially owned restricted
securities 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 our common stock then outstanding, which,
immediately after this offering, will equal approximately
shares; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 also are limited by manner-of-sale provisions, notice
requirements and requirements relating to the availability of current public
information about us.
50
<PAGE> 55
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
RULE 701
In general, under Rule 701, any of our employees, consultants or advisors
who purchases or receives shares from us under a compensatory stock purchase
plan or option plan or other written agreement will be eligible to resell his or
her shares beginning 90 days after the date of this prospectus. Non-affiliates
will be able to sell their shares subject only to the manner-of-sale provisions
of Rule 144. Affiliates will be able to sell their shares without compliance
with the holding period requirements of Rule 144.
STOCK OPTIONS
Prior to the expiration of the lock-up agreements, we intend to file a
registration statement under the Securities Act covering shares of common stock
reserved for issuance upon exercise of outstanding options under the 1988 Option
Plan, 1998 Option Plan, the Stock Purchase Plan and the 2000 Stock Incentive
Plan. See "Management -- Employee Benefit Plans." The registration statement is
expected to be filed and become effective as soon as practicable after the
closing of this offering. Accordingly, shares registered under that registration
statement will be available for resale in the open market beginning immediately
upon the effectiveness of registration, except with respect to Rule 144 volume
limitations that apply to our affiliates and shares covered by a separate
lock-up agreement.
51
<PAGE> 56
UNDERWRITING
Chase Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView
Corporation are the representatives of the underwriters. Subject to the terms
and conditions of the underwriting agreement, the underwriters named below,
through their representatives, have severally agreed to purchase from us and the
selling shareholders the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Chase Securities Inc. ...........................
U.S. Bancorp Piper Jaffray Inc. .................
Wit SoundView Corporation........................
--------
Total............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to various conditions precedent, including the absence
of any material adverse change in our business and the receipt of various
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the shares of common
stock offered by us and the selling shareholders if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions we and the selling shareholders will pay to the underwriters.
Such amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITH WITHOUT
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares directly to the public at the
initial public offering price set forth on the cover page of this prospectus and
to various dealers at that price less a concession not in excess of $ per
share. The underwriters may allow and such dealers may re-allow a concession not
in excess of $ per share to various other dealers. The underwriters have
informed us that they do not intend to confirm discretionary sales of more than
5% of the shares of common stock offered in this offering.
We and certain of the selling shareholders have granted to the underwriters
an option, exercisable no later than 30 days after the date of this prospectus,
to purchase up to additional shares of common stock at the
initial public offering price, less the
52
<PAGE> 57
underwriting discount set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage of these
option shares which the number of shares of common stock to be purchased by it
shown in the above table bears to the total number of shares of common stock
offered by this prospectus. We and certain of the selling shareholders will be
obligated, pursuant to this option, to sell shares to the underwriters to the
extent the option is exercised. The underwriters may exercise this option only
to cover over-allotments made in connection with the sale of shares of common
stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling shareholders have each agreed to indemnify the
underwriters against liabilities specified in the underwriting agreement,
including liabilities under the Securities Act of 1933, as amended, and to
contribute to payments the underwriters may be required to make in respect of
these liabilities.
Our officers and directors and all of our shareholders have agreed that
they will not, without the prior written consent of Chase Securities Inc.,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of our common stock, options or warrants to acquire shares of our common
stock or securities exchangeable for or convertible into shares of our common
stock owned by them or any other rights to purchase or acquire our common stock
for a period of 180 days following the effective date of the registration
statement that includes this prospectus. We have agreed that we will not,
without the prior written consent of Chase Securities Inc., directly or
indirectly, offer, sell, contract to sell, make any short sale, pledge, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of our capital stock, or any securities exchangeable or exercisable for
or convertible into or any rights to purchase or acquire shares of our capital
stock for a period of 180 days following the date of this prospectus, except
that we may issue shares upon the exercise of options granted prior to the date
of this prospectus and may grant additional options or sell additional shares
under our stock option or stock purchase plans.
In connection with this offering, the underwriters may effect transactions
that could have the effect of raising or maintaining, or preventing or retarding
a decline in, the market price of our shares. As a result, the price of our
shares may be higher than the price that might otherwise exist in the open
market. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
In particular, the underwriters may make short sales of our shares and may
purchase our shares on the open market to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Covered short sales
are sales made in an amount not greater than the over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
53
<PAGE> 58
In addition, an underwriter may enter a stabilizing bid in connection with
the offering, which is the placing of any bid or effecting of any purchase, for
the purpose of pegging, fixing, or maintaining the price of the shares. The
underwriters may also impose penalty bids, which permit them to reclaim the
selling concessions from a syndicate member when shares sold by the syndicate
member are purchased in syndicate covering transactions. Any stabilizing, if
commenced, may be discontinued at any time.
Prior to this offering, there has been no public market for our shares. The
initial public offering price for the shares will be determined by negotiations
among us and the representatives. Among the factors considered in determining
the initial public offering will be prevailing market and economic conditions,
our revenue, the prospects for our future earnings, market valuations of other
companies engaged in activities similar to our business operations and our
management. The estimated initial public offering price range set forth on the
cover of this preliminary prospectus is subject to change as a result of market
conditions or other factors.
At our request, the underwriters have reserved up to shares
of common stock for sale at the initial public offering price to our directors,
officers, employees, business associates and related persons. The number of
shares of common stock available for sale to the general public will be reduced
if such persons purchase the reserved shares. Any reserved shares which are not
so purchased may be offered by the underwriters to the general public on the
same basis as the other shares offered by this prospectus.
A prospectus in electronic format will be made available on the Websites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to the underwriters
for sale to their online brokerage account holders.
54
<PAGE> 59
LEGAL MATTERS
The legality of the shares of common stock offered hereby will be passed
upon for us and the selling shareholders by Dorsey & Whitney LLP, Great Falls,
Montana and Minneapolis, Minnesota. Certain legal matters will be passed upon
for the underwriters by Venture Law Group, a Professional Corporation, Kirkland,
Washington.
EXPERTS
KPMG LLP, independent certified public accountants, have audited our
financial statements as of December 31, 1998 and 1999 and for each of the years
in the three year period ended December 31, 1999, as set forth in their report
appearing elsewhere in this prospectus. We have included our financial
statements in this prospectus and elsewhere in the registration statement in
reliance on the report of KPMG LLP, which was given on the authority of said
firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common stock offered by this prospectus. As permitted by the rules and
regulations of the Commission, this prospectus, which is a part of the
registration statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. For further information
about us and the common stock offered by this prospectus, you should review the
registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents or provisions of any contract or
other document referred to in this prospectus are not necessarily complete, and
in each instance reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement. All statements made in this
prospectus concerning these contracts or documents are qualified in all respects
by this reference. A copy of the registration statement, as well as other
documents we file with the Commission, may be inspected without charge in the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Please call the
Commission at 1-800-SEC-0330 for further information about its public reference
rooms. Copies of all or any part of the registration statement and other
documents we file may be taken from the public reference rooms upon the payment
of fees prescribed by the Commission. In addition, the registration statement
and other documents we file with the Commission through its Electronic Data
Gathering, Analysis and Retrieval, or "EDGAR," system are available to the
public through the Commission's web site at http://www.sec.gov.
Upon completion of this offering, we will be required to file periodic
reports, proxy statements and other information with the Commission. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the Commission's public reference rooms and through
the web site of the Commission referred to above.
55
<PAGE> 60
ILX LIGHTWAVE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Income........................................ F-4
Statements of Shareholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ILX Lightwave Corporation:
We have audited the accompanying balance sheets of ILX Lightwave
Corporation as of December 31, 1998 and 1999 and the related statements of
income, shareholders' equity, and cash flows for each of the years in the
three-year 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 generally accepted auditing
standards. 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 financial position of ILX Lightwave Corporation at
December 31, 1998 and 1999 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Billings, Montana
February 4, 2000
except as to the third
and fourth paragraphs of
Note 1(l), which is as
of August 24, 2000
F-2
<PAGE> 62
ILX LIGHTWAVE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $1,888,605 $1,041,393 $ 616,888
Accounts receivable, net of allowance for doubtful
accounts of $0, $20,000 and $32,000 at December 31,
1998 and 1999 and June 30, 2000 (unaudited),
respectively....................................... 1,666,941 2,851,595 5,870,149
Inventory............................................. 1,365,250 2,027,790 3,450,571
Prepaid expenses...................................... 186,404 56,232 160,349
Deferred tax assets................................... 89,816 72,786 161,773
Accrued interest receivable........................... 4,356 3,519 --
---------- ---------- -----------
Total current assets............................. 5,201,372 6,053,315 10,259,730
Property and equipment.................................. 2,260,919 2,751,360 3,161,892
Less accumulated depreciation......................... 1,268,396 1,595,118 1,780,798
---------- ---------- -----------
Net property and equipment......................... 992,523 1,156,242 1,381,094
Other assets............................................ 6,353 18,251 19,823
---------- ---------- -----------
$6,200,248 $7,227,808 $11,660,647
========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 679,974 $ 694,608 $ 1,719,965
Accrued salaries, wages and benefits.................. 392,474 562,396 633,134
Accrued warranty expense.............................. 138,450 99,696 156,396
Current installments of long-term debt................ 11,344 -- 466,667
Current taxes payable................................. 265,027 7,184 396,335
---------- ---------- -----------
Total current liabilities........................ 1,487,269 1,363,884 3,372,497
Long-term debt.......................................... -- -- 856,174
Deferred income taxes................................... 98,525 29,394 121,528
---------- ---------- -----------
Total liabilities................................ 1,585,794 1,393,278 4,350,199
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 (unaudited)
authorized shares; and 41,203,800; 37,051,800 and
31,635,948 (unaudited) shares issued and
outstanding at December 31, 1998 and 1999 and June
30, 2000, respectively............................. 412,038 370,518 316,359
Paid-in capital....................................... 902,982 -- --
Retained earnings..................................... 3,376,334 5,540,912 7,070,989
Notes receivable secured by common stock.............. (76,900) (76,900) (76,900)
---------- ---------- -----------
Total shareholders' equity....................... 4,614,454 5,834,530 7,310,448
Commitments and contingencies...........................
---------- ---------- -----------
$6,200,248 $7,227,808 $11,660,647
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 63
ILX LIGHTWAVE CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -------------------------
---------------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales........................... $7,565,484 $11,848,480 $17,403,558 $8,186,367 $16,601,454
Cost of sales................... 3,078,553 5,091,469 7,753,639 3,380,588 7,149,970
---------- ----------- ----------- ---------- -----------
Gross margin.................. 4,486,931 6,757,011 9,649,919 4,805,779 9,451,484
Operating expenses:
Marketing and sales........... 1,451,968 1,934,174 2,473,448 1,226,476 1,654,210
Research and development...... 1,056,502 1,888,451 2,322,450 1,076,169 2,157,057
General and administrative.... 640,088 845,933 1,378,108 557,785 1,063,786
---------- ----------- ----------- ---------- -----------
Total operating expenses... 3,148,558 4,668,558 6,174,006 2,860,430 4,875,053
---------- ----------- ----------- ---------- -----------
Operating income........... 1,338,373 2,088,453 3,475,913 1,945,349 4,576,431
Other income (expense):
Interest income............... 68,352 62,314 54,158 32,945 13,624
Interest expense.............. (2,584) (1,224) (1,206) (88) (39,432)
Foreign exchange gain
(loss)..................... (27,925) 49,861 7,623 (46,506) 9,322
Other......................... 11,651 (23) (7,936) (18,011) 6,331
---------- ----------- ----------- ---------- -----------
Total other income
(loss)................... 49,494 110,928 52,639 (31,660) (10,155)
---------- ----------- ----------- ---------- -----------
Income before income
taxes.................... 1,387,867 2,199,381 3,528,552 1,913,689 4,566,276
Income tax expense.............. 483,047 771,656 1,268,879 689,464 1,660,702
---------- ----------- ----------- ---------- -----------
Net income................. $ 904,820 $ 1,427,725 $ 2,259,673 $1,224,225 $ 2,905,574
========== =========== =========== ========== ===========
Basic earnings per share........ $ 0.02 $ 0.03 $ 0.06 $ 0.03 $ 0.08
========== =========== =========== ========== ===========
Diluted earnings per share...... $ 0.02 $ 0.03 $ 0.05 $ 0.03 $ 0.08
========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 64
ILX LIGHTWAVE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
NUMBER OF PAID-IN RETAINED SECURED BY SHAREHOLDERS'
SHARES COMMON STOCK CAPITAL EARNINGS COMMON STOCK EQUITY
---------- ------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996............................ 44,083,800 $440,838 $1,580,261 $ 1,136,005 $ (9,200) $ 3,147,904
Exercise of stock options......... 180,000 1,800 17,861 -- (9,200) 10,461
Dividends paid.................... -- -- -- (92,216) -- (92,216)
Net income........................ -- -- -- 904,820 -- 904,820
---------- -------- ---------- ----------- -------- -----------
Balances at December 31,
1997............................ 44,263,800 442,638 1,598,122 1,948,609 (18,400) 3,970,969
Exercise of stock options......... 468,000 4,680 53,820 -- (58,500) --
Repurchase of common stock........ (3,528,000) (35,280) (748,960) -- -- (784,240)
Net income........................ -- -- -- 1,427,725 -- 1,427,725
---------- -------- ---------- ----------- -------- -----------
Balances at December 31,
1998............................ 41,203,800 412,038 902,982 3,376,334 (76,900) 4,614,454
Additional shares issued.......... 48,000 480 14,320 -- -- 14,800
Repurchase of common stock........ (4,200,000) (42,000) (917,302) (95,095) -- (1,054,397)
Net income........................ -- -- -- 2,259,673 -- 2,259,673
---------- -------- ---------- ----------- -------- -----------
Balances at December 31,
1999............................ 37,051,800 370,518 -- 5,540,912 (76,900) 5,834,530
Repurchase of common stock
(unaudited)..................... (5,415,852) (54,159) -- (1,375,497) -- (1,429,656)
Net income (unaudited)............ -- -- -- 2,905,574 -- 2,905,574
---------- -------- ---------- ----------- -------- -----------
Balances at June 30, 2000
(unaudited)..................... 31,635,948 $316,359 -- $ 7,070,989 $(76,900) $ 7,310,448
========== ======== ========== =========== ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 65
ILX LIGHTWAVE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------------
--------------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 904,820 $1,427,725 $ 2,259,673 $ 1,224,225 $ 2,905,574
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 200,317 236,893 326,722 148,430 185,680
Provision for doubtful accounts..... -- -- 20,000 -- 12,000
Director stock compensation......... -- -- 14,800 -- --
Change in:
Accrued interest receivable....... (3,186) 13,062 837 407 3,519
Accounts receivable............... (372,339) (464,457) (1,204,654) (1,036,686) (3,030,554)
Inventory......................... (120,046) (261,443) (662,540) (384,949) (1,422,781)
Prepaid expenses and other
assets......................... 73,535 (158,538) 118,274 89,796 (105,689)
Accounts payable and accrued
expenses, salaries, wages and
benefits....................... 415,935 349,273 184,556 (13,019) 1,096,095
Accrued warranty expense.......... 11,370 91,690 (38,754) (15,779) 56,700
Current taxes payable............. 423,647 (171,486) (257,843) 20,296 389,151
Deferred income taxes............. 7,508 (7,010) (52,101) (14,809) 3,147
---------- ---------- ----------- ----------- -----------
Net cash provided by operating
activities................... 1,541,561 1,055,709 708,970 17,912 92,842
---------- ---------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of securities
available-for-sale.................. (564,439) (600,000) -- -- --
Maturities of securities
available-for-sale.................. 679,950 791,028 -- -- --
Purchases of property and equipment... (374,045) (529,400) (490,441) (177,220) (410,532)
---------- ---------- ----------- ----------- -----------
Net cash used in investing
activities................... (258,534) (338,372) (490,441) (177,220) (410,532)
---------- ---------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of long-term debt............ -- -- -- 618 1,400,618
Payments on long-term debt............ (43,146) (44,506) (11,344) (11,344) (77,777)
Proceeds from exercise of stock
options............................. 10,461 -- -- -- --
Repurchase of common stock............ -- (784,240) (1,054,397) -- (1,429,656)
Dividends paid........................ (92,216) -- -- -- --
---------- ---------- ----------- ----------- -----------
Net cash used in financing
activities................... (124,901) (828,746) (1,065,741) (10,726) (106,815)
---------- ---------- ----------- ----------- -----------
Net change in cash and cash
equivalents........................... 1,158,126 (111,409) (847,212) (170,034) (424,505)
Cash and cash equivalents, beginning of
period................................ 841,888 2,000,014 1,888,605 1,888,605 1,041,393
---------- ---------- ----------- ----------- -----------
Cash and cash equivalents, end of
period................................ $2,000,014 $1,888,605 $ 1,041,393 $ 1,718,571 $ 616,888
========== ========== =========== =========== ===========
Cash paid during the period for:
Interest.............................. $ 2,584 $ 1,224 $ 1,206 $ 88 $ 39,432
Income taxes.......................... 51,892 950,152 1,578,823 690,330 1,268,404
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 66
ILX LIGHTWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
ILX Lightwave Corporation (the Company) designs, manufactures and markets
optical test and measurement equipment for sale in the United States and
throughout the world. The Company has facilities located in Bozeman, Montana and
Boulder, Colorado as well as sales and service centers located in Japan and
England.
(b) USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to
the reporting of assets, liabilities, revenues and expenses, and the disclosure
of contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(C) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with maturities of three months or less at the
date of purchase to be cash equivalents. Cash equivalents include certificates
of deposit of $628,818 and $285,000 at December 31, 1998 and 1999, respectively.
(d) ACCOUNTING FOR CERTAIN DEBT AND EQUITY SECURITIES
Debt securities for which the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are stated at
amortized cost. Debt and equity securities held primarily for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in income. Debt and
equity securities not classified as held-to-maturity or trading are classified
as available-for-sale and reported at fair value with unrealized gains and
losses, net of income taxes, shown as a separate component of shareholders'
equity.
(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company assesses the need for an allowance for doubtful accounts based
upon factors including past loss experience, known and inherent risks in the
accounts, adverse situations that may affect a customer's ability to repay and
current economic conditions.
(f) INVENTORIES
Inventories are stated at the lower of standard cost (which approximate the
first-in, first-out method) or market value. Inventory costs include labor,
materials and certain direct and indirect costs related to inventory purchasing,
production and storage.
F-7
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(g) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets. Estimated useful lives range from five to ten years.
(h) WARRANTY COSTS
The Company provides a limited one year warranty on all of its products and
accrues estimated warranty costs at the time of sale.
(i) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in tax expense in the period that includes the enactment date.
(j) REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized when the
products are shipped to customers.
(k) STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25. "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
(l) EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income available
to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or resulted in the issuance of common stock that would share in the
earnings of the entity. Dilutive potential common shares are added to the
weighted-average shares used to compute basic EPS.
Effective February 5, 1999, the Company declared a three-for-one stock
split (effected in the form of a two-for-one stock dividend).
Effective July 13, 2000 (unaudited), the Company declared a three-for-one
stock split (effected in the form of a two-for-one stock dividend). Effective
August 24, 2000 (unaudited), the Company declared a four-for-one stock split
(effected in the form of a three-for-one stock dividend).
F-8
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
All share and per share data have been restated for the effect of the stock
dividends, accounted for as stock splits, except where otherwise identified. In
conjunction with the stock splits, the Company's authorized shares were
increased to 50,000,000.
(m) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is deemed impaired
if the sum of the expected future cash flows is less than the carrying amount of
the asset. If impaired, an impairment loss is recognized to reduce the carrying
value of the asset to fair value. At December 31, 1998 and 1999 there were no
assets that were considered impaired.
(n) FOREIGN CURRENCY TRANSACTIONS
Gains and losses from foreign currency transactions are included in results
of operations.
(o) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the fair value for financial instruments, whether
recognized or not recognized on the balance sheet. A financial instrument is
defined as cash, evidence of an ownership interest in an entity, or a contract
that both imposes a contractual obligation on one entity to deliver cash or
another financial instrument to a second entity. Quoted market prices are used
for fair value when available, but do not exist for some of the Company's
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques.
The following assumptions and methods were used by the Company in
estimating the fair value of its financial instruments:
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents approximate fair value due to the liquid short-term nature of the
instruments.
Accounts Receivable, Accounts Payable, Accrued Expenses and Other
Liabilities. The carrying amounts approximate fair value because of the short
maturity of those instruments.
Long-term Debt. The carrying amounts approximate fair value due to the debt
bearing interest at a variable rate.
(p) UNAUDITED INFORMATION
The financial statements include the unaudited balance sheet as of June 30,
2000 and the unaudited statements of income and cash flows for the six months
ended June 30, 1999 and 2000. In management's opinion, this information has been
prepared on the same basis as the audited financial statements and reflects all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information, in accordance with generally accepted
accounting principles for interim financial information, for the period
presented. Results for interim periods are not necessarily indicative of the
results to be expected for the entire year.
F-9
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999 JUNE 30, 2000
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $ 911,694 $1,502,953 $2,740,871
Work-in-process.......................................... 212,592 266,640 446,689
Finished goods........................................... 240,964 258,197 263,011
---------- ---------- ----------
$1,365,250 $2,027,790 $3,450,571
========== ========== ==========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999 JUNE 30, 2000
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment................................................ $1,918,394 $2,336,233 $2,750,866
Furniture and fixtures................................... 218,154 269,714 264,741
Leasehold improvements................................... 124,371 145,413 146,285
---------- ---------- ----------
$2,260,919 $2,751,360 $3,161,892
========== ========== ==========
</TABLE>
(4) NOTE PAYABLE
The Company has a revolving line of credit in the amount of $1,500,000,
which had not been drawn at December 31, 1999. The line of credit bears interest
at prime plus 1%. Interest is payable monthly, with any advances due July 27,
2000. The line of credit is secured by accounts receivable, investments,
intangibles, inventory, and equipment. The line of credit agreement restricts,
among other things, the ability of the Company to pay dividends, incur
additional debt and alter the nature or scope of the Company's business without
prior consent of the lender.
(Unaudited) -- In April 2000, the Company amended the line of credit to
increase the amount available to $2,000,000 bearing interest at prime plus .75%
with a maturity date of March 22, 2001. In April 2000, the Company also entered
into a term loan in the amount of $1,400,000. See note 8.
(5) LEASE COMMITMENTS
The Company leases its office and plant facilities in Bozeman under a
non-cancelable operating lease with a term of ten years beginning April 1, 1994.
The Company may extend the term of the lease at its option for up to three
successive five-year terms. The lease agreement requires the Company to pay
utilities, taxes and maintenance expenses on the property and requires monthly
payments of $11,500. The Company also leases its office and plant facilities in
Boulder under a non-cancelable operating lease with a term of three years
beginning September 1998. The lease agreement requires the Company to pay
utilities, taxes and maintenance expenses on the property and requires monthly
payments of $8,263. Rent expense, included in general and administrative
expenses in the statements of income, was $138,000, $171,053 and $245,285 for
the years ended December 31, 1997, 1998 and 1999, respectively, and $124,991 and
$159,550 for the six months ended June 30, 1999 and 2000 (unaudited),
respectively.
F-10
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has sub-leased a portion of its office space in its Boulder
facility beginning December 1998 on essentially the same terms as its operating
lease. The sub-lease agreement requires the lessee to pay a pro-rata share of
the utilities, tax and maintenance expense on the property and requires monthly
payments of $618. Rent income, included in other income in the statements of
income, was $618 and $7,416 for the years ended December 31, 1998 and 1999,
respectively, and $3,708 and $3,708 for the six months ended June 30, 1999 and
2000 (unaudited), respectively.
Future minimum rental payments and sub-lease income for the next five years
under these leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
PAYMENTS INCOME
-------- ------
<S> <C> <C>
2000........................................................ $237,156 7,416
2001........................................................ 187,578 --
2002........................................................ 138,000 --
2003........................................................ 115,000 --
2004........................................................ -- --
</TABLE>
(6) INCOME TAX EXPENSE
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -------------------------
---------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
-------- -------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................. $383,430 $628,647 $1,074,190 $573,140 $1,348,838
State............................... 92,109 150,019 246,790 131,133 308,717
-------- -------- ---------- -------- ----------
475,539 778,666 1,320,980 704,273 1,657,555
-------- -------- ---------- -------- ----------
Deferred:
Federal............................. 6,389 (5,780) (42,956) (12,209) 2,595
State............................... 1,119 (1,230) (9,145) (2,600) 552
-------- -------- ---------- -------- ----------
7,508 (7,010) (52,101) (14,809) 3,147
-------- -------- ---------- -------- ----------
$483,047 $771,656 $1,268,879 $689,464 $1,660,702
======== ======== ========== ======== ==========
</TABLE>
F-11
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income tax expense differed from "expected" income tax expense (computed by
applying the Federal corporate income tax rate of 34% to income before income
taxes) as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------------
---------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
-------- -------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense....... $471,875 $747,790 $1,199,708 $650,654 $1,552,534
Increase (decrease) resulting from:
State taxes, net of Federal income
tax benefit...................... 61,531 98,201 156,846 84,832 204,118
Research tax credit................. (50,000) (76,000) (85,000) (38,000) (100,804)
Other, net.......................... (359) 1,665 (2,675) (8,022) 4,854
-------- -------- ---------- -------- ----------
$483,047 $771,656 $1,268,879 $689,464 $1,660,702
======== ======== ========== ======== ==========
</TABLE>
Differences between the financial statement carrying amounts and the tax
bases of assets and liabilities that give rise to significant portions of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999 JUNE 30, 2000
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accrued warranty expense.................................. $ 53,240 $ 38,338 $ 60,142
Accrued vacation.......................................... 26,473 35,490 49,937
UNICAP adjustment to inventory............................ 10,103 -- 39,388
Reserve for bad debts..................................... -- 7,691 12,306
-------- -------- ---------
Deferred tax assets.................................. 89,816 81,519 161,773
-------- -------- ---------
Deferred tax liability:
Property and equipment, principally due to differences in
depreciation........................................... (98,525) (29,394) (121,528)
UNICAP adjustment to inventory............................ -- (8,733) --
-------- -------- ---------
Deferred tax liabilities............................. (98,525) (38,127) (121,528)
-------- -------- ---------
Net deferred tax asset (liability)................... $ (8,709) $ 43,392 $ 40,245
======== ======== =========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income in the periods
which those temporary differences are deductible. Management considers the
scheduled reversal of deferred tax liabilities, taxes paid in carryback years,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and estimates of
future taxable income over the periods which the deferred tax assets are
deductible, at December 31, 1998 and 1999, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences.
F-12
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------------
----------------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Average outstanding shares
during the year on which
basic earnings per share is
calculated.................. 44,136,216 42,383,196 39,932,580 41,203,800 34,343,880
Add:
Incremental shares from
assumed exercise of stock
options.................. 291,384 637,896 1,050,696 1,003,632 2,023,572
Add:
Incremental shares from
partially paid shares
(see note 12)............ 49,848 296,112 357,720 345,360 520,164
----------- ----------- ----------- ----------- -----------
Average outstanding shares on
which diluted earnings per
share is calculated......... 44,477,448 43,317,204 41,340,996 42,552,792 36,887,616
=========== =========== =========== =========== ===========
Net income available to common
shareholders................ $ 904,820 $ 1,427,725 $ 2,259,673 $ 1,224,225 $ 2,905,574
=========== =========== =========== =========== ===========
Basic earnings per share...... $ .02 $ .03 $ .06 $ .03 $ .08
=========== =========== =========== =========== ===========
Diluted earnings per share.... $ .02 $ .03 $ .05 $ .03 $ .08
=========== =========== =========== =========== ===========
</TABLE>
(8) STOCK PURCHASE AGREEMENT AND STOCK OPTIONS
In connection with an earlier sale of the Company's common stock, the
Company entered into a stock purchase agreement with a shareholder. The stock
purchase agreement provides the shareholder with certain future stock
registration rights if the Company registers stock under the Securities Act.
Except for shares excluded under the terms of the stock option plan, the
agreement also provides the shareholder the option to retain its existing
ownership percentage of 14.62% of the Company under future sales or exchanges of
stock. In April 1998 the Company repurchased 3,240,000 shares for a total price
of $720,000. In conjunction with this purchase, the Company entered into another
stock purchase agreement with this shareholder. The agreement grants the Company
an exclusive and irrevocable option to purchase all or any part of the shares
owned by the shareholder. In September 1999, the Company repurchased 4,200,000
shares for a total price of $1,054,397.
(Unaudited) -- On April 4, 2000 the Company exercised its option to
repurchase the remaining 5,415,852 shares for a total price of $1,429,656. This
resulted in a termination of the agreement. The repurchase was financed with a
term loan in the amount of $1,400,000. The term loan bears interest at prime
rate plus 1.5%, with principal payable in 36 equal installments of approximately
$39,000 beginning May 31, 2000. The term loan is subject to the same
restrictions as the line of credit (see note 4).
F-13
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1988, the Company established a stock option plan whereby certain
key employees were eligible to receive incentive stock options and non-qualified
stock options and certain directors and consultants were eligible to receive
non-qualified stock options. During 1998, the original stock option plan expired
and a new plan, with similar terms, was approved by the board of directors. The
1998 plan provides for the award of options for a maximum of 5,556,000 shares
(unaudited) (restated for stock splits and including the additional
authorization of 1,956,000 shares reserved for issuance under the 1998 plan
(unaudited) in May 2000) of the Company's common stock. In connection with any
option granted under the plan, the Company, may at its sole discretion, grant a
stock appreciation right (SAR) which may be exercised as an alternative, but not
in addition to, an option granted pursuant to the stock option plan. The
exercise price of incentive stock options may not be less than fair market value
at the date of the grant. Options are nontransferable and expire if not
exercised within seven years from the date of the grant for options granted
prior to September 4, 1998 and ten years for options granted on September 4,
1998 and thereafter. Vesting periods are determined on the date of grant. All
options granted as of December 31, 1999 had exercise prices equal to fair value,
as determined by the board of directors in accordance with the terms of the
stock option plan, at the date of grant. At December 31, 1999 and June 30, 2000
(unaudited), total shares available for option grants under the 1998 plan to
employees are 2,322,000 and 4,038,000, respectively. At December 31, 1999 and
June 30, 2000 (unaudited), no SAR's had been granted.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1996 (2,203,200 exercisable).... 3,276,000 $ .16
Granted..................................................... 2,592,000 .14
Canceled.................................................... (3,096,000) .17
Exercised................................................... (180,000) .11
----------
Outstanding at December 31, 1997 (1,432,800 exercisable).... 2,592,000 .14
Granted..................................................... 1,296,000 .23
Canceled.................................................... (108,000) .13
Exercised................................................... (468,000) .13
----------
Outstanding at December 31, 1998 (1,190,880 exercisable).... 3,312,000 .18
Granted..................................................... 1,218,000 .27
Canceled.................................................... (1,128,000) .22
----------
Outstanding at December 31, 1999 (1,730,640 exercisable).... 3,402,000 .20
Granted (unaudited)......................................... 672,000 1.04
Canceled (unaudited)........................................ (432,000) .24
----------
Outstanding at June 30, 2000 (1,781,040 exercisable)
(unaudited)............................................... 3,642,000 .35
==========
</TABLE>
F-14
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The stock options outstanding at December 31, 1999 (adjusted for the
February 1999, July 2000 and August 2000 stock splits) consist of the following:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------- --------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
NUMBER EXERCISE TERM TO NUMBER EXERCISE
OF SHARES PRICE EXPIRATION OF SHARES PRICE
--------- -------- ---------- --------- --------
<S> <C> <C> <C> <C>
1,404,000.. $.13 4.27 Years 1,296,000 $.13
792,000.. .22 5.62 Years 192,240 .21
1,206,000.. .27 9.61 Years 192,000 .31
--------- ---------
3,402,000.. .20 1,680,240 .16
========= =========
</TABLE>
For the purposes of computing pro forma net income, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. The assumptions used to value the option grant are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------------
------------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dividend yield.................... 0% 0% 0% 0% 0%
Expected term..................... 4 years 4 years 6 years 4 years 6 years
Risk-free interest rate........... 6.0% 5.6% - 5.8% 4.8% - 6.0% 4.8% - 5.5% 6.5%
Volatility rate................... 0% 0% 0% 0% 0%
Calculated fair value............. $.35 $.77 $.85 $.53 $4.05
</TABLE>
The Company applies the intrinsic value method in accounting for its grants
of options. Option valuation models require the input of highly subjective
assumptions. Because the Company's 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 stock options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. Had the
Company determined compensation cost
F-15
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
based on the fair value at the grant date for its stock options using the fair
value method, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, ------------------------
------------------------------------ JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
-------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income-
As reported....................... $904,820 $1,427,725 $2,259,673 $1,224,225 $2,905,574
Pro forma......................... 882,621 1,420,200 2,229,976 1,215,204 2,877,192
Basic earnings per share-
As reported....................... .02 .03 .06 .03 .08
Pro forma......................... .02 .03 .06 .03 .08
Diluted earnings per share-
As reported....................... .02 .03 .05 .03 .08
Pro forma........................... $ .02 $ .03 $ .05 $ .03 $ .08
======== ========== ========== ========== ==========
</TABLE>
(9) RISK CONCENTRATIONS
Export Sales: Export sales accounted for approximately 34%, 22%, 29%, 29%
(unaudited) and 31% (unaudited) of total sales for the years ended December 31,
1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000,
respectively.
Major Customers: The Company had two customers which accounted for 36% of
total sales during the year ended December 31, 1999 and 30% of the accounts
receivable at December 31, 1999. The loss of these customers could have a
material adverse impact of the Company's financial position and results of
operation.
Suppliers: The Company had two suppliers which accounted for 47% of
inventory purchases during the year ended December 31, 1999. The interruption in
the supply of inventory from these suppliers could have a material adverse
impact on the Company's financial position and results of operations.
(10) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan covering substantially all employees.
Eligible employees may contribute up to 15% of their salary and the Company
makes matching contributions of up to 100% of the employee contribution, limited
to 2% of salary. Employees vest in Company contributions in 20% increments in
service years two to six, being fully vested at the end of six years of service.
The Company's contributions for the years ended December 31, 1997, 1998 and 1999
and for the six months ended June 30, 1999 and 2000 (unaudited) were
approximately $24,000, $33,000, $38,000, $17,000 and $26,000, respectively.
(11) NOTES RECEIVABLE SECURED BY COMMON STOCK
During 1996, 1997 and 1998, a shareholder exercised options to purchase
90,000, 90,000 and 468,000 shares, respectively, of the Company's common stock.
These purchases were financed with long-term notes in the amount of $9,200,
$9,200 and $58,500, respectively, from the Company. The terms of the notes
require annual interest payments at a rate of 6.25%, 6.25% and 5.75%,
F-16
<PAGE> 76
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respectively, and principal payments at maturity, December 2003, June 2004 and
January 2003, respectively. The notes are secured by the shares of common stock
issued.
(12) SUBSEQUENT EVENT (UNAUDITED)
On July 28, 2000 the Company's Board of Directors granted 515,000 stock
options to certain employees of the Company. The exercise price of the options
is $6.10. The options have a four year vesting period.
The Company effected stock splits on July 13, 2000 and August 24, 2000. See
note 1(l).
F-17
<PAGE> 77
[The inside back cover of the prospectus contains our logo and the phrase
"Optical Test and Measurement Equipment" at the bottom of the page]
<PAGE> 78
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES
[ILX LIGHTWAVE LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
----------------------
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
------------------
, 2000
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
WE HAVE NOT TAKEN ANY ACTION IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION AND DISTRIBUTION
OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS 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> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Except as set forth below, the following fees and expenses will be paid by
us in connection with the issuance and distribution of the securities registered
hereby and do not include underwriting commissions and discounts. All expenses,
except for the SEC registration, NASD filing and Nasdaq listing fees, are
estimated.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $30,360
NASD filing fee............................................. 12,000
Nasdaq National Market listing fee.......................... 95,000
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent's and registrar's fees.......................
Printing and engraving expenses.............................
Miscellaneous...............................................
-------
Total..................................................
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Statutes provides that a corporation
shall indemnify any person made or threatened to be made a party to a proceeding
by reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts of omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefore by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interest of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interest of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in certain
instances. A decision as to required indemnification is made by a disinterested
majority of the Board of Directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of the Board, by special legal
counsel, by the stockholders or by a court.
Provisions regarding indemnification of our officers and directors to the
extent permitted by Section 302A.521 are contained in our article of
incorporation and bylaws.
We intend to purchase a policy of directors' and officers' liability
insurance that insures our directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances, including
securities law claims.
II-1
<PAGE> 80
The Underwriting Agreement contained in Exhibit 1.1 to this registration
statement provides that the underwriters are obligated, under certain
circumstances, to indemnify our directors and officers against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1997, we have issued and sold the following securities that
were not registered under the Securities Act:
- On January 28, 1998, we issued 468,000 shares of our common stock to our
Chief Financial Officer in exchange for promissory notes totalling
$58,500.
- On February 5, 1999, we issued 2,289,100 shares of common stock to
reflect our three-for-one stock split (in the form of a two-for-one stock
dividend) effective on that date.
- On December 7, 1999, we issued 48,000 shares of our common stock as
compensation to one of our directors.
- On July 13, 2000, we issued 5,272,658 shares of common stock to reflect
our three-for-one stock split (in the form of a two-for-one stock
dividend) effective on that date.
- On August 24, 2000, we issued 23,726,961 shares of common stock to
reflect our four-for-one stock split (in the form of a three-for-one
stock dividend) effective on that date.
- From June 30, 1997 through June 30, 2000, we granted stock options to our
employees, directors and consultants under our 1988 stock option plan and
1998 stock option plan pursuant to which the optionees may purchase up to
an aggregate of 2,682,000 shares of our common stock at exercise prices
ranging from $0.13 to $1.08 per share. Of the options we granted during
this period, options to purchase a total of 2,310,000 shares of our
common stock remain outstanding as of June 30, 2000.
The sale and issuance of these securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Rule 701 promulgated thereunder in that the securities were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation.
II-2
<PAGE> 81
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Specimen of Common Stock certificate
5.1* Opinion of Dorsey & Whitney LLP
10.1 Employee Stock Purchase Plan
10.2 1988 Stock Option Plan
10.3 1998 Long-Term Incentive and Stock Option Plan
10.4* 2000 Stock Incentive Plan
10.5 Lease Agreement dated June 29, 2000 between the Company and
Anthony Wayne Oil Corporation
10.6 Sublease Agreement dated August 10, 1998 between the Company
and Exabyte, assigned to Nautilus Court II Partnership, Ltd.
December 21, 1999
10.7 Lease Agreement dated December 22, 1992 between the Company
and Anthony Wayne Oil Corporation
10.8 Loan and Security Agreement dated June 28, 1999 between
Silicon Valley Bank and the Company, as amended by the First
Amendment to Loan and Security Agreement dated March 23,
2000 between Silicon Valley Bank and the Company
23.1 Consent of KPMG LLP
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to
the Registration Statement)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
-------------------------
* To be filed by amendment.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
The registrant will 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 for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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 Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 82
For purposes of determining any liability under the Securities Act of 1933,
the registrant will treat 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 as part of this registration
statement as of the time the Securities and Exchange Commission declared it
effective.
For the purpose of determining any liability under the Securities Act of
1933, the registrant will treat each post-effective amendment that contains a
form of prospectus as a new registration statement for the securities offered in
the registration statement, and will treat that offering of the securities at
that time as the initial bona fide offering of those securities.
II-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bozeman, State of
Montana, on August 31, 2000.
ILX LIGHTWAVE CORPORATION
By: /s/ LAWRENCE A. JOHNSON
------------------------------------
Lawrence A. Johnson
Chairman, Chief Executive Officer
and President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Lawrence A. Johnson and Randall T.
Dugger, and each of them, his true and lawful attorneys-in-fact and agents, with
full powers of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all (i) amendments
(including post-effective amendments) and additions to this registration
statement and (ii) registration statements, and any and all amendments thereto
(including post-effective amendments), relating to the offering contemplated
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to
such attorneys-in-fact and agents and each of them full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or his or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LAWRENCE A. JOHNSON Chairman, Chief Executive Officer and August 31, 2000
------------------------------------------ President (principal executive officer)
Lawrence A. Johnson
/s/ RANDALL T. DUGGER Vice President Finance and August 31, 2000
------------------------------------------ Administration and Chief Financial
Randall T. Dugger Officer (principal financial officer
and principal accounting officer)
/s/ FREDERICK R. HUME Director August 31, 2000
------------------------------------------
Frederick R. Hume
/s/ GLENDEN F. JOHNSON Director August 31, 2000
------------------------------------------
Glenden F. Johnson
/s/ STEVEN M. QUIST Director August 31, 2000
------------------------------------------
Steven M. Quist
/s/ JAMES C. WYANT Director August 31, 2000
------------------------------------------
James C. Wyant
</TABLE>
II-5
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Articles of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate.
5.1* Opinion of Dorsey & Whitney LLP.
10.1 Employee Stock Purchase Plan.
10.2 1988 Stock Option Plan.
10.3 1998 Long-Term Incentive and Stock Option Plan.
10.4* 2000 Stock Incentive Plan.
10.5 Lease Agreement dated June 29, 2000 between the Company and
Anthony Wayne Oil Corporation.
10.6 Sublease Agreement dated August 10, 1998 between the Company
and Exabyte, assigned to Nautilus Court II Partnership Ltd.
December 21, 1999.
10.7 Lease Agreement dated December 22, 1992 between the Company
and Anthony Wayne Oil Corporation.
10.8 Loan and Security Agreement dated June 28, 1999 between
Silicon Valley Bank and the Company, as amended by the First
Amendment to Loan and Security Agreement dated March 23,
2000 between Silicon Valley Bank and the Company.
23.1 Consent of KPMG LLP.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to
the Registration Statement).
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
-------------------------
* To be filed by amendment.
II-6
