<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 2000
REGISTRATION NO. 333-45482
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLIANCE FIBER OPTIC PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA (PRIOR TO 3674 77-0417039
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER REINCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
</TABLE>
ALLIANCE FIBER OPTIC PRODUCTS, INC.
735 NORTH PASTORIA AVENUE
SUNNYVALE, CA 94085
(408) 736-6900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PETER C. CHANG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ALLIANCE FIBER OPTIC PRODUCTS, INC.
735 NORTH PASTORIA AVENUE
SUNNYVALE, CA 94085
(408) 736-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GABRIELLA A. LOMBARDI PAUL C. PRINGLE
MARY A. HELVEY BROWN & WOOD LLP
P. CHRISTINE LILLQUIST 555 CALIFORNIA STREET, SUITE 5000
ERA ANAGNOSTI SAN FRANCISCO, CA 94104
PILLSBURY MADISON & SUTRO LLP
2550 HANOVER STREET
PALO ALTO, CA 94304
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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>
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FILING FEE(3)
-----------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value..... 7,187,500 $13.00 $93,437,500 $24,668
-----------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Included 937,500 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a).
(3) Includes $22,770 previously paid.
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.
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--------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States offering (the "U.S. Prospectus") and one
to be used in a concurrent international offering (the "International
Prospectus"). The two prospectuses will be identical in all respects except for
the front and back cover pages and the sections entitled "Underwriting." Pages
to be included in the International Prospectus and not the U.S. Prospectus are
marked "Alternate Page."
<PAGE> 3
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 OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000
PROSPECTUS
6,250,000 SHARES
ALLIANCE FIBER OPTIC PRODUCTS, INC.
COMMON STOCK
----------------------
This is Alliance Fiber Optic Products' initial public offering. Alliance
Fiber Optic Products is selling all of the shares. The U.S. underwriters are
offering shares in the U.S. and Canada and the international managers
are offering shares outside the U.S. and Canada.
We expect the public offering price to be between $11.00 and $13.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "AFOP."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Alliance Fiber Optic
Products.................................................. $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional
shares at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments. The
international managers may similarly purchase up to an additional
shares.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
SG COWEN
----------------------
The date of this prospectus is , 2000.
<PAGE> 4
[INSIDE FRONT COVER]
On the left-hand side of the page is a large photograph depicting a row of our
DWDM modules with fibers extending upwards.
At the top of the right-hand side of the page is a small photograph of a globe
encircled with interconnects and couplers. Underneath this photograph is a
vertical list of our component groups, as follows: Optical Path Integration
Solution Products (OPIS(TM)), Optical Amplifier Products, Wavelength Management
Products and Advanced Optical Devices.
Our company name appears beneath the large photograph depicting the splitters.
Beneath our company name appears the phrase "THE ART AND SCIENCE OF FIBER
OPTICS".
Our logo appears at the bottom right side of the page.
<PAGE> 5
[GATEFOLD]
The phrase "BROAD EXPERTISE ACROSS MULTIPLE PRODUCT LINES" runs across the
top of the two pages of the gatefold. The gatefold is divided into four
sections. Each section contains two or three product photographs.
The top left section pertains to Optical Path Intergation Solution Products
(OPIS(TM)) and contains photographs of a coupler module, two splitters and
interconnects. The bottom left section, depicting optical amplifier products,
contains photographs of couplers and a filter. The upper right section depicts
wavelength management products and contains photographs of two different modules
and a filter. The bottom right section, depicting advanced optical devices,
contains photographs of attenuators and a depolarizer.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Information Regarding Forward-Looking Statements............ 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 31
Management.................................................. 44
Certain Relationships and Related Party Transactions........ 50
Principal Stockholders...................................... 52
Description of Capital Stock................................ 54
Shares Eligible for Future Sale............................. 57
Material United States Federal Tax Consequences to
Non-United States Holders................................. 59
Underwriting................................................ 62
Legal Matters............................................... 6
Experts..................................................... 66
Where You Can Find Additional Information................... 66
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
This prospectus includes the following trademarks of Alliance Fiber Optic
Products: OPIS and MICS. All other trademarks and trade names appearing in this
prospectus are the property of their respective holders. The inclusion of other
companies' brand names and products in this prospectus is not an endorsement of
Alliance Fiber Optic Products. These companies are not involved with the
offering of our securities.
i
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors" beginning on page 4 and the consolidated financial statements, related
notes and other financial data, included elsewhere in this prospectus, before
making an investment decision.
ALLIANCE FIBER OPTIC PRODUCTS, INC.
We design, manufacture and market a broad range of high performance fiber
optic components, and integrated modules incorporating these components, for
leading and emerging communications equipment manufacturers. We offer a broad
line of products including interconnect devices that are used to connect optical
fibers and components, couplers and splitters that are used to divide and
combine optical power, and dense wavelength division multiplexing, or DWDM,
devices that separate and combine multiple specific wavelengths. Our emphasis on
design for manufacturing and our comprehensive manufacturing expertise enable us
to produce our products efficiently and in volume quantities. Our product scope
and ability to integrate our components into optical modules enable us to
satisfy a wide range of customer requirements throughout the optical networking
market. Our customers deploy our products in long-haul networks, that connect
cities, metropolitan networks, that connect areas within cities, and last mile
access networks, that connect to individual businesses and homes. Our eight
largest customers for the 12 months ended August 31, 2000 include a diverse
group of equipment manufacturers, including Alcatel, ANTEC, Avanex, JDS
Uniphase, Marconi Communications, NORDX/CDT, Ortronics and Tyco Electronics.
Communications service providers increasingly rely on fiber optic
technology to meet the rising demand for data-carrying capacity, or bandwidth,
in telecommunications networks. Next generation optical networks require
advanced systems and a large number of components to provide necessary bandwidth
and connectivity. Ryan, Hankin & Kent, a leading telecommunications market
research and consulting firm, estimates that the worldwide market for optical
components used in long distance and cable television applications will grow
from approximately $6.6 billion in 1999 to over $23 billion in 2003.
Our objective is to become a leading supplier of fiber optic components
and integrated modules for metropolitan and last mile access optical networks.
As key elements of our strategy, we intend to:
- leverage our existing customer relationships and establish new
customers;
- offer innovative product solutions to meet our customers' requirements;
- broaden our intellectual property portfolio and advance our product
line;
- expand our manufacturing capacity and refine our manufacturing
processes;
- strengthen sales and marketing efforts in the metropolitan and last
mile access markets; and
- pursue strategic acquisitions to expand our technology and product
offerings.
CORPORATE INFORMATION
We were incorporated in California in December 1995. We plan to
reincorporate as Alliance Fiber Optic Products, Inc. in Delaware prior to the
commencement of this offering. Our principal executive offices and primary
research facilities are located at 735 North Pastoria Avenue, Sunnyvale,
California 94085 and our telephone number at that location is (408) 736-6900.
1
<PAGE> 8
THE OFFERING
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<S> <C>
Common stock offered by Alliance Fiber Optic
Products
U.S. offering.............................. shares
International offering..................... shares
Total.................................... 6,250,000 shares
Shares outstanding after this offering.......... 51,559,999 shares
Use of proceeds................................. We expect to use the net proceeds of the offering
for general corporate purposes, including expansion
of our manufacturing operations, sales and
marketing activities, research and development and
working capital, and repayment of an aggregate of
$754,000 of indebtedness. We also may use a portion
of the net proceeds of this offering for the
acquisition of complementary businesses, products
or technologies. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... AFOP
</TABLE>
Unless otherwise stated, all information in this prospectus assumes:
- the automatic conversion of all outstanding shares of our preferred
stock into common stock immediately prior to the closing of this
offering;
- no exercise of the over-allotment option granted to the underwriters;
- our reincorporation as a Delaware corporation prior to completion of
this offering; and
- a three-for-two stock split prior to the completion of this offering.
The number of shares of common stock to be outstanding immediately after
this offering is based upon shares of common stock outstanding as of September
30, 2000 and excludes:
- 2,739,700 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 2000, at a weighted average price of
$ per share; and
- 2,053,633 shares of common stock available for future issuances under
our 1997 Stock Plan.
2
<PAGE> 9
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ----------------------
1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ----------- -------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................ $ 4,774 $ 5,263 $ 4,906 $ 7,551 $ 2,675 $ 7,414
Gross profit.................................... 751 1,701 2,149 2,640 689 3,169
Income (loss) from operations................... 171 26 (742) (1,455) (831) (1,852)
Net income (loss)............................... 126 68 (388) (1,271) (732) (1,734)
Net income (loss) per share:
Basic......................................... $ 0.03 $ 0.01 $ (0.07) $ (0.21) $ (0.13) $ (0.22)
Diluted....................................... 0.01 -- (0.07) (0.21) (0.13) (0.22)
Shares used in computing net income (loss) per
share:
Basic......................................... 5,400 5,400 5,400 6,120 5,632 7,679
Diluted....................................... 29,958 29,958 5,400 6,120 5,632 7,679
Pro forma net income (loss) per share
(unaudited):
Basic and diluted............................. $ (0.04) $ (0.05)
Shares used in computing pro forma net income
(loss) per share (unaudited):
Basic and diluted............................. 29,220 33,480
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,792 $ 72,538
Working capital............................................. 6,560 74,306
Total assets................................................ 14,483 82,229
Long-term liabilities, less current portion................. 663 35
Mandatorily redeemable convertible preferred stock.......... 10,115 --
Total stockholders' equity.................................. 251 78,866
</TABLE>
The preceding table presents a summary of our balance sheet data as of
June 30, 2000:
- on an actual basis;
- on a pro forma as adjusted basis to give effect to the automatic
conversion of all of our outstanding shares of convertible preferred
stock into 33,600,000 shares of common stock; and to the sale of
6,250,000 shares of common stock in this offering at an assumed initial
public offering price of $12.00 per share, after deducting the
estimated underwriting discount and estimated offering expenses.
See note 1 of notes to consolidated financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
Pro forma basic and diluted net loss per share have been calculated
assuming the conversion of all previously outstanding shares of convertible
preferred stock into common stock as if the stock had been converted immediately
upon its issuance.
3
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business and
financial results could be harmed. In that case, the trading price of our common
stock could decline and you might lose all or part of your investment. You
should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUES IN THE FUTURE TO ACHIEVE AND SUSTAIN PROFITABILITY.
We have incurred losses for the last two fiscal years and expect that our
net losses and negative cash flow will continue for the foreseeable future as we
continue to invest in our business. We incurred net losses of $388,000 in 1998,
$1.3 million in 1999, and $1.7 million for the six months ended June 30, 2000.
As of June 30, 2000, we had an accumulated deficit of approximately $3.2
million.
We have recently expanded our manufacturing facilities, and we expect to
continue to incur significant and increasing expenses for expansion of our
manufacturing operations, research and development, sales and marketing, and
administration, and in developing direct sales and distribution channels. In
particular, given our early stage of development, our increasing operating
expenses and the rate at which competition in our industry is intensifying, we
may not be able to adequately control our costs and expenses or achieve or
maintain adequate operating margins. As a result, to achieve and maintain
profitability, we will need to generate and sustain substantially higher
revenues while maintaining reasonable cost and expense levels. We may not be
able to achieve and sustain profitability on a quarterly or an annual basis.
A NUMBER OF FACTORS COULD CAUSE OUR QUARTERLY AND ANNUAL FINANCIAL RESULTS TO BE
WORSE THAN EXPECTED, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
We believe that period to period comparisons of our operating results are
not a good indication of our future performance. Our quarterly operating results
have fluctuated in the past and are likely to fluctuate significantly in the
future due to a variety of factors, many of which are outside of our control. If
our quarterly or annual operating results do not meet the expectations of
investors and securities analysts, the trading price of our common stock could
significantly decline. Some of the factors that could affect our quarterly or
annual operating results are discussed below.
TWO OF OUR PRODUCT LINES HAVE HISTORICALLY REPRESENTED ALL OF OUR REVENUES, AND
IF WE ARE UNSUCCESSFUL IN COMMERCIALLY SELLING OUR THIN-FILM FILTER-BASED
PRODUCTS, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Sales of our optical path integration, or OPIS, product line and our
optical amplifier products accounted for all of our revenues in the six months
ended June 30, 2000 and substantially all of our historical revenues. We expect
to substantially depend on these product lines for our near-term revenues. Any
significant decline in the price of, or demand for, products in these lines, or
failure to increase market acceptance, would seriously harm our business. In
addition, we believe that our future growth and a significant portion of our
future revenues will depend on the commercial success of our thin-film filter-
based WDM and DWDM products, we only began shipping these products commercially
in July 2000. If our target customers do not widely adopt, purchase and
successfully deploy our new products, our revenues may not grow significantly
and our business will be seriously harmed.
4
<PAGE> 11
WE WILL NOT ATTRACT NEW ORDERS UNLESS WE CAN DELIVER SUFFICIENT QUANTITIES OF
OUR PRODUCTS TO CUSTOMERS.
Communications service providers and optical systems manufacturers
typically require that suppliers commit to provide specified quantities of
products over a given period of time. If we are unable to commit to deliver
quantities of our products to satisfy a customer's anticipated needs, we will
lose the order and the opportunity for significant sales to that customer for a
lengthy period of time. Our manufacturing operations are currently operating
near capacity. If we do not increase our manufacturing capacity, growth of our
business will be negatively impacted. We are just beginning to receive orders
for significant quantities of our DWDM products while simultaneously increasing
our manufacturing capacity for those products. We would be unable to fill large
orders if we do not have sufficient manufacturing capacity to enable us to
commit to provide customers with specified quantities of products.
WE DEPEND ON THIRD PARTIES TO SUPPLY OUR RAW MATERIALS, COMPONENTS AND
EQUIPMENT, AND IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT QUANTITIES OF THESE ITEMS
AT ACCEPTABLE PRICES, OUR ABILITY TO FILL CUSTOMER ORDERS WOULD BE LIMITED AND
OUR OPERATING RESULTS COULD BE HARMED.
We depend on third parties to supply the raw materials and components we
use to manufacture our products. To be competitive, we must obtain from our
suppliers, on a timely basis, sufficient quantities of raw materials and
components at acceptable prices. We obtain most of our critical raw materials
and components from a single or limited number of suppliers and generally do not
have long-term supply contracts with them. As a result, our suppliers could
terminate the supply of a particular material or component at any time without
penalty. Finding alternative sources may involve significant expense and delay,
if these sources can be found at all. Difficulties in obtaining raw materials or
components in the future may delay or limit our product shipments which could
result in lost orders, increase our costs, reduce our control over quality and
delivery schedules and require us to redesign our products. If a supplier became
unable or unwilling to continue to manufacture or ship materials or components
in required volumes, we would have to identify and qualify an acceptable
replacement. A delay or reduction in shipments or any need to identify and
qualify replacement suppliers would harm our business. In this regard, we are
experiencing difficulties in obtaining ferrules used in our OPIS line of
products. The difficulties have typically resulted from demand for ferrules
within the industry exceeding the capacity of suppliers. If we are unable to
obtain sufficient ferrules to meet increasing demand for products incorporating
these ferrules, potential growth of our business will be impeded. In addition,
all of our graded index, or GRIN, lenses, which are incorporated into
substantially all of our filter-based DWDM products, are obtained from Nippon
Sheet Glass.
We also depend on a limited number of manufacturers and vendors that make
and sell the complex equipment we use in our manufacturing process. In periods
of high market demand, the lead times from order to delivery of this equipment
could be significant. Delays in the delivery of this equipment or increases in
the cost of this equipment could harm our operating results.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OUR ABILITY
TO SELL OUR PRODUCTS COULD BE HARMED.
Our success depends to a significant degree upon the continued
contributions of the principal members of our technical sales, marketing,
engineering and management personnel, many of whom perform important management
functions and would be difficult to replace. We particularly depend upon the
continued services of our executive officers, particularly Peter Chang, our
Chief Executive Officer, David Hubbard, our Vice President, Sales and Marketing,
and other key engineering, sales, marketing, finance, manufacturing and support
personnel. In addition, we depend upon the continued services of key management
personnel at our Taiwanese subsidiary. None of our officers or key employees is
bound by an employment agreement for any specific term, and may terminate their
employment at any time. In addition, we do not have "key person" life insurance
policies covering any of our employees.
As a result of the expansion of our operations, we must hire a
significant number of additional engineering, technical sales, marketing and
manufacturing personnel. Hiring technical sales personnel in
5
<PAGE> 12
our industry is very competitive due to the limited number of people available
with the necessary technical skills and understanding of our technologies. Our
ability to continue to attract and retain highly skilled personnel will be a
critical factor in determining whether we will be successful in the future.
Competition for highly skilled personnel is intense, particularly in Northern
California. We may also have difficulty hiring skilled engineers at our
manufacturing facility in Taiwan. If we are not successful in attracting,
assimilating or retaining qualified personnel to fulfill our current or future
needs, our business may be harmed.
OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY
OUR REVENUES COULD DECLINE.
The market for fiber optic components is intensely competitive. We
believe that our principal competitors are the major manufacturers of optical
components and integrated modules, including vendors selling to third parties
and business divisions within communications equipment suppliers. Our principal
competitors in the components market include Avanex Corporation, Corning, DiCon
Fiberoptics, Gould, JDS Uniphase, which recently acquired E-TEK Dynamics and
announced its intended acquisition of SDL, Lucent, New Focus, Nortel, Oplink,
Stratos Lightwave and Tyco Electronics. We believe that we primarily compete
with diversified suppliers for the majority of our product line and to a lesser
extent with niche companies that offer a more limited product line. Competitors
in any portion of our business may also rapidly become competitors in other
portions of our business. In addition, our industry has recently experienced
significant consolidation, and we anticipate that further consolidation will
occur. This consolidation has further increased competition.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing, manufacturing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, to
devote greater resources to the development, promotion and sale of products, to
negotiate lower prices on raw materials and components, or to deliver
competitive products at lower prices.
Several of our existing and potential customers are also current and
potential competitors of ours. These companies may develop or acquire additional
competitive products or technologies in the future and subsequently reduce or
cease their purchases from us. Three of our top five customers are also
competitors and accounted for 19.5% of our revenues in the 12 months ended
August 31, 2000. In light of the consolidation in the optical networking
industry, we also believe that the size of suppliers will be an increasingly
important part of a purchaser's decision-making criteria in the future. We may
not be able to compete successfully with existing or new competitors, nor can we
ensure that the competitive pressures we face will not result in lower prices
for our products, loss of market share, or reduced gross margins, any of which
could harm our business.
New and competing technologies are emerging due to increased competition
and customer demand. The introduction of products incorporating new or competing
technologies or the emergence of new industry standards could make our existing
products noncompetitive. For example, there are technologies for the design of
wavelength division multiplexers that compete with the technology that we
incorporate in our products. If our products do not incorporate technologies
demanded by customers, we could lose market share and our business would suffer.
IF OUR CUSTOMER BASE DOES NOT GROW, WE MAY NOT BE ABLE TO INCREASE OR SUSTAIN
OUR REVENUES.
Our future success will depend on our ability to migrate existing
customers to our new products and our ability to attract additional customers.
Many of our present customers are relatively new companies. The growth of our
customer base could be adversely affected by:
- customer unwillingness to implement our products;
- any delays or difficulties that we may incur in completing the
development and introduction of our planned products or product
enhancements;
6
<PAGE> 13
- the success of our customers;
- new product introductions by our competitors;
- any failure of our products to perform as expected; or
- any difficulty we may incur in meeting customers' delivery requirements
or product specifications.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS IN A COST-EFFECTIVE MANNER
OR ACHIEVE SUFFICIENT PRODUCT RELIABILITY, THIS COULD DELAY PRODUCT SHIPMENTS TO
OUR CUSTOMERS OR REQUIRE US TO DEVELOP NEW MANUFACTURING PROCESSES, WHICH WOULD
IMPAIR OUR OPERATING RESULTS.
Complex and precise processes are required for the manufacture of our
products. Changes in our manufacturing processes or those of our suppliers, or
the inadvertent use of defective materials, could significantly reduce our
manufacturing yields and product reliability. Because the majority of our
manufacturing costs are relatively fixed, manufacturing yields are critical to
our results of operations. Lower than expected production yields could delay
product shipments and impair our operating results. We may not obtain acceptable
yields in the future.
In some cases, existing manufacturing techniques, which involve
substantial manual labor, may not allow us to cost-effectively meet our
production goals so that we maintain acceptable gross margins while meeting the
cost targets of our customers. We will need to develop new manufacturing
processes and techniques that will involve higher levels of automation to
increase our gross margins. We may not achieve adequate manufacturing cost
efficiencies.
Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our product
development department to our manufacturing group and coordinate our efforts
with those of our suppliers to rapidly achieve volume production. If we fail to
effectively manage this process or if we experience delays, disruptions or
quality control problems in our manufacturing operations, our shipments of
products to our customers could be delayed.
OUR LENGTHY AND VARIABLE QUALIFICATION AND SALES CYCLE MAKES IT DIFFICULT TO
PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE, WHICH MAY CAUSE US
TO HAVE EXCESS MANUFACTURING CAPACITY OR INVENTORY AND NEGATIVELY IMPACT OUR
OPERATING RESULTS.
In the communications industry, service providers and optical systems
manufacturers often undertake extensive qualification processes prior to placing
orders for large quantities of products such as ours, because these products
must function as part of a larger system or network. This process may range from
three to six months and sometimes longer. Once they decide to use a particular
supplier's product or component, these potential customers design the product
into their system, which is known as a design-in win. Suppliers whose products
or components are not designed in are unlikely to make sales to that customer
until at least the adoption of a future redesigned system. Even then, many
customers may be reluctant to incorporate entirely new products into their new
systems, as this could involve significant additional redesign efforts. If we
fail to achieve design-in wins in our potential customers' qualification
processes, we will lose the opportunity for significant sales to those customers
for a lengthy period of time. In addition, some of our customers require that
our products be subjected to Telcordia qualification testing, which can take up
to nine months or more. While our customers are evaluating our products and
before they place an order with us, we may incur substantial sales and marketing
and research and development expenses, expend significant management efforts,
increase manufacturing capacity and order long lead-time supplies. Even after
the evaluation process, it is possible a potential customer will not purchase
our products. In addition, product purchases are frequently subject to unplanned
processing and other delays, particularly with respect to larger customers for
which our products represent a very small percentage of their overall purchase
activity. Accordingly, our revenues and operating results may vary significantly
and unexpectedly from quarter to quarter.
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IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR PRODUCTS MAY BE DROPPED FROM SUPPLY PROGRAMS AND OUR REVENUES MAY DECLINE.
Customers generally will not purchase any of our products, other than
limited numbers of evaluation units, before they qualify our products, approve
our manufacturing process and approve our quality assurance system. Our existing
manufacturing lines, as well as each new manufacturing line, must pass through
various levels of approval with our customers. For example, customers may
require that we be registered under international quality standards. Our
products may also have to be qualified to specific customer requirements. This
customer approval process determines whether the manufacturing line achieves the
customers' quality, performance and reliability standards. Delays in product
qualification may cause a product to be dropped from a long-term supply program
and result in significant lost revenue opportunity over the term of that
program.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS, WE INCUR SUBSTANTIAL EXPENSES
FOR WHICH WE MAY NOT EARN ASSOCIATED REVENUES.
The development of new or enhanced fiber optic products is a complex and
uncertain process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent the development, introduction or
marketing of new products and enhancements. Development costs and expenses are
incurred before we generate revenues from sales of products resulting from these
efforts. Our total research and development expenses were approximately $526,000
in 1997, $1.5 million in 1998, $1.5 million in 1999, and $1.9 million for the
six months ended June 30, 2000. We intend to continue to invest a substantial
amount of funds in our research and product development efforts, which could
have a negative impact on our earnings in future periods.
OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX OPTICAL NETWORKS AND MAY CONTAIN
DEFECTS THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED,
WHICH COULD DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS.
Our products are designed to be deployed in large and complex optical
networks. Because of the nature of these products, they can only be fully tested
for reliability when deployed in networks for long periods of time. Our fiber
optic products may contain undetected defects when first introduced or as new
versions are released, and our customers may discover defects in our products
only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things:
- loss of customers;
- damage to our reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
The occurrence of any one or more of the foregoing factors could cause our net
income to decline.
THE OPTICAL NETWORKING COMPONENT INDUSTRY HAS IN THE PAST AND MAY IN THE FUTURE
EXPERIENCE DECLINING AVERAGE SELLING PRICES, WHICH COULD CAUSE OUR GROSS MARGINS
TO DECLINE.
The optical networking component industry has in the past experienced
declining average selling prices as a result of increasing competition and
greater unit volumes as communication service providers continue to deploy fiber
optic networks. We anticipate that average selling prices may decrease in the
future in response to product introductions by competitors, price pressures from
significant customers and greater manufacturing efficiencies achieved through
increased automation in the manufacturing process.
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Average selling price declines may contribute to a decline in our gross margins,
which could harm our results of operations.
IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID EXPANSION OF OUR OPERATIONS,
INCLUDING THE GROWTH IN OUR MANUFACTURING FACILITIES AND THE ANTICIPATED
SIGNIFICANT INCREASE IN THE NUMBER OF EMPLOYEES, OUR OPERATING RESULTS COULD BE
HARMED.
We have rapidly expanded our operations domestically and internationally
in recent periods and expect to continue to do so. As of June 30, 2000, we had a
total of 75 full-time employees in Sunnyvale, California, and 249 full-time
employees in Taiwan. We plan to hire a significant number of employees over the
next several quarters in connection with the expansion of our manufacturing
operations. The growth in employees and our operations, combined with the
challenges of expanding and managing geographically dispersed operations, has
placed, and will continue to place, a significant strain on our management and
resources. Some of our existing senior management personnel joined us within the
last 12 months, including a number of key managerial, technical and operations
personnel whom we have not yet fully integrated. Our Chief Financial Officer and
our Senior Vice President, Product Development, have both joined us since July
2000. To manage the expected growth of our operations and personnel, we will be
required to:
- improve existing and implement new operational, financial and
management controls, reporting systems and procedures;
- hire, train, motivate and manage additional qualified personnel;
- expand our manufacturing capacity; and
- effectively manage relationships with our customers, suppliers,
representatives and other third parties.
In addition, we will need to coordinate our domestic and international
operations and establish the necessary infrastructure to implement our
international strategy. For example, we are currently evaluating the
establishment of a manufacturing facility in mainland China. If we are not able
to manage our growth in an efficient and timely manner, our business will be
severely harmed.
Our success also depends, to a large degree, on the efficient and
uninterrupted operation of our facilities. Our current facilities will not be
sufficient to accommodate our anticipated growth. We recently expanded our
manufacturing facilities in Taiwan. We also recently leased additional
facilities in Sunnyvale, California, and are in the process of expanding into
this facility. Relocating a portion of our employees could cause temporary
disruptions in our operations and divert management's attention. We may need
additional space in the future. Because of acute shortages of office and
manufacturing space in Northern California, we cannot assure you that we will be
able to locate suitable space on acceptable terms or at all in the future.
IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE
MARKET ACCEPTANCE, SALES OF OUR PRODUCTS COULD DECLINE, WHICH REDUCE OUR
REVENUES.
The communications industry is characterized by rapidly changing
technology, frequent new product introductions, changes in customer requirements
and evolving industry standards. Our future success depends on our ability to
anticipate market needs and develop products that address those needs. As a
result, our products could quickly become obsolete if we fail to predict market
needs accurately or develop new products or product enhancements in a timely
manner. Our failure to predict market needs accurately or to develop new
products or product enhancements in a timely manner will harm market acceptance
and sales of our products. If the development or enhancement of these products
or any other future products takes longer than we anticipate, or if we are
unable to introduce these products to market, our sales will not increase. Even
if we are able to develop and commercially introduce these new products, the new
products may not achieve widespread market acceptance necessary to provide an
adequate return on our investment.
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IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
TO USE OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR
REVENUES OR INCREASE OUR COSTS.
The fiber optic component market is a highly competitive industry in
which we, and most other participants, rely on a combination of patent,
copyright, trademark and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect proprietary rights. The
competitive nature of our industry, rapidly changing technology, frequent new
product introductions, changes in customer requirements, and evolving industry
standards heighten the importance of protecting proprietary technology rights.
Since the United States Patent and Trademark Office keeps patent applications
confidential until a patent is issued, our pending patent applications may
attempt to protect proprietary technology claimed in a third party patent
application. Our existing and future patents may not be sufficiently broad to
protect our proprietary technologies as policing unauthorized use of our
products is difficult and we cannot be certain that the steps we have taken will
prevent the misappropriation or unauthorized use of our technologies,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as U.S. law. Our competitors may independently develop similar
technology, duplicate our products or design around any of our patents or other
intellectual property. If we are unable to adequately protect our proprietary
technology rights, others may be able to use our proprietary technology without
having to compensate us, which could reduce our revenues and negatively impact
our ability to compete effectively.
Litigation may be necessary to enforce our intellectual property rights
or to determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.
IF WE FAIL TO INCREASE SALES OF OUR PRODUCTS TO CUSTOMERS OUTSIDE OF NORTH
AMERICA, GROWTH OF OUR BUSINESS WILL BE HARMED.
For the year ended December 31, 1999, sales to customers located outside
of North America were 28.7% of our revenues and for the six months ended June
30, 2000, sales to customers located outside of North America were 20.8% of our
revenues. In order to expand our business, we must increase our sales to
customers located outside of North America. We have limited experience in
marketing and distributing our products internationally and in developing
versions of our products that comply with local standards. Our international
sales will be limited if we cannot establish relationships with international
distributors, establish additional foreign operations, expand international
sales channels, hire additional personnel and develop relationships with
international communications equipment manufacturers. Even if we are able to
successfully continue international operations, we may not be able to maintain
or increase international market demand for our products.
IF WE DO NOT COMPLY WITH FEDERAL, STATE AND LOCAL LAWS AND GOVERNMENTAL
REGULATIONS, WE COULD BE SUBJECT TO LIABILITY.
Our failure to comply with a variety of federal, state and local laws and
regulations in the United States and Taiwan could subject us to criminal, civil
and administrative penalties. Some of our products may be subject to United
States laws and regulations that govern the export of products and disclosure of
technical information to some foreign countries and materials of those
countries. These laws and regulations may require licenses for export of some of
our products and disclosure of technology to some countries, including Taiwan,
where a substantial portion of our manufacturing operations occur, and to
foreign citizens, including a number of our employees. in temporary bans of
sales of technologies such as ours. If we fail to obtain appropriate export
approvals or to make appropriate disclosures to regulatory bodies, limitations
on exports of our technologies may ensue. We may also be subject to restrictions
on import of our products into foreign countries.
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In addition, we are subject to laws relating to the storage, use, discharge
and disposal of toxic or otherwise hazardous or regulated chemicals or materials
used in our manufacturing processes. If we fail to store, use, discharge or
dispose of hazardous materials appropriately, we could be subject to substantial
liability or could be required to suspend or adversely modify our manufacturing
operations. In addition, we could be required to pay for the cleanup of our
properties if they are found to be contaminated, even if we are not responsible
for the contamination. Our failure to comply with the forgoing laws or any other
laws and regulations could subject us to liability.
IF WE FAIL TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS, OUR OPERATING RESULTS
COULD BE HARMED.
Because we experience long lead times for materials and components and
are often required to purchase significant amounts of materials and components
far in advance of product shipments, we may not effectively manage our inventory
levels, which could harm our operating results. In anticipation of market demand
for our DWDM products, we have been, and intend to continue, building inventory.
If we underestimate our requirements, we may have inadequate inventory, which
could result in delays in shipments and loss of customers. If we purchase raw
materials and increase production in anticipation of orders that do not
materialize or that shift to another quarter, we will have to carry or write off
excess inventory and our gross margins will decline. Either situation could
cause our results of operations to be below the expectations of investors and
public market analysts, which could, in turn, cause the price of our common
stock to decline. The time our customers require to incorporate our products
into their own can vary significantly and generally exceeds several months,
which further complicates our planning processes and reduces the predictability
of our forecasts. Even if we receive these orders, the additional manufacturing
capacity that we add to meet our customer's requirements may be underutilized in
a subsequent quarter.
In order to facilitate the rapid deployment of anticipated projects, our
customers have in the past, and may in the future build, significant inventory.
If, after building a significant inventory of our products, these projects are
delayed, our customers will be required to maintain a significant inventory of
our products for longer periods than they originally anticipated, which would
reduce further purchases by these customers of our products until deployment of
the delayed projects commences. These reductions, in turn, could cause
fluctuations in our future results of operations and severely harm our business
and financial condition.
We are in the process of implementing automated manufacturing management
systems in California and in Taiwan. We may experience problems implementing our
new automated manufacturing management systems. As we grow, we will need to
implement additional systems, which we may fail to do on a timely basis.
BECAUSE OUR MANUFACTURING OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE FAULT
ZONES, WE FACE THE RISK THAT A NATURAL DISASTER COULD LIMIT OUR ABILITY TO
SUPPLY PRODUCTS.
Our manufacturing operations are located in Sunnyvale, California, and
Tu-Cheng City, Taiwan, both active earthquake fault zones. These regions have
experienced large earthquakes in the past and may likely experience them in the
future. Because the majority of our manufacturing operations are located in
Taiwan, a large earthquake in Taiwan could disrupt our manufacturing operations
for an extended period of time, which would limit our ability to supply our
products to our customers in sufficient quantities on a timely basis, harming
our customer relationships.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT ARE COSTLY
TO DEFEND AND COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE.
Our industry is very competitive and is characterized by frequent
intellectual property litigation based on allegations of infringement of
intellectual property rights. Numerous patents in our industry have already been
issued and as the market further develops and additional intellectual property
protection is obtained by participants in our industry, litigation is likely to
become more frequent. From time to time,
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third parties may assert patent, copyright, trademark and other intellectual
property rights to technologies or rights that are important to our business. In
addition, we may in the future enter into agreements to indemnify our customers
for any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any litigation arising from claims
asserting that our products infringe or may infringe the proprietary rights of
third parties, whether the litigation is with or without merit, could be
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. These claims could cause us to stop
selling our products which incorporate the challenged intellectual property and
could also result in product shipment delays or require us to redesign or modify
our products or to enter into licensing agreements. These licensing agreements,
if required, would increase our product costs and may not be available on terms
acceptable to us, if at all.
Although we are not aware of any intellectual property claims against us,
we may be a party to litigation in the future. We may not prevail in any such
actions, given their complex technical issues and inherent uncertainties.
Insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. If there is a successful
claim of infringement or we fail to develop non-infringing technology or license
the proprietary rights on a timely basis, our business could be harmed.
RISKS ASSOCIATED WITH THE OPTICAL NETWORKING INDUSTRY
WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE INTERNET AND THE
COMMUNICATIONS INDUSTRY, WHICH IS EXPERIENCING RAPID CONSOLIDATION AND
REALIGNMENT AND MAY NOT CONTINUE TO DEMAND FIBER OPTIC PRODUCTS, THEREBY
REDUCING DEMAND FOR OUR PRODUCTS.
Our future success depends on the continued growth of the Internet as a
widely used medium for communications and commerce, and the growth of optical
networks to meet the increased demand for capacity to transmit data, or
bandwidth. If the Internet does not continue to expand as a medium for
communications and commerce, the need to significantly increase bandwidth across
networks and the market for fiber optic components may not continue to develop.
If this growth does not continue, sales of our products may decline, which would
adversely affect our revenues. Future demand for our products is uncertain and
will depend heavily on the continued growth and upgrading of optical networks,
especially in the metropolitan and last mile access segments of the networks.
The rate at which communication service providers and other fiber optic network
users have built new fiber optic networks or installed new systems in their
existing fiber optic networks has fluctuated in the past and these fluctuations
may continue in the future. These fluctuations may result in reduced demand for
new or upgraded fiber optic systems that utilize our products and, therefore,
may result in reduced demand for our products.
The communications industry is also experiencing rapid consolidation and
realignment, as industry participants seek to capitalize on the rapidly changing
competitive landscape developing around the Internet and new communications
technologies such as fiber optic networks. As the communications industry
consolidates and realigns to accommodate technological and other developments,
our customers may consolidate or align with other entities in a manner that
harms our business.
THE MARKET FOR FIBER OPTIC COMPONENTS IS NEW AND UNPREDICTABLE AND CHARACTERIZED
BY RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES
NOT DEVELOP AND EXPAND AS WE ANTICIPATE, DEMAND FOR OUR PRODUCTS MAY DECLINE,
WHICH WOULD ADVERSELY IMPACT OUR REVENUES.
The market for fiber optic components is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is new, it is
difficult to predict its potential size or future growth rate. Widespread
adoption of optical networks, especially in the metropolitan and last mile
access segments of the networks, is critical to our future success. Potential
end-user customers who have invested substantial resources in
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their existing copper lines or other systems may be reluctant or slow to adopt a
new approach, such as optical networks. Our success in generating revenues in
this emerging market will depend on:
- the education of potential end-user customers and network service
providers about the benefits of optical networks; and
- the continued growth of the metropolitan and last mile access segments
of the communications network.
If we fail to address changing market conditions, sales of our products
may decline, which would adversely impact our revenues.
ADDITIONAL RISKS RELATED TO THIS OFFERING
WE MAY ENGAGE IN FUTURE ACQUISITIONS OR STRATEGIC INVESTMENTS THAT WE MAY NOT BE
ABLE TO SUCCESSFULLY INTEGRATE OR MANAGE AND THESE ACQUISITIONS OR STRATEGIC
INVESTMENTS MAY DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT AND ASSUME
CONTINGENT LIABILITIES.
We may review acquisition prospects and strategic investments that would
complement our current product offerings, augment our market coverage or enhance
our technical capabilities, or that may otherwise offer growth opportunities.
Any of these acquisitions or investments could significantly dilute our
investors. While we have no current agreements or negotiations underway with
respect to any such acquisitions or strategic investments, we may acquire or
make investments in businesses, products or technologies in the future. We have
little experience in acquisitions and strategic investments. Acquisitions and
strategic investments may entail numerous integration risks and impose costs on
us, including:
- difficulties in assimilating acquired operations, technologies or
products, including the loss of key employees;
- unanticipated costs;
- diversion of management's attention from our core business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have no or limited prior
experience;
- dilutive issuances of equity securities;
- incurrence of substantial debt;
- assumption of contingent liabilities;
- incurrence of significant amortization expenses related to goodwill and
other intangible assets; and
- incurrence of significant immediate write-offs.
WE MAY NEED TO RAISE MORE CAPITAL, BUT THE AVAILABILITY OF ADDITIONAL FINANCING
IS UNCERTAIN.
We intend to use the proceeds from this offering for general corporate
purposes, including working capital and capital expenditures. We believe that
these proceeds, together with our existing capital resources, will be sufficient
to meet our capital requirements for at least the next 12 months. However, our
capital requirements depend on several factors, including:
- the rate of market acceptance of our products;
- our ability to expand our customer base;
- the growth of our research and development and sales and marketing
organizations; and
- other infrastructure requirements.
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If our capital requirements vary significantly from those currently
planned, we may require additional financing sooner than anticipated. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced. In addition,
stockholders may experience further dilution, or these equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock. If additional funds are raised through the issuance of debt
securities, these securities would have rights, preferences and privileges
senior to holders of common stock and the terms of these securities could impose
restrictions on our operations. Additional financing may not be available when
needed on terms favorable to us or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to develop or enhance
our products and services, take advantage of future opportunities or respond to
competitive pressures, which could negatively impact our product development and
sales.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO DECLINE.
Additional sales of our common stock in the public market after this
offering, or the perception that such sales could occur, could cause the market
price of our common stock to decline. Upon completion of this offering, we will
have 51,559,999 shares of common stock outstanding. All shares sold in this
offering will be freely transferable without restriction or additional
registration under the Securities Act of 1933. The remaining shares of common
stock outstanding after this offering will be available for sale, assuming the
effectiveness of lock-up agreements under which our stockholders have agreed not
to sell or otherwise dispose of their shares of common stock in the public
market, as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF AVAILABILITY FOR SALE
---------------- -----------------------------
<S> <C>
31,965,000............................................ (180 days after prospectus)
</TABLE>
Any or all of these shares may be released prior to expiration of the
180-day lockup period at the discretion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. To the extent shares are released before the expiration of the
lock-up period and these shares are sold into the market, the market price of
our common stock could decline. Immediately following the 180-day lockup period,
shares of our common stock outstanding after this offering will become available
for sale. The remaining shares of our common stock will become available for
sale at various times thereafter upon the expiration of one-year holding
periods.
MANY CORPORATE ACTIONS WILL BE SUBSTANTIALLY CONTROLLED BY OFFICERS, DIRECTORS
AND AFFILIATED ENTITIES REGARDLESS OF THE OPPOSITION OF OTHER INVESTORS TO
PURSUE AN ALTERNATIVE COURSE OF ACTION.
Our directors, executive officers and their affiliated entities
beneficially own approximately 63.7% (56.0% after completion of this offering)
of our outstanding common stock. These stockholders, if they acted together,
could exert substantial control over matters requiring approval by our
stockholders, including electing directors and approving mergers or other
business combination transactions. This concentration of ownership may also
discourage, delay or prevent a change in control of our company, which could
deprive our stockholders of an opportunity to receive a premium for their stock
as part of a sale of our company and might reduce our stock price. These actions
may be taken even if they are opposed by the other investors, including those
who purchase shares in this offering.
DELAWARE LAW AND OUR CORPORATE CHARTER AND BYLAWS CONTAIN CERTAIN ANTI-TAKEOVER
PROVISIONS THAT WOULD DELAY OR DISCOURAGE TAKE-OVER ATTEMPTS THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE.
Provisions in our certificate of incorporation, as restated upon the
closing of this offering, may have the effect of delaying or preventing a change
of control or changes in our management. These provisions include:
- the right of the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors;
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- the ability of the board of directors to alter our bylaws without
obtaining stockholder approval;
- the establishment of a classified board of directors;
- the ability of the board of directors to issue, without stockholder
approval, up to 5,000,000 shares of preferred stock with terms set by
the board of directors, the rights of which could be senior to those of
common stock; and
- the elimination of the right of stockholders to call a special meeting
of stockholders and to take action by written consent.
Each of these provisions could discourage potential take-over attempts
and could lower the market price of our common stock.
In addition, because we are incorporated in Delaware, we are governed by
the provisions of Section 203 of Delaware General Corporate Law. These
provisions may prohibit large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining with us. These
provisions in our charter, bylaws and under Delaware law could discourage
potential takeover attempts and could reduce the price that investors might be
willing to pay for shares of our common stock in the future and result in the
market price being lower than it would be without these provisions.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." These statements involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any
future results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
- marketing and commercialization of our products under development;
- our estimates for future revenues and profitability;
- our estimates regarding our capital expenditures and our needs for
additional financing;
- our plans to expand our manufacturing capacity;
- our plans for future products and services and for enhancements of
existing products and services;
- our patent applications and intellectual property;
- anticipated expenditures for research and development, sales and
marketing and general and administrative expenses;
- our ability to expand our sales and marketing operations both
domestically and internationally;
- our ability to establish relationships with key customers; and
- sources of revenue and anticipated revenue including those generated by
current and new products.
This prospectus contains statistical data regarding the optical
networking industry that we obtained from industry publications, including
reports generated by Ryan, Hankin & Kent. These industry publications generally
indicate that they have obtained their information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. Although we believe that the publications are reliable, we have not
independently verified their data.
In some cases, you can identify forward-looking statements by terms such
as "may," "might," "will," "should," "could," "would," "expect," "believe,"
"estimate," "predict," "potential," or the negative of these terms, and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events, are based on
assumptions and are subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in this prospectus in greater detail
under the heading "Risk Factors." Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in
this prospectus and have filed as exhibits to the registration statement, of
which this prospectus is a part, completely and with the understanding that our
actual future results may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
16
<PAGE> 23
USE OF PROCEEDS
We expect that the net proceeds we will receive from the sale of the
shares of common stock offered by us will be approximately $68.5 million, based
on an assumed initial public offering price of $12.00 per share, and after
deducting the estimated underwriting discount and estimated offering expenses.
If the underwriters exercise their over-allotment option in full, our net
proceeds will be approximately $79.0 million.
The principal purposes of this offering are:
- to obtain additional capital;
- to create a public market for our common stock;
- to increase our visibility and credibility; and
- to facilitate future access to the public equity markets.
We currently intend to use the net proceeds of this offering for general
corporate purposes, including expansion of our manufacturing operations, sales
and marketing activities, research and development and working capital. We also
intend to use approximately $754,000 to repay the outstanding balance under two
loan facilities, both of which mature in 2003 and bear interest at a rate of
prime plus 1% and prime plus 1 3/4%, respectively. During the next 12 months we
expect to use approximately $24 million for the expansion of our manufacturing
and product development facilities. We also may use a portion of the net
proceeds of this offering for the acquisition of complementary businesses,
products or technologies. While we evaluate these types of opportunities from
time to time, there are currently no agreements or negotiations with respect to
any specific transaction.
We have not yet determined all of our expected expenditures, and we
cannot estimate the amounts to be used for each purpose set forth above.
Accordingly, our management will have significant flexibility in applying the
net proceeds of this offering. Pending their use, we intend to invest the net
proceeds of this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock,
and we do not currently intend to pay any cash dividends on our common stock in
the foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any.
17
<PAGE> 24
CAPITALIZATION
The following table describes our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis after giving effect to the automatic conversion of
all of our outstanding shares of convertible preferred stock into
common stock and our reincorporation in Delaware; and
- on a pro forma as adjusted basis to give effect to the sale of
6,250,000 shares of common stock in this offering at an assumed initial
public offering price of $12.00 per share, after deducting the
estimated underwriting discount and estimated offering expenses, and
the application of the net proceeds.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term liabilities.................... $ 251 $ 251 $ 125
Long-term liabilities....................................... 663 663 35
------- ------- -------
914 914 160
------- ------- -------
Mandatorily redeemable convertible preferred stock, $0.001
par value; 45,000,000 shares authorized; 26,100,000 shares
issued and outstanding, actual............................ 10,115 -- --
------- ------- -------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 75,000,000 shares
authorized; 10,171,875 shares issued and outstanding,
actual; 36,271,875 shares issued and outstanding, pro
forma; 225,000,000 shares authorized, 42,521,875 shares
issued and outstanding, pro forma as adjusted.......... 10 36 43
Additional paid-in capital.................................. 8,389 18,478 86,971
Receivables from stockholders............................... (420) (420) (420)
Deferred stock-based compensation........................... (4,464) (4,464) (4,464)
Cumulative translation adjustments.......................... (65) (65) (65)
Accumulated deficit......................................... (3,199) (3,199) (3,199)
------- ------- -------
Total stockholders' equity.................................. 251 10,366 78,866
------- ------- -------
Total capitalization........................................ $11,280 $11,280 $79,026
======= ======= =======
</TABLE>
The actual, pro forma and pro forma as adjusted information set forth in
the table excludes:
- 3,010,725 shares of common stock issuable upon the exercise of stock
options outstanding as of June 30, 2000, at a weighted average exercise
price of $0.16 per share;
- 3,917,400 shares available for future issuance under our 1997 Stock
Plan.
18
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was
approximately $10.4 million, or $0.29 per share of common stock. Pro forma net
tangible book value per share represents the amount of our pro forma total
tangible assets less total liabilities, divided by the pro forma number of
shares of common stock outstanding assuming the conversion of all shares of
mandatorily redeemable convertible preferred stock outstanding as of June 30,
2000 into 26,100,000 shares of common stock. Pro forma net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of shares of common stock in this offering and the pro forma net
tangible book value per share of common stock immediately after completion of
this offering on a pro forma as adjusted basis. After giving effect to the sale
of the 6,250,000 shares of common stock by us at an assumed initial public
offering price of $12.00 per share, and after deducting the estimated
underwriting discount and estimated offering expenses, our pro forma net
tangible book value as of June 30, 2000 would have been $78.9 million, or $1.85
per share of common stock. This represents an immediate increase in net tangible
book value of $1.56 per share of common stock to existing common stockholders
and an immediate dilution in pro forma net tangible book value of $10.15 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.00
------
Pro forma net tangible book value per share before
offering............................................... $0.29
Increase in pro forma net tangible book value per share
attributable to this offering.......................... 1.56
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.85
------
Dilution per share to new investors......................... $10.15
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before deducting the
estimated underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 36,271,875 85.3% $18,514,000 19.8% $0.51
New investors...................... 6,250,000 14.7 75,000,000 80.2 12.00
---------- ----- ----------- -----
Total............................ 42,521,875 100.0% 93,514,000 100.0%
========== ===== =========== =====
</TABLE>
The table above assumes no exercise of any outstanding stock options. As
of June 30, 2000, there were 3,010,725 shares of common stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$0.16 per share. To the extent that any of these options are exercised, there
will be further dilution to new investors.
19
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31,
1998, 1999 and June 30, 2000 and for each of the three years in the period ended
December 31, 1999 and the six months ended June 30, 2000 are derived from the
consolidated financial statements and related notes included elsewhere in this
prospectus, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The consolidated financial data as of December 31, 1997 are derived
from audited financial statements not included in this prospectus. The
consolidated financial data as of June 30, 1999 and for the six months ended
June 30, 1999 are derived from unaudited financial statements included elsewhere
in this prospectus. The consolidated financial data as of and for the year ended
December 31, 1996 are derived from unaudited financial statements not included
in this prospectus. We have prepared the unaudited information on the same basis
as the audited financial statements and have included all adjustments,
consisting of only normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results. When you
read this selected consolidated financial data, it is important that you also
read the consolidated financial statements and related notes included in this
prospectus, as well as the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Our
historical results are not necessarily indicative of our future results.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ----------------------
1996 1997 1998 1999 1999 2000
------- ------- ------ ------- ----------- -------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................................... $ 4,774 $ 5,263 $4,906 $ 7,551 $2,675 $ 7,414
Cost of revenues.................................. 4,023 3,562 2,757 4,911 1,986 4,245
------- ------- ------ ------- ------ -------
Gross profit.................................. 751 1,701 2,149 2,640 689 3,169
------- ------- ------ ------- ------ -------
Operating expenses:
Research and development........................ -- 526 1,487 1,532 636 1,908
Sales and marketing............................. -- 559 591 968 413 815
General and administrative...................... 580 456 593 975 409 822
Stock-based compensation charge(*).............. -- 134 220 620 62 1,476
------- ------- ------ ------- ------ -------
Total operating expenses...................... 580 1,675 2,891 4,095 1,520 5,021
------- ------- ------ ------- ------ -------
Income (loss) from operations..................... 171 26 (742) (1,455) (831) (1,852)
Interest and other income, net.................... 2 151 275 117 60 189
------- ------- ------ ------- ------ -------
Income (loss) before income taxes................. 173 177 (467) (1,338) (771) (1,663)
Income tax provision (benefit).................... 47 109 (79) (67) (39) 71
------- ------- ------ ------- ------ -------
Net income (loss)................................. $ 126 $ 68 $ (388) $(1,271) $ (732) $(1,734)
======= ======= ====== ======= ====== =======
Net income (loss) per share(1):
Basic........................................... $ 0.03 $ 0.01 $(0.07) $ (0.21) $(0.13) $ (0.22)
======= ======= ====== ======= ====== =======
Diluted......................................... 0.01 -- (0.07) (0.21) (0.13) (0.22)
======= ======= ====== ======= ====== =======
Shares used in computing net income (loss) per
share(1):
Basic........................................... 5,400 5,400 5,400 6,120 5,632 7,679
======= ======= ====== ======= ====== =======
Diluted......................................... 29,958 29,958 5,400 6,120 5,632 7,679
======= ======= ====== ======= ====== =======
Pro forma net income (loss) per
share(unaudited)(2):
Basic and diluted............................... $ (0.04) $ (0.05)
======= =======
Shares used in computing pro forma net income
(loss) per share(unaudited)(2):
Basic and diluted............................... 29,220 33,480
======= =======
(*) Stock-based compensation in operating
expenses:
Research and development.......................... $ -- $ -- $ -- $ 63 $ 4 $ 237
Sales and marketing............................... -- 29 55 77 18 75
General and administrative........................ -- 105 165 480 40 1,164
------- ------- ------ ------- ------ -------
$ -- $ 134 $ 220 $ 620 $ 62 $ 1,476
======= ======= ====== ======= ====== =======
</TABLE>
20
<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- JUNE 30,
1996 1997 1998 1999 2000
------ ------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,422 $2,820 $3,985 $ 6,139 $ 4,792
Working capital............................................. 2,760 2,986 4,881 7,875 6,560
Total assets................................................ 2,939 5,139 8,107 12,142 14,483
Long-term liabilities, less current portion................. -- -- 68 317 663
Mandatorily redeemable convertible preferred stock.......... 3,416 3,416 6,115 9,835 10,115
Total stockholders' equity.................................. 99 565 994 396 251
</TABLE>
------------
(1) The diluted net income (loss) per share computation excludes potential
shares of common stock (convertible preferred stock, options to purchase
common stock and shares of common stock issued upon exercise of stock
options which are subject to repurchase rights held by us), if their effect
would be anti-dilutive. See note 1 of notes to consolidated financial
statements for a detailed explanation of the determination of the shares
used in computing basic and diluted net income (loss) per share.
(2) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of mandatorily redeemable convertible
preferred stock upon the effectiveness of the registration statement related
to this offering. See note 1 of notes to consolidated financial statements
for a detailed explanation of the determination of the shares used in
computing pro forma net loss per share. The pro forma net loss per share
computation excludes shares of common stock issuable upon exercise of stock
options and shares of common stock issued upon exercise of stock options
which are subject to repurchase rights by us.
21
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. The results described below are not necessarily indicative of
the results to be expected in any future period. This discussion and analysis
contains forward-looking statements within the meaning of the federal securities
laws. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or our predictions. See "Information Regarding
Forward-Looking Statements."
OVERVIEW
We were founded in December 1995 and commenced operations to design,
manufacture and market fiber optic interconnect products. We also distributed a
cable television transmission product line, which we discontinued in 1997. Since
1997 we have broadened our optical path integration solution, or OPIS, product
line and introduced our optical amplifier product line. Most of these new
products were introduced between 1997 and 1999. In early 1999, we started
developing our dense wavelength division multiplexing, or DWDM, and other
wavelength management products, forming a new product line based in part on our
proprietary technology. We started selling our DWDM devices in limited
production quantities in July 2000.
From our inception through June 30, 2000, we derived substantially all of
our revenues from our OPIS and optical amplifier product lines. We expect our
DWDM and other wavelength management products to comprise an increasing
percentage of our revenues in the future. In the six months ended June 30, 2000,
our top 10 customers comprised 56.8% of our revenues. The number of customers
that each accounted for more than 10% of our revenues in the years ended
December 31, 1997 and 1998 were three and two, respectively. One customer,
Ortronics, accounted for 11.2% of our revenues in the year ended December 31,
1999, and no customer accounted for more than 10% of our revenues in the six
months ended June 30, 2000.
We market and sell our products predominantly through our direct sales
force. Although we derived a significant portion of our revenues between 1996
and 1998 from overseas customers, an increasing percentage of our sales since
early 1999 have been in North America. We began building our domestic direct
sales force in early 1998. The percentages of our revenues derived from sales
outside of North America were 64.8%, 61.2%, 28.7% and 20.8% in the years ended
December 31, 1997, 1998 and 1999 and in the six months ended June 30, 2000,
respectively.
We recognize revenues upon the shipment of our products to the customer
provided that we have received a signed purchase order, the price is fixed, and
the collection of the resulting receivable is probable. Subsequent to the sale
of the products, we have no obligation to provide any modification or
customization, upgrades, enhancements, or postcontract customer support.
Our cost of revenues consists of raw materials, components, direct labor,
manufacturing overhead and production start-up costs. We believe our cost of
revenues as a percentage of revenues will increase in the near term as we
introduce new products and expand our manufacturing capacity.
Research and development expenses consist primarily of salaries and
related personnel expenses, fees paid to outside service providers, materials
costs, test units and other expenses related to the design, development, testing
and enhancement of our products. We expense our research and development costs
as they are incurred. We believe that a significant level of investment for
product research and development is required to remain competitive. We plan to
significantly expand our product development efforts, and expect our research
and development expenses to increase in absolute dollars starting in the fourth
quarter of 2000.
Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. We intend to expand our sales and
22
<PAGE> 29
marketing efforts, both domestically and internationally, in order to increase
market awareness and to generate sales of our products. However, we cannot be
certain that any increased expenditures will result in higher revenues. In
addition, we believe our future success depends upon establishing successful
relationships with a variety of key customers. We believe that continued
investment in sales and marketing functions is critical to our success and
expect these expenses to increase in absolute dollars in the foreseeable future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting and human resources
personnel, plus professional fees such as legal and accounting. We expect these
expenses to increase in absolute dollars as we continue to add personnel and
incur costs related to the growth of our business and our operations as a public
company.
In connection with the grant of stock options to employees and
consultants, we recorded deferred stock-based compensation of approximately $7.0
million through June 30, 2000, representing the difference between the estimated
fair market value of the common stock and the option exercise price of these
options at the date of grant. Deferred stock-based compensation is being
amortized using the graded vesting method, under which each option grant is
separated into portions based on its vesting terms which results in acceleration
of amortization expense for the overall award. The accelerated amortization
pattern results in expensing approximately 52% of the total award in year one,
27% in year two, 15% in year three and 6% in year four. We expect that the
deferred stock-based compensation charge of $4.5 million as of June 30, 2000
will be amortized on an accelerated basis over the vesting periods, which are
generally four years.
In October 1997, we acquired 97% of the outstanding common stock of
Transian Technology Ltd. Co., a Taiwan corporation, for $512,000 to expand our
design and manufacturing capacity. In April 1998, we invested an additional
$152,000 in cash in Transian, increasing our ownership to 98.5% of the common
stock of Transian.
RESULTS OF OPERATIONS
The following table sets forth the relationship between various
components of operations, stated as a percentage of revenues, for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------------
1997 1998 1999 1999 2000
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................ 67.7 56.2 65.0 74.2 57.2
----- ----- ----- ----- -----
Gross profit............................... 32.3 43.8 35.0 25.8 42.8
Operating expenses:
Research and development...................... 10.0 30.3 20.3 23.8 25.7
Sales and marketing........................... 10.6 12.0 12.8 15.4 11.0
General and administrative.................... 8.7 12.1 12.9 15.3 11.1
Stock-based compensation charge............... 2.6 4.5 8.2 2.3 19.9
----- ----- ----- ----- -----
Total operating expenses................... 31.9 58.9 54.2 56.8 67.7
Income (loss) from operations................... 0.4 (15.1) (19.2) (31.0) (24.9)
Interest and other income, net.................. 2.9 5.6 1.5 2.3 2.5
----- ----- ----- ----- -----
Income (loss) before income taxes............... 3.3 (9.5) (17.7) (28.7) (22.4)
Income taxes provision (benefit)................ 2.1 (1.6) (0.9) (1.4) 1.0
----- ----- ----- ----- -----
Net income (loss)............................... 1.2% (7.9)% (16.8)% (27.3)% (23.4)%
===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 30
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenues. Revenues increased from $2.7 million for the six months ended
June 30, 1999 to $7.4 million for the six months ended June 30, 2000, an
increase of 177%. The increase was primarily due to higher sales of our
interconnect products, which increased $3.3 million, as well as additional sales
from the expansion of our OPIS and optical amplifier product lines, which
increased $1.74 million.
Gross Profit. Gross profit, including amortization of deferred
stock-based compensation, increased from $689,000 in the six months ended June
30, 1999 to $3.2 million in the six months ended June 30, 2000. As a percentage
of revenues, gross profit increased from 25.8% to 42.8% over the same periods.
Excluding $108,000 of amortization of deferred stock compensation for the six
months ended June 30, 2000, gross profit increased from $689,000, or 25.8% of
revenues, in the six months ended June 30, 1999 to $3.3 million, or 44.2% of
revenues, in the six month period ended June 30, 2000. This increase in gross
profit was primarily a result of manufacturing economies of scale resulting from
higher production volumes. We expect our gross profit as a percentage of
revenues to be negatively impacted in the near term due to higher stock-based
compensation charges and low production volumes of our recently introduced DWDM
products.
Research and Development Expenses. Research and development expenses,
including amortization of deferred stock compensation, increased from $640,000,
or 23.9% of revenues, in the six months ended June 30, 1999 to $2.1 million, or
28.9% of revenues, in the six months ended June 30, 2000. Excluding $4,000 and
$237,000 of amortization of deferred stock compensation for the six months ended
June 30, 1999 and June 30, 2000, respectively, research and development expenses
increased from $636,000, or 23.8% of revenues, in the six months ended June 30,
1999 to $1.9 million, or 25.7% of revenues, in the six months ended June 30,
2000. Research and development expenses were higher in 2000 as a result of an
increase in the number of personnel and related expenses, and expenses incurred
in developing manufacturing processes for, and building prototypes and sample
quantities of, our new DWDM product line. Since we began selling production
quantities of our DWDM products in the third quarter of 2000, the associated
production and manufacturing start-up costs will be recognized in the cost of
revenues line, rather than as research and development. Consequently, our
research and development expenses will decrease in absolute dollars in the third
quarter of 2000, but we expect that it will increase thereafter as we add
additional personnel and initiate new development projects.
Sales and Marketing Expenses. Sales and marketing expenses, including
amortization of deferred stock compensation, increased from $431,000, or 16.1%
of revenues, in the six months ended June 30, 1999 to $890,000, or 12.0% of
revenues, in the six months ended June 30, 2000. Excluding $18,000 and $75,000
of amortization of deferred stock compensation for the six months ended June 30,
1999 and June 30, 2000, respectively, sales and marketing expenses increased in
absolute dollars from $413,000, or 15.4% of revenues, in the six months ended
June 30, 1999 to $815,000, or 11.0% of revenues, in the six months ended June
30, 2000. Expenses increased in absolute dollars with the addition of sales and
marketing personnel and the expansion of our marketing efforts, but decreased as
a percentage of revenues due to efficiencies gained at the higher sales volume.
We expect our sales and marketing expenses to continue to increase in absolute
dollars.
General and Administrative Expenses. General and administrative expenses,
including amortization of deferred stock compensation, increased from $449,000,
or 16.8% of revenues, in the six months ended June 30, 1999 to $1,986,000, or
26.8% of revenues, in the six months ended June 30, 2000. Excluding $40,000 and
$1.2 million of amortization of deferred stock compensation for the six months
ended June 30, 1999 and June 30, 2000, respectively, general and administrative
expenses increased from $409,000, or 15.3% of revenues, in the six months ended
June 30, 1999 to $822,000, or 11.1% of revenues, in the six months ended June
30, 2000. General and administrative expenses increased in absolute dollars
primarily due to increased staffing and associated expenses necessary to manage
and support our increased scale of operations, but decreased as a percentage of
revenues due to overhead remaining relatively constant despite higher revenues.
We expect our general and administrative expenses to continue to increase in
absolute dollars.
24
<PAGE> 31
Interest and Other Income, Net. Interest and other income totaled $60,000
for the six months ended June 30, 1999, compared to $189,000 for the six months
ended June 30, 2000. Net interest income totaled $68,000 and $116,000 in the six
months ended June 30, 1999 and 2000, respectively. The balance of other income
consisted primarily of foreign currency transaction gains and losses.
Income Taxes. Because of the taxable losses incurred in prior years, the
income tax benefit received for the six months ended June 30, 1999 amounted to
5.0% of the loss before income taxes. For the six months ended June 30, 2000, we
incurred income taxes representing 4.3% of the loss before income taxes.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenues. Revenues were $5.3 million, $4.9 million and $7.6 million for
the years ended December 31, 1997, 1998 and 1999, respectively. Revenues
declined from 1997 to 1998 primarily because we stopped selling cable television
transmission products during 1997. Revenues increased from 1998 to 1999 due to
higher volume sales of our OPIS product line and the introduction of our optical
amplifier products in early 1999.
Gross Profit. Gross profit increased from $1.7 million, or 32.3% of
revenues, in 1997 to $2.1 million, or 43.8% of revenues, in 1998 and increased
to $2.6 million, or 35.0% of revenues, in 1999. The increase in gross profit
from 1997 to 1998 was primarily due to a change in product mix weighted towards
higher margin products. The decrease in gross profit as a percentage of revenues
from 1998 to 1999 was primarily due to start-up manufacturing costs associated
with the introduction of new products, the expansion of our manufacturing
facilities in Taiwan and reductions in average selling prices. Gross profit for
the year ended December 31, 1999 reflects amortization of $26,000 of deferred
stock compensation.
Research and Development Expenses. Research and development expenses
increased from $526,000, or 10.0% of revenues, to $1.5 million, or 30.3% of
revenues, to $1.6 million, or 21.1% of revenues, for the years ended December
31, 1997, 1998, and 1999, respectively. These increases were primarily due to
costs related to the development of additional OPIS and optical amplifier
products. Research and development expense for the year ended December 31, 1999
included amortization of deferred stock compensation of $63,000.
Sales and Marketing Expenses. Sales and marketing expenses, including
amortization of deferred stock compensation, increased from $588,000, or 11.2%
of revenues, to $646,000, or 13.2% of revenues, to $1.0 million, or 13.8% of
revenues, for the years ended December 31, 1997, 1998, and 1999, respectively.
Excluding $29,000, $55,000 and $77,000 of amortization of deferred stock
compensation for years ended December 31, 1997, 1998, and 1999, respectively,
sales and marketing expenses increased from $559,000, or 10.6% of revenues, to
$591,000, or 12.0% of revenues, to $968,000, or 12.8% of revenues, for the years
ended December 31, 1997, 1998 and 1999, respectively. These increases were
attributable primarily to hiring additional sales and marketing personnel, which
increased labor related sales and marketing costs by $120,000 from the year
ended December 31, 1998 to the year ended December 31, 1999, and expanding our
sales and marketing efforts, reflected in a $150,000 increase in marketing and
advertising expenses.
General and Administrative Expenses. General and administrative expenses,
including amortization of deferred stock compensation, increased from $561,000,
or 10.7% of revenues, to $758,000, or 15.5% of revenues, to $1.5 million, or
19.3% of revenues, for the years ended December 31, 1997, 1998, and 1999,
respectively. Excluding $105,000, $165,000 and $480,000 of amortization of
deferred stock compensation for years ended December 31, 1997, 1998, and 1999,
respectively, general and administrative expenses increased from $456,000, or
8.7% of revenues, to $593,000, or 12.1% of revenues, to $975,000, or 12.9% of
revenues, for the years ended December 31, 1997, 1998 and 1999, respectively.
These increases in expenses were primarily due to hiring additional personnel,
which increased labor related general and administrative costs by $165,000 from
the year ended December 31, 1998 to the year ended December 31, 1999 and
associated expenses necessary to manage and support our increased scale of
operations.
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<PAGE> 32
Interest and Other Income, Net. Interest and other income was $151,000,
$275,000 and $117,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. These amounts consisted primarily of interest income, which varied
based on cash balances.
Income Taxes. Income taxes included a provision of $109,000 in 1997 and
benefits of $79,000 in 1998 and $67,000 in 1999. The benefits in 1998 and 1999
were based primarily on recovering income taxes paid in previous years.
As of June 30, 2000, we had approximately $520,000 of federal net
operating loss carryforwards for tax purposes and $206,000 of federal and state
tax credit carryforwards available to offset future taxable income. The net
operating loss and tax credit carryforwards will expire at various dates from
2013 through 2020, if not utilized. We have not recognized any benefit from the
use of loss carryforwards for these periods or for any other periods since
inception.
Under current tax rules, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating loss that we may utilize
in any year include, but are not limited to, a cumulative ownership change of
more than 50% over a three-year period.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of the assets is more likely
than not. Based upon the weight of available evidence, which included our
historical operating performance and our cumulative net losses, we have provided
a full valuation allowance against our net deferred tax assets.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data
from our consolidated statement of operations and the data as a percentage of
revenues. The consolidated statement of operations data have been derived from
our unaudited consolidated financial statements. In the opinion of management,
this statement has been prepared on substantially the same basis as the audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods presented. This information
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<PAGE> 33
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $1,349 $1,326 $2,375 $2,501 $3,143 $4,271
Cost of revenues.................... 934 1,052 1,315 1,610 1,797 2,448
------ ------ ------ ------ ------ ------
Gross profit...................... 415 274 1,060 891 1,346 1,823
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development.......... 292 344 390 506 725 1,183
Sales and marketing............... 205 208 248 307 328 487
General and administrative........ 204 205 230 336 398 424
Stock-based compensation charge... 29 33 439 119 796 680
------ ------ ------ ------ ------ ------
Total operating expenses....... 730 790 1,307 1,268 2,247 2,774
------ ------ ------ ------ ------ ------
Income (loss) from operations....... (315) (516) (247) (377) (901) (951)
Interest and other income, net...... 30 30 30 27 122 67
------ ------ ------ ------ ------ ------
Income (loss) before income taxes... (285) (486) (217) (350) (779) (884)
Income taxes provision (benefit).... (17) (22) (14) (14) 35 36
------ ------ ------ ------ ------ ------
Net income (loss)................... $ (268) $ (464) $ (203) $ (336) $ (814) $ (920)
====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF REVENUES:
Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 69.2 79.3 55.4 64.4 57.2 57.3
------ ------ ------ ------ ------ ------
Gross profit...................... 30.8 20.7 44.6 35.6 42.8 42.7
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development.......... 21.6 25.9 16.4 20.2 23.1 27.7
Sales and marketing............... 15.2 15.7 10.4 12.3 10.4 11.4
General and administrative........ 15.1 15.5 9.7 13.4 12.7 9.9
Stock-based compensation charge... 2.1 2.5 18.5 4.8 25.3 15.9
------ ------ ------ ------ ------ ------
Total operating expenses....... 54.0 59.6 55.0 50.7 71.5 64.9
------ ------ ------ ------ ------ ------
Income (loss) from operations....... (23.2) (38.9) (10.4) (15.1) (28.7) (22.2)
Interest and other income, net...... 2.2 2.2 1.3 1.1 3.9 1.6
------ ------ ------ ------ ------ ------
Income (loss) before income taxes... (21.0) (36.7) (9.1) (14.0) (24.8) (20.6)
Income taxes provision (benefit).... (1.3) (1.7) (0.6) (0.6) 1.1 0.9
------ ------ ------ ------ ------ ------
Net income (loss)................... (19.7)% (35.0)% (8.5)% (13.4)% (25.9)% (21.5)%
====== ====== ====== ====== ====== ======
</TABLE>
You should not rely on our results for any quarter as an indication of
our future performance. Our operating results in future quarters may be below
public market analysts' or investors' expectations, which would likely cause the
price of our common stock to fall. The following discussion highlights
significant events that have impacted our revenues and financial results for the
six quarters ended June 30, 2000.
Revenues generally increased over the previous six quarters with
significant increases since the second quarter of 1999. Increased demand for our
interconnect products as well as the introduction of additional products in our
OPIS product line and the introduction of our optical amplifier product line
caused our revenues to increase over the last four quarters. We began
recognizing revenues from our recently introduced DWDM products in the quarter
ending September 30, 2000. We believe that our
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<PAGE> 34
DWDM product line will contribute an increasing percentage of our revenues, as
long as this product line is well received by the market.
Gross profit generally increased in absolute dollars over the previous
six quarters primarily due to higher volume sales and manufacturing
efficiencies. Gross profit declined in the second and fourth quarters of 1999
due to increased manufacturing start-up costs associated with the introduction
of new products. We began selling limited production quantities of our DWDM
products in the third quarter of 2000. We expect the gross margin from these
products to be negative initially, due to anticipated low production volumes,
higher stock-based compensation charges and manufacturing start-up costs. Driven
by a 79.1% increase in revenues for the quarter ended September 30, 1999, gross
profit increased significantly over the quarter ended June 30, 1999 due to
increased production volumes which resulted in lower per unit fixed costs.
Research and development expenses increased in absolute dollars in each
of the previous six quarters. These increases were primarily due to the addition
of personnel and costs associated with additional product development projects,
including the development of our DWDM and other wavelength management products.
Research and development expenses increased significantly over the last two
quarters as we developed the manufacturing processes for our DWDM product line
and incurred expenses associated with producing prototypes and sample
quantities. Since we began selling production quantities of our DWDM products in
the third quarter of 2000, the associated production and manufacturing start-up
costs will be recognized in cost of revenues, rather than as research and
development expenses. Consequently, we expect our research and development
expenses to decrease in the third quarter of 2000, but to increase in subsequent
quarters as we add additional personnel and initiate new development projects.
Sales and marketing expenses increased in absolute dollars in each of the
previous six quarters primarily due to an increase in the number of sales and
marketing personnel, sales commissions and marketing expenses. Sales and
marketing expenses have tended to decrease as a percentage of revenues as our
sales volume has increased. We expect sales and marketing costs to increase as
we build our sales and marketing organization.
General and administrative expenses increased in absolute dollars in each
of the previous six quarters due to an increase in the number of personnel and
costs related to supporting a larger organization. We expect general and
administrative expenses to continue to increase as we continue to expand our
organization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
private sales of convertible preferred stock and bank debt. At June 30, 2000, we
had cash, cash equivalents and marketable securities of $5.2 million. In July
and August 2000, we raised an additional $27.5 million from the sale of Series C
mandatorily redeemable convertible preferred stock.
Cash used in operating activities was $409,000 in 1998 and $1.0 million
in 1999. The increase in cash used in operations was due primarily to increased
accounts receivable balances, which increased by $1.2 million during the year
ended December 31, 1999 because of increased revenues, and inventory balances,
which increased by $278,000, partially offset by a $338,000 increase in accounts
payable and a $236,000 increase in accrued expenses and other liabilities which
increased as our overall operations expanded. Cash provided by operating
activities was $466,000 in the six months ended June 30, 2000 due to increased
accounts payable of $1.2 million, increased accrued expenses and other
liabilities of $539,000, and a net loss of $1.7 million, which when offset by
$2.0 million of non-cash charges provide $300,000, all partially offset by
increased accounts receivable of $498,000 and increased inventory of $1.0
million. Operating cash was used primarily to fund increasing working capital
levels. Working capital, excluding cash, decreased by $730,000 in 1998,
increased by $840,000 in 1999, and increased by $32,000 in the six months ended
June 30, 2000. Cash provided by operating activities was $1.1 million in 1997
primarily because working capital, excluding cash, decreased by $1.2 million
from 1996.
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<PAGE> 35
Cash used in investing activities was $1.0 million in 1997, $1.7 million
in 1998, $862,000 in 1999 and $2.6 million in the six months ended June 30,
2000. In each period, cash was used to acquire property and equipment. In
addition, in 1997, $512,000 was used to purchase our Taiwan subsidiary, and in
the six months ended June 30, 2000, $433,000 was used to purchase marketable
securities.
Cash generated by financing activities was $960,000 in 1997, $3.3 million
in 1998, $4.1 million in 1999 and $795,000 in the six months ended June 30,
2000. Cash generated by financing activities in 1997 and 1998 resulted from the
sale of Series A mandatorily redeemable convertible preferred stock. Cash
generated by financing activities in 1999 resulted primarily from the sale of
Series B mandatorily redeemable convertible preferred stock and borrowings of
$295,000 under our bank lending facility. Cash generated by financing activities
in the six months ended June 30, 2000 was due primarily to net borrowings of
$459,000 under our bank lending facilities and repayment of notes from Series B
stockholders.
We entered into loan facilities in July 1999 and January 2000 with
Silicon Valley Bank for a maximum of $800,000, which was fully drawn down, and
$754,000 of which remains outstanding as of June 30, 2000. At September 30,
2000, the first facility had principal of $222,000 outstanding and was subject
to an interest rate of 10.75% and the second facility had principal of $472,000
outstanding and was subject to an interest rate of 10.5%. We plan to repay these
loans with a portion of the proceeds of this offering. In July 2000, we arranged
additional facilities with Silicon Valley Bank: a $750,000 equipment lease line
which is fully available; and a $1 million line of credit under which we have
obtained a $641,000 letter of credit to secure a building lease. Certain
equipment we own secures the existing loan facilities. In addition, Silicon
Valley Bank holds a general lien on our assets.
We expect to incur approximately $24 million of capital expenditures over
the next 12 months, primarily to purchase equipment and expand our operations
and manufacturing capacity in the United States and Taiwan. In July 2000, we
entered into a lease for an additional 10,500 square feet of space near our
existing facility in Sunnyvale, California, and we are presently negotiating for
additional spaces in both the United States and Taiwan.
We believe that the anticipated net proceeds from this offering, together
with our current cash and cash equivalents, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. However, our future growth, including potential
acquisitions, may require additional funding. If cash generated from operations
is insufficient to satisfy our long-term liquidity requirements, we may need to
raise capital through additional equity or debt financings or additional credit
facilities. If additional funds are raised through the issuance of securities,
these securities could have rights, preferences and privileges senior to holders
of common stock, and the terms of any debt facility could impose restrictions on
our operations. The sale of additional equity or debt securities could result in
additional dilution to our stockholders, and additional financing may not be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and marketing efforts, which could harm our
business, financial condition and operating results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We currently maintain our funds primarily in money market funds and
highly liquid marketable securities. We do not have any derivative financial
instruments. As of June 30, 2000, substantially all of our investments matured
in less than three months. We plan to invest a significant portion of our
existing cash, together with net proceeds from the offering, in interest
bearing, investment grade securities, with maturities of less than 12 months. We
do not believe that our investments or future investments, in the aggregate,
will have significant exposure to interest rate risk.
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<PAGE> 36
Exchange Rate Sensitivity
We currently have operations in the United States and Taiwan. The
functional currency of our subsidiary in Taiwan is the local currency, and we
are subject to foreign currency exchange rate fluctuations associated with
re-measurement to U.S. dollars. Though some expenses are incurred by our Taiwan
operations, substantially all of our sales are made in U.S. dollars; hence, we
have minimal exposure to foreign currency rate fluctuations relating to sales
transactions.
While we expect our international revenues to continue to be denominated
predominately in U.S. dollars, an increasing portion of our international
revenues may be denominated in foreign currencies in the future. In addition, we
plan to expand our overseas operations. As a result, our operating results may
become subject to significant fluctuations based upon changes in exchange rates
of certain currencies in relation to the U.S. dollar. We will analyze our
exposure to currency fluctuations and may engage in financial hedging techniques
in the future to attempt to minimize the effect of these potential fluctuations;
however, exchange rate fluctuations may adversely affect our financial results
in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivatives Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. The statement is
effective for fiscal years beginning after June 15, 2000. We will adopt the
standard no later than the first quarter of fiscal year 2001 and management does
not expect a material impact on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements under certain
circumstances. We adopted the provisions of SAB 101 in these financial
statements for all periods presented.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
44 did not and is not expected to have a material impact on our financial
position, results of operations or cash flows.
30
<PAGE> 37
BUSINESS
OVERVIEW
We design, manufacture and market a broad range of high performance fiber
optic components and integrated modules incorporating these components. Our
products enable leading and emerging communications equipment manufacturers to
deliver optical networking systems to the rapidly growing long-haul,
metropolitan and last mile access segments of the communications network. We
combine our patented technology with our manufacturing expertise to scale
production of key components and deliver favorable price and performance
characteristics. Further, we integrate our components into customized products
that improve efficiencies and meet the specific design needs of our customers.
Our eight largest customers for the 12 months ended August 31, 2000 include a
diverse group of equipment manufacturers across various markets, including
Alcatel, ANTEC, Avanex, JDS Uniphase, Marconi Communications, NORDX/CDT,
Ortronics and Tyco Electronics. Our strategy is to enhance our products,
technology and manufacturing expertise to continue developing innovative product
solutions that allow our customers to expand and optimize the capacity of fiber
optic networks.
INDUSTRY BACKGROUND
The Growth of Optical Networks
The popularity of the Internet and the rapidly growing number of data
intensive Internet-based applications and services have fueled a dramatic
increase in the volume of data traffic. According to Ryan, Hankin & Kent,
Internet data-carrying capacity will increase from 350,000 terabytes, or
trillions of bytes, per month at the end of 1999, to more than 15 million
terabytes per month in 2003, a compound annual growth rate of 156%. This traffic
growth has dramatically increased the demands on communication networks
originally developed to primarily transport voice traffic. To meet this
increasing demand, many communications service providers are designing and
installing new networks based on fiber optic technology, which provides greater
data-carrying capacity, or bandwidth, and increased transmission speeds compared
to existing communications networks. Until recently, most of the fiber deployed
had been dedicated to long-haul networks. However, the increasing demands for
high-speed network access and bandwidth are shifting the focus towards more
complex metropolitan networks and last mile access networks, which require an
increasing number of connections and components.
The Existing Network Infrastructure
Optical fiber is currently being deployed across the following segments
of communications networks: long-haul, metropolitan and last mile access.
Long-haul networks. Long-haul networks connect the communications
networks of cities around the world and transport large amounts of data and
voice traffic. To solve congestion problems, service providers have invested
significant resources in the deployment of optical infrastructure. As a result,
current long-haul networks provide high bandwidth for transmitting data over
very long distances. The build-out of long-haul networks represents an important
step in improving network infrastructure to support increased demand for new
services and greater traffic volumes.
Metropolitan networks. Metropolitan networks connect long-haul networks
to last mile access networks within urban areas. Due to the increase in data
traffic and the demand for enhanced services, the existing metropolitan network
infrastructure has become a bottleneck for the provision of communications
services to business and residential end users. As a result, service providers
are making significant investments in infrastructure to reduce capacity
constraints in metropolitan networks.
Last mile access networks. Last mile access networks connect business and
residential end users to their service provider in order to provide increased
bandwidth to the end user. Traditional access networks use the existing copper
wire based infrastructure, which is slow compared to the high-speed networks
commonly used within businesses. Established and new service providers are
beginning to deploy
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<PAGE> 38
fiber technologies in the last mile access network in order to provide high
bandwidth connectivity to the end user.
Advances in Fiber Optic Networking Technology
Service providers are seeking to maximize the performance and capacity of
both new and existing optical networks through advances in optical technology.
Wavelength division multiplexing, or WDM, has been used for several years to
increase system capacity by combining different light signals, or wavelengths,
on a single optical fiber. Each wavelength represents a separate high-bandwidth
channel that can carry data. Multiplexing devices combine, or multiplex, these
different wavelengths at one end of the optical network, and demultiplexing
devices separate, or demultiplex, them at the other end. WDM technology has been
enhanced with the introduction of dense wavelength division multiplexing, or
DWDM, which permits the wavelengths to be spaced more closely together. The
tighter spacing allows even more wavelengths to be transmitted on one optical
fiber. According to Ryan, Hankin & Kent, the terrestrial DWDM optical component
market will grow from approximately $1.6 billion in 1999 to over $8.2 billion in
2003. The use of WDM and DWDM technology is well established in the long-haul
market and is increasingly utilized in the metropolitan and last mile access
markets.
Growing Demand for Optical Components
Fiber optic components are used within optical networks to create,
combine, isolate, amplify, split, direct and perform various other functions on
the optical signals. Fiber optic components are divided into two broad
categories, active and passive components. Active components require power to
operate and use electrical signals to create, modulate or amplify optical
signals. Passive optical components guide, mix, filter, route, adjust and
stabilize optical signals transmitted through an optical network.
To meet the increasing performance and functionality requirements of the
metropolitan and last mile access optical networks, communications equipment
manufacturers utilize increasingly sophisticated technologies, such as
multichannel WDM, that require more components. Technological advances in the
development and production of active and passive components will enable the
further penetration of next generation optical networks into these markets. The
continued expansion of fiber optic networks and the evolution of communications
equipment will generate significant demand for fiber optic components. Ryan,
Hankin & Kent estimates that the market for fiber optic components was
approximately $6.6 billion in 1999 and is expected to grow to over $22.5 billion
by 2003. The rapid pace of new product introductions and the difficulty of
designing and manufacturing high performance components has caused
communications equipment manufacturers to increasingly rely on independent
suppliers of fiber optic components.
Requirements of Fiber Optic Components Suppliers
With the rapid evolution and penetration of optical networks, component
vendors must address the increasingly stringent requirements of communications
equipment manufacturers, including:
Component expertise across multiple product platforms. As the complexity
of optical networks increase, component suppliers must demonstrate expertise
across multiple products and product platforms. The growth of optical networks
necessitates that communications equipment manufacturers obtain the optical
components they need, in the quantities they require, in the shortest possible
time. These products must also meet increasingly stringent performance
requirements while remaining cost effective.
Scalable manufacturing processes. The further deployment of optical fiber
networks will require components that can be manufactured efficiently in
increasing volumes. The production of high performance optical components is
typically complex, labor intensive and requires a range of expertise. The
ability to expand production to meet rapidly growing demand is a core competency
expected of a component supplier.
Extensive product offerings. As optical communications networks continue
to grow in size and complexity, communications equipment manufacturers will seek
to work with fewer vendors that offer
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<PAGE> 39
more complete product lines. To simplify their design and manufacturing
requirements, communications equipment manufacturers will require integrated
solutions that combine various components.
Innovation and flexibility. To remain competitive in the rapidly changing
communications market, equipment manufacturers will continue to rely on
component manufacturers who continually innovate and provide enhanced product
performance. Component manufacturers must also provide flexible solutions that
will meet the evolving needs of next generation communications networks.
The continued expansion of fiber optic networks provides a significant
opportunity for component vendors who meet these requirements.
OUR SOLUTION
We design, manufacture and market a broad range of high performance fiber
optic components and integrated modules. Our products enable leading
communications equipment manufacturers to deliver optical networking solutions
to the rapidly growing long-haul, metropolitan and last mile access segments of
the communications network. Our approach is to use our highly scalable
manufacturing capabilities to produce a wide array of high quality optical
components and integrated subsystems. We intend to leverage our intellectual
property and technical expertise in order to provide next generation components
and custom-designed integrated modules. We believe that we provide the following
key benefits to our customers:
Broad product expertise. We offer a broad line of products, including
interconnect devices that are used to connect optical fibers and components,
couplers and splitters that are used to divide and combine optical power, and
dense wavelength division multiplexing, or DWDM, devices that separate and
combine multiple specific wavelengths. Our broad product offerings allow us to
satisfy a wide array of customer requirements throughout all segments of the
optical networking market, including long-haul, metropolitan and last mile
access. In addition, we are able to integrate our products to meet a wide range
of customer specifications.
High performance, cost-effective components. Our optical components are
designed to meet the needs and specifications of increasingly complex optical
network applications. Our products offer high performance and reliable operation
over a wide range of conditions. For example, we believe our DWDM products
achieve the wavelength separation demanded in the most advanced communications
systems. We devote significant resources to the development and efficient
production of high performance components which we believe meet the demands of
the evolving metropolitan and last mile access networks.
Proven manufacturing expertise. We have been successfully designing,
manufacturing and delivering passive components in volume since 1996. Our
manufacturing operations are vertically integrated, whereby we manufacture
substantially all of our parts and subcomponents. This integration provides us
advantages in design for manufacture and in the control and supply of requisite
materials. Our proven manufacturing expertise allows us to produce our products
efficiently and in volume quantities.
Innovative component technology. We utilize our intellectual property and
technical expertise to develop optical component solutions to meet the needs of
our customers. Our emphasis on design for manufacture enables us to quickly and
efficiently translate our designs into volume manufacturing. For example, our
DWDM filters incorporate our patented technology that allows a filter to be
configured prior to assembly, improving manufacturing efficiencies for our
customers.
OUR STRATEGY
Our objective is to become a leading supplier of fiber optic components
and subsystems for metropolitan and last mile access optical networks. We intend
to expand our business by providing a wide
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<PAGE> 40
selection of high quality components and integrated subsystems, maintaining
dependable production and delivering continuous product innovation. As key
elements of our strategy, we intend to:
Leverage and expand our broad customer base. In the last 12 months, we
have sold our products to more than 150 customers. We plan to leverage the
relationships we have developed with each of our customers to increase our
sales. We intend to derive additional revenues from our customers through the
marketing of our recently introduced DWDM wavelength management product line and
our integrated modular subsystems. We also intend to capitalize on our product
capabilities to establish relationships with new customers. We will continue to
work with our broad set of customers to better understand general market needs,
particularly in the metropolitan and last mile access markets.
Offer innovative product solutions. We intend to offer products that
address the more exacting performance requirements driven by the increasing
complexity of optical networks. We seek to provide our customers with integrated
subsystem modules that meet their specific product requirements. For example,
our interconnect devices, splitters and couplers can be packaged with our more
advanced DWDM multiplexers offer customized solutions.
Expand research and development efforts. We intend to continue to expand
our research and development team at a rapid pace. This will assist us in
leveraging our intellectual property portfolio to broaden and advance our
product line. We will focus our development efforts primarily on product
offerings which address the growing demand for optical connectivity in
metropolitan and last mile access networks.
Enhance our manufacturing capabilities and efficiencies. We intend to
expand our manufacturing capacity and continue to improve process efficiency by
adding and refining our automated production processes, quality systems and
capacity. We recently leased additional manufacturing space in Sunnyvale,
California and are planning to expand our manufacturing facilities in Taiwan. In
addition, we are evaluating the expansion of our manufacturing operations into
mainland China. Our strategy is to manufacture our products in the most
cost-effective location. We expect that new products will be developed and
introduced to manufacturing in the United States. Once we have developed and
refined the production process in the United States, we expect to transfer
certain high volume production to Taiwan. More labor-intensive products may
ultimately be manufactured in China.
Expand our sales, marketing and support efforts. We plan to continue to
invest in our sales, marketing and support efforts to strengthen relationships
with key communications equipment manufacturers in the metropolitan and last
mile access markets, both domestically and internationally. We believe that
expanding this effort will allow us to target and sell to new customers, while
increasing sales of more advanced components to existing customers. In addition,
it will enable us to work with customers to support their requirements for new,
innovative products.
Pursue strategic acquisitions. We may seek to enhance and expand our
technology and product offerings through strategic acquisitions. Acquiring
complementary and innovative technologies, additional manufacturing expertise
and skilled engineering and sales personnel may allow us to expand our business
more rapidly than through internal means. We believe that these opportunities
can be an important element of our competitive position and can further
complement our overall business strategy.
PRODUCTS
Our passive optical products support the needs of current and next
generation optical network systems applications. Our optical path integration
solution, or OPIS, product family provides both a comprehensive line of optical
interconnect devices, couplers and splitters as well as customized integrated
modules incorporating these devices. Our optical amplifier products are
specifically designed to serve the needs of high power optical amplifier
equipment manufacturers. Our wavelength management products include WDM and DWDM
components and modules that utilize thin film filter and fused fiber
technologies to separate optical signals. Our advanced optical devices include
our all-fiber optical depolarizer, which reduces the degree of polarization of a
light source, and our automatic variable optical
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<PAGE> 41
attenuator, which controls the amount of power in an optical fiber. These
advanced products are designed for challenging fiber optic applications.
OPIS PRODUCTS. In nearly all fiber optic networks, the optical fiber,
passive optical components and active optical devices must be joined using
optical interconnection systems. Our OPIS platform provides fundamental
component support for these applications as well as standard and custom value
added integrated solutions that address the need for higher functionality and
modularity.
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
OPIS Products
------------------------------------------------------------------------------------------------
NAME FEATURES AND FUNCTIONS BENEFITS STATUS
------------------------------------------------------------------------------------------------
- Integrate multiple - Ease of installation
components into a - Reduce component size Commercially
OPIS Modules single package for next generation Shipping
systems
------------------------------------------------------------------------------------------------
- Connect fibers and - Precision performance
Optical Connectors, components - Low insertion loss Commercially
Adapters and Cable - Customizable Shipping
Assemblies - Compact size
------------------------------------------------------------------------------------------------
- Distribute optical - Increase reliability
signals to multiple - Low insertion loss
Fused Fiber Optical fibers - Expand optical Commercially
Splitters and Couplers - Allow for wide networks Shipping
bandwidth
- Rugged packaging
------------------------------------------------------------------------------------------------
- Control power in - Increase reliability
Optical Fixed optical fibers - Reduce variability of Commercially
Attenuators - All fiber design wavelength Shipping
- Rugged construction
------------------------------------------------------------------------------------------------
- Connect devices within - Reduce component size
Optical Backplane communications for next generation In development
Systems networks systems
------------------------------------------------------------------------------------------------
</TABLE>
OPIS Modules. The evolution of optical components is driven by the
increasing need for packaging density, module functionality and overall cost
effectiveness. We design and package our various OPIS components to provide
integrated modules for our customers. Our integrated modules reduce our
customers' system design requirements and improve implementation.
Optical Connectors, Adapters and Cable Assemblies. Optical connectors and
adapters are precision devices that connect fibers together. Optical cable
assemblies are used to bridge relatively short distances with optical paths. We
offer a broad range of industry standard connection products that support a wide
range of fiber and fiber cable types. Further, with our integrated design and
manufacturing capability, we are able to customize these products to meet our
customers' needs for compact size and special features. We specialize in
providing our customers with high performance custom cable assemblies to serve
in conjunction with our optical interconnection solutions at all interface
points in the optical communications network.
Fused Fiber Optical Splitters and Couplers. Fused fiber optical splitters
and couplers are branching devices which are used to split optical power from a
single fiber, or set of fibers, into a different set of fibers. They are often
used to distribute optical signals to multiple locations for processing. These
devices utilize signal and power sharing features to reduce the total cost of
delivering bandwidth to end users. Our optical splitters and couplers reduce
insertion loss, or the power loss incurred when inserting components into an
optical path, and deliver high performance, including uniform optical wavelength
splitting.
35
<PAGE> 42
Optical Fixed Attenuators. Optical fixed attenuators diminish the optical
power within a given optical path without interference or reduction in optical
signal quality. Typically this function is embedded in an optical connector or
adapter element to simplify optical network installation. We utilize attenuated
fiber that reduces power while preserving performance characteristics, including
optical signal quality and reliability.
Optical Backplane Connection Systems. Backplanes provide the internal
interface, or connection, between various components of optical communication
systems. As data transmission rates increase, optical backplanes will be
required to ensure that the routing of signals between elements within an
optical network is performed at the same rate. We are currently developing
interconnection solutions to meet these needs.
OPTICAL AMPLIFIER COMPONENT PRODUCTS. Optical amplifiers are used to
extend the capability of optical networks by increasing optical signals at
periodic intervals along a fiber network. Our optical amplifier passive
components are specifically designed for incorporation into optical networks and
subsystem elements. We offer products with wide wavelength range and low signal
loss that enable the high power amplification needed to drive optical signals
for long distance or wide distribution.
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------
Optical Amplifier Component Products
---------------------------------------------------------------------------------------------
NAME FEATURES AND FUNCTIONS BENEFITS STATUS
---------------------------------------------------------------------------------------------
- Enhance network
Optical Tap Couplers monitoring and - Low power loss
and Ultra Low management - Improve system Commercially
Polarization Dependent - Very low polarization stability Shipping
Loss Tap Couplers dependent loss
---------------------------------------------------------------------------------------------
- Maintain wavelength
separation using - Cost-effective
Amplifier WDM Couplers fibers - Low power loss Commercially
- Allow for wide - Improve amplifier Shipping
bandpass performance
---------------------------------------------------------------------------------------------
- Maintain wavelength
separation using - Improve amplifier
Amplifier Filter WDMs filters performance Commercially
- Allow for wide - High isolation Shipping
bandpass
---------------------------------------------------------------------------------------------
- Equalize individual
wavelength - Improve amplifier
Gain Flattening Filters amplification performance In development
- Enable longer distance - Low noise
networks
---------------------------------------------------------------------------------------------
</TABLE>
Optical Tap Couplers and Ultra Low Polarization Dependent Loss Tap
Couplers. Optical tap couplers are fused fiber branching devices that split off
a portion of light to allow for optical monitoring and feedback. These devices
are used extensively in fiber amplifier power control. They are also utilized in
transmission equipment for performance monitoring and control. Our ultra low
polarization dependent loss, or PDL, devices offer the lowest possible levels of
sensitivity to polarization, which is a characteristic of light that can cause a
reduction in the power of optical signals. These PDL devices enable more
effective monitoring and management of optical networking.
Amplifier WDM Couplers. Amplifier WDM couplers are used with specialized
fibers to combine or separate specific wavelengths of light associated with
standard telecommunications optical amplifier requirements. Our amplifier WDM
couplers are stable low power loss components with high power handling
capability.
Amplifier Filter WDMs. Amplifier filter WDMs, or FWDMs, utilize thin film
filter technology to maintain wavelength separation in demanding applications.
In addition, filter technology allows narrow
36
<PAGE> 43
wavelength separation. Our FWDMs are designed for a range of applications, such
as wavelength splitting and combining lasers used in amplification.
Gain Flattening Filters. Gain flattening filters are used to ensure that
signals are amplified in equal amounts. By equalizing the increase, gain
flattening filters can significantly improve the performance of amplifiers in
multi-channel networks. We are currently developing these products.
WAVELENGTH MANAGEMENT PRODUCTS. In recent years, wavelength division
multiplexing has become the preferred method of increasing bandwidth throughout
optical networks. Our wavelength management products serve WDM and DWDM systems
as core passive elements that reliably direct and manage larger numbers of
optical signal channels. Our wavelength management products also enable network
DWDM systems to accurately, efficiently and reliably manage and monitor a large
number of optical signals by separating these signals into different paths that
can be processed individually.
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------
Wavelength Management Products
---------------------------------------------------------------------------------------------
NAME FEATURES AND FUNCTIONS BENEFITS STATUS
---------------------------------------------------------------------------------------------
- Combine and separate
Fused fiber WDM optical signals - Reduce bandwidth cost Commercially
Couplers - High power handling - Low power loss Shipping
---------------------------------------------------------------------------------------------
- Low power loss
Filter WDMs - Combine and separate - High wavelength Commercially
optical signals isolation Shipping
---------------------------------------------------------------------------------------------
- Enable high density
- Combine and separate networks Commercially
DWDMs optical signals - Extend use of thin Shipping 200
- Proprietary filter film technology in DWDM GHz and 100 GHz
technology networks
---------------------------------------------------------------------------------------------
- Compact packaging
design
Add/Drop DWDM Filters - Add or drop signals in - High wavelength Beta testing
DWDM networks isolation
- Cost effective
---------------------------------------------------------------------------------------------
</TABLE>
Fused Fiber WDM Couplers. Fused fiber WDM couplers are used to combine
and separate optical signals transmitted on different wavelengths. This function
provides the first level of bandwidth expansion for a network by increasing a
fiber's signal carrying capacity. Fused fiber WDM couplers may also be used to
add additional functionality to the network such as network status monitoring.
Our fused fiber WDM couplers provide a cost effective way to minimize loss and
maximize wavelength isolation.
Filter WDMs. Our thin film filter based WDMs, or FWDMs, are also used to
combine and separate optical signals. FWDMs allow for even higher isolation and
more narrow wavelength separations than fused fiber technology. Our FWDMs are
designed for a range of network applications including combining active and
passive components and wavelength monitoring, splitting and separating tasks.
DWDMs. Dense wave division multiplexers, or DWDMs, are integrated optical
modules which combine, or multiplex, and separate, or demultiplex, multiple
optical signals of different wavelengths on a single fiber. The separation of
wavelengths are so narrow, or dense, that a large number of channels (greater
than 10) can be combined within the band of usable wavelengths of the fiber
itself. We utilize proprietary thin film technology in the development and
manufacture of our DWDM products. This technology delivers excellent performance
characteristics, including channel separation and overall channel bandpass,
which is the range of frequencies that will pass through a filter. Thin film
filter technology allows for a range of solutions for 200 GHz, 100 GHz and 50
GHz International Telecom Union wavelength spacing applications, which permit 40
channels, 80 channels, and 160 channels, respectively, to
37
<PAGE> 44
be transmitted across a single fiber. Our DWDMs directly address the scalable
channel plans found in metropolitan and last mile access network applications.
Add/Drop DWDM Filters. Add/drop DWDM filter products are used to insert
or extract specific wavelengths in a DWDM system. While a large number of
channels can be transmitted through a single fiber network, often only selected
channels of information are required at a particular location. Our add/drop
components use high performance filter technology and operate with very little
optical power loss in order to provide high channel separation and high
stability.
ADVANCED PHOTONIC DEVICES. As the capacity and complexity of optical
networks continue to increase, future systems face significant challenges.
Performance characteristics such as stability, channel balance and power loss
due to polarization become difficult to manage without the addition of optical
control devices. Our advanced photonic devices serve to add further control in
next generation networks and network measurement equipment.
<TABLE>
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Advanced Optical Devices
----------------------------------------------------------------------------------------------------
NAME FEATURES AND FUNCTIONS BENEFITS STATUS
----------------------------------------------------------------------------------------------------
- Eliminate the effects - Improved network
of polarization performance
All-Fiber Depolarizers dependent loss - Increase range of Commercially Shipping
- All fiber design wavelengths
----------------------------------------------------------------------------------------------------
- Control power in
Automatic Variable optical fibers - Cost effective
Optical Attenuators - Maintain DWDM network - Improved network Beta testing
stability performance
----------------------------------------------------------------------------------------------------
</TABLE>
All-Fiber Depolarizers. Depolarizers are devices that reduce the degree
of polarization of a light source. As polarization effects become a more
significant limiting factor in next generation network performance,
depolarization becomes an increasingly important tool in developing solutions to
design constraints. We have developed and patented an all-fiber depolarizer
which can significantly depolarize light from a range of sources, including
those used in communications networks and fiber optic test and measurement
equipment.
Automatic Variable Optical Attenuators. Automatic variable optical
attenuators, or VOAs, are designed to control the optical power in a fiber. An
automatic VOA is often combined with an active system component to maintain
optical power on a network even if the input signal is changing power. Our
automatic VOAs are specifically designed for application in DWDM networks for
use with individual channel source elements such as add/drop transmitters. The
cost and performance characteristics of our automatic VOAs are specifically
targeted to allow for the use of these devices in volume as principal DWDM
channel stabilization components.
38
<PAGE> 45
NON RECIPROCAL OPTICAL DEVICES. Non reciprocal optical devices, or NRODs,
provide non reversible light direction control. Our NRODs allow light to travel
through fiber in only one direction, blocking light from travelling in the
reverse direction. These devices are used in amplifier design and optical
add/drop multiplexing. We are currently developing the following products:
<TABLE>
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Non Reciprocal Optical Devices
----------------------------------------------------------------------------------------------------
NAME FEATURES AND FUNCTIONS BENEFITS STATUS
----------------------------------------------------------------------------------------------------
- Enable optical - Cost effective
add/drop networks - Low insertion loss
Optical Circulators - High wavelength In development
isolation
----------------------------------------------------------------------------------------------------
- Enable further size - Compact size
Optical Isolator Taps reduction - High stability In development
----------------------------------------------------------------------------------------------------
- Enable further size - Compact size
Optical Isolator FWDMs reduction - High stability In development
----------------------------------------------------------------------------------------------------
</TABLE>
Optical Circulators. Optical circulators are used to direct signal paths
in optical fibers with low insertion loss and through multiple ports that
require wavelength isolation.
Optical Isolator Taps. Optical isolator taps are compound devices which
combine wavelength isolation and tap functions of discrete devices in a single
compact device.
Optical Isolator FWDMs. Optical isolator FWDMs are compound devices which
combine the wavelength isolation and FWDM functions of discrete devices in a
single compact device.
TECHNOLOGY
Our developed technologies enable us to continue to expand our product
line and to increase the penetration of the OPIS, amplifier components and
wavelength management products in the optical communications market. These
technologies span several material, process and design disciplines necessary to
develop and manufacture high performance fiber optic products.
Interconnection Systems Technology. We have developed technological
expertise in polymer molding, mold-making and metal machining, which allows for
greater control in manufacturing, more innovative design of new products and
reduced development time for new product introductions.
Fused Fiber Technology. Our fusion process and related machine building
technology allow us to better control the manufacture of fused fiber devices.
This leads to improved manufacturing yields and higher component performance.
Advanced Optical Packaging Technology. Our patent-pending v-collimator
technology enables the pre-tuning of DWDM optical assemblies in the
manufacturing process. This capability contributes to greater manufacturing
efficiency, overall material cost reduction and enhanced performance.
Optical Component Integration Technology. We are continually developing
technology to further integrate components in higher density and
customer-specific packaging in support of our OPIS product line. This technology
includes fiber fusion, fiber routing, testing across technology platforms and
reliable packaging.
DWDM Thin Film Design Technology. Our patented DWDM multi-integrated
cavity segment, or MICS, technology allows us to double the cavity structure of
fabricated thin film devices while maintaining performance integrity of the
individual device segments. This post-fabrication technology relaxes the
requirements that thin film vendors must meet for us to achieve high performance
results, and enables us to achieve higher performance results with decreased
time to market.
39
<PAGE> 46
Depolarizer Technology. Our patented all-fiber depolarizers are based on
fused fiber technology and our proprietary design. This results in a fully
passive depolarizer which is effective at significantly reducing the states of
polarization of relatively narrow linewidth light sources. This is particularly
useful in the test and measurement of advanced optical components.
Other Technology. We have developed technology and have filed several
patents covering various optical component and associated manufacturing
processes. These product areas include, among others, circulators and variable
optical attenuators.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. As of June 30, 2000, we had three
U.S. patents, six additional U.S. patents allowed and ten U.S. patents pending.
The three U.S. patents expire between May 1, 2017 and December 5, 2017. We also
had one foreign patent issued, four foreign patents allowed and 22 foreign
patents pending. We also utilize unpatented proprietary know-how and trade
secrets and employ various methods to protect them.
To date we have not received any notice or claim of infringement.
However, from time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. Patents of third parties may be
determined to be valid, or some of our products may ultimately be determined to
infringe them. Other companies may pursue litigation with respect to those or
other claims. The results of any litigation are inherently uncertain. In the
event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we
could be required to obtain licenses to the infringing technology, to pay
substantial damages under applicable law, to cease the manufacture, use and sale
of infringing products or to expend significant resources to develop
non-infringing technology. Licenses may not be available from third parties
either on commercially reasonable terms or at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, any
infringement claim or litigation against us could significantly harm our
business, operating results and financial condition.
CUSTOMERS
We sell our products to communications equipment manufacturers that
incorporate our products into their systems that they in turn sell to network
service providers. In certain cases, we sell our products to other component
manufacturers for resale or inclusion in their products. In the 12 months ended
August 31, 2000, we sold our products to more than 150 customers. For each of
the markets which our customers' products primarily serve, the following table
shows, in alphabetical order, our customers who have purchased $100,000 or more
of our products during the 12 months ended August 31, 2000.
<TABLE>
<CAPTION>
ACCESS/PON
LONG-HAUL METROPOLITAN BROADBAND
---------------------- ----------------------- ------------------
<S> <C> <C>
Alcatel Geyser Networks ANTEC
Marconi Communications Juniper Networks Harmonic
(through Solectron) Motorola
Optimight Scientific-Atlanta
Redback Networks
</TABLE>
40
<PAGE> 47
<TABLE>
<CAPTION>
LOCAL AREA NETWORKS SUBSYSTEMS OTHER
------------------------ ---------------- ---------------------
<S> <C> <C>
AGU Datentechnik Avanex ACS Industries
AI/FOCS JDS Uniphase Chuan Wei
Arctic Fiber Moon Continental Optronics
Brugg Telecom 3M EXFO
Gruber Tyco Electronics Fibertron
Leviton Fico
NORDX/CDT FONS
North American Cable Ottawa Mould Craft
Ortronics Spoval
Quality Fiber Connection
</TABLE>
In the 12 months ended August 31, 2000, our largest customer accounted
for 8.7% of our revenues.
BACKLOG
We define backlog to include orders for which we expect to recognize
revenues within the succeeding 12 months. As of June 30, 2000, our backlog was
approximately $6.2 million and as of September 30, 1999, our backlog was
approximately $732,000. Sales are made pursuant to purchase orders, which are
frequently subject to revision or cancellation. Because of the possibility of
changes in delivery or acceptance schedules, cancellations of orders,
distributor returns or price reductions, our backlog, as of any particular date,
may not be representative of actual sales for any succeeding period.
SALES, MARKETING AND TECHNICAL SUPPORT
Sales. Our direct sales force markets and sells our products primarily in
the United States. We also maintain a sales support staff in Taiwan to service
customers based in the Asia Pacific region. Our direct sales force and technical
marketing personnel maintain close contact with our customers and provide
technical support. We are planning to expand our sales force in the United
States and to establish an international distribution network.
Marketing. We have a number of marketing programs to support the sale and
distribution of our products and to inform existing and potential customers
about the capabilities and benefits of our products. Our marketing efforts
include participating in industry trade shows and technical conferences,
advertising in trade journals and communicating through our corporate Web site
and direct mail.
Technical Support. We maintain a technically knowledgeable support staff
that is critical to our development of long-term customer relationships. Our
technical support staff works closely with our customers to understand their
product requirements, assists them with utilizing our product line, and develops
customized product solutions.
COMPETITION
The fiber optic component industry is highly competitive and subject to
rapid technological change. We believe that the principal differentiating
factors in the fiber optic component market are support for multiple optical
interfaces, high optical power, wavelength selection, manufacturing capacity,
reliable and compact packaging, price, product innovation and reliability. We
believe we compete favorably in each of these areas. Based on our assessment of
the performance and price of similar competitive offerings, we believe that our
products compare favorably, although we cannot assure that they will continue to
do so.
Our principal competitors in the components market include Avanex,
Corning, DiCon Fiberoptics, Gould, JDS Uniphase, which recently acquired E-TEK
Dynamics and announced its intended acquisition of SDL, Lucent, New Focus,
Oplink, Stratos Lightwave and Tyco Electronics. We believe that we primarily
compete with diversified suppliers for the majority of our product line and to a
lesser extent with
41
<PAGE> 48
niche companies that offer a more limited product line. Competitors in any
portion of our business may also rapidly become competitors in other portions of
our business. In addition, our industry has recently experienced significant
consolidation, and we anticipate that further consolidation will occur. This
consolidation has further increased competition. We cannot assure you that we
will be able to compete successfully with existing or future competitors or that
competitive pressures will not seriously harm our business, operating results
and financial condition.
PRODUCT DEVELOPMENT
As of June 30, 2000, we had 23 engineers and technicians directly
involved in research and development of our products both in the United States
and in Taiwan. Our engineering team has extensive design, packaging, processing
and software experience in optical components, interfaces and systems. In
addition, as of June 30, 2000, we had 42 manufacturing engineers, operators and
managers involved in manufacturing start-up and sample production activities of
our DWDM product line. Costs related to these activities were included in
research and development through June 30, 2000.
Our primary product development center is located in Sunnyvale,
California. We also maintain a product development center in Tu-Cheng City,
Taiwan. Our research and development expense was $526,000, $1.5 million, $1.5
million and $1.9 million for the years ended December 31, 1997, 1998 and 1999
and for the six months ended June 30, 2000, respectively. We have increased, and
intend to continue to increase, our research and development budget and staff to
enhance our current fiber optic components and integrated modules, and to
develop new technologies and products to serve the next generation communication
markets.
MANUFACTURING
We currently manufacture the majority of our OPIS and optical amplifier
products at our facility in Tu-Cheng City, Taiwan. We manufacture our
filter-based and advanced products at our headquarters in Sunnyvale, California.
We have recently increased our manufacturing capacity by expanding the size of
our Sunnyvale, California manufacturing operations from approximately 5,200
square feet to approximately 16,000 square feet. In addition, we are planning to
expand our manufacturing facilities in Tu-Cheng City.
Each of our facilities maintains comprehensive in-house manufacturing
processes, including component and integrated module design, integration,
production and testing. We plan to continue to invest resources in manufacturing
management, engineering and quality control. We also plan to continue to develop
automated manufacturing systems to provide higher throughput, improve yields and
reduce our manufacturing costs.
A number of critical raw materials and components used in manufacturing
our products are acquired from single or limited source suppliers. The inability
to obtain sufficient quantities of those materials or components may result in
delays, increased costs, and reductions in our product shipments.
We have established a quality management system to assure that the
products we provide to our customers meet or exceed industry standards. This
system is based on the international standard ISO 9000. Our Taiwan facility has
been ISO 9002 certified in manufacturing since June 1997. Our United States
facility has been ISO 9001 certified in manufacturing since August 2000.
FACILITIES
In the United States, we lease a total of approximately 22,200 square
feet in two buildings located in Sunnyvale, California. Of the 22,200 square
feet:
- we lease a 11,700 square feet of administrative, sales, marketing, and
manufacturing space pursuant to a lease that expires in May 2004; and
- we lease a 10,500 square foot manufacturing facility pursuant to a
lease that expires in July 2004.
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<PAGE> 49
In Taiwan, we lease a total of approximately 38,800 square feet in one
facility located in Tu-Cheng City, Taiwan. The manufacturing facility totals
approximately 25,200 square feet, and 13,600 square feet are office and product
development space. The leases for these facilities expire at various times from
April 2001 to May 2003.
EMPLOYEES
As of June 30, 2000, we had 75 full-time employees located in the United
States, 14 of whom were engaged in product development, 42 in manufacturing
production, four in quality, nine in sales, marketing, application support and
customer service, and six in general and administration. As of June 30, 2000, we
had 249 full-time employees located in Taiwan, nine of whom were engaged in
product development, 217 in manufacturing, 11 in quality, and 12 in sales,
general and administration. None of our employees are represented by a labor
union. We have not experienced any work stoppages and we consider our relations
with our employees to be good.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising in the ordinary course of business. As of the date of this prospectus,
there are no material legal proceedings pending or, to our knowledge, threatened
against us.
43
<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows information about our executive officers and
directors as of August 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter C. Chang........................... 41 Chairman of the Board, Chief Executive Officer and
President
Gregory Barnes........................... 51 Vice President, U.S. Operations
John M. Harland.......................... 48 Vice President, Finance and Chief Financial Officer
David A. Hubbard......................... 40 Vice President, Sales and Marketing
James Lee................................ 37 Vice President and General Manager, Asian
Operations
Wei-shin Tsay, Ph.D...................... 48 Senior Vice President, Product Development
R. David Dicioccio....................... 42 Director
Peter T. Morris.......................... 43 Director
Michael Tung............................. 45 Director
James C. Yeh............................. 42 Director
</TABLE>
PETER C. CHANG has served as our Chairman of the Board, Chief Executive
Officer and President since our formation in December 1995. From 1990 to 1995,
Mr. Chang was Division Manager at Hon Hai Holding. From 1984 to 1988, he was an
engineer at AlliedSignal Inc. and from 1988 to 1990 was a member of the
technology staff at Lucent Bell Labs. Mr. Chang received a B.S. in Mechanical
Engineering from National Taiwan University and a M.S. in Mechanical Engineering
from Notre Dame University.
GREGORY BARNES has served as our Vice President, U.S. Operations since
April 2000. From February 1994 to March 2000 he served as a General Manager at
Xerox Corporation. Mr. Barnes received an M.B.A. and a B.S. in Engineering from
California State University Pomona.
JOHN M. HARLAND has served as our Vice President of Finance and Chief
Financial Officer since July 2000. From April 2000 to July 2000, Mr. Harland
served as Vice President, Finance, Chief Financial Officer and Secretary of
Medpool.com, an internet-based trading exchange between hospitals and suppliers.
From January 1998 to January 2000, Mr. Harland was Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Biometric Imaging,
Inc., a cell-analysis diagnostic company acquired by Becton Dickinson in
February 1999. From October 1996 to December 1997, he was Vice President,
Finance and Administration, Chief Financial Officer and Treasurer of Influence,
Inc. From May 1995 to October 1996, he was Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Indigo Medical,
Incorporated, which was acquired by Johnson & Johnson in August 1996. Mr.
Harland received his M.A. from Cambridge University in Business Studies and
Natural Sciences, his M.B.A. from Golden Gate University and is a Certified
Public Accountant.
DAVID A. HUBBARD has served as our Vice President, Sales and Marketing
since September 1996. From February 1995 to September 1996, Mr. Hubbard was
Director of Marketing/Business Development at Tracor/AEL Industries. Mr. Hubbard
received his Master of Science degree from University of Connecticut and his
B.S. from State University of New York.
JAMES LEE has served as our Vice President and General Manager, Asian
Operations since March 1996. From August 1993 to February 1996, Mr. Lee served
as General Manager of mainland China Operations at Seagull Group Corporation, a
manufacturer of stone products. Mr. Lee holds a B.S. in Industrial Management
from the National Taiwan University of Technology.
WEI-SHIN TSAY, PH.D. has served as our Senior Vice President, Product
Development since August 2000. From May 1999 to August 2000, Dr. Tsay served as
a Director of Marketing for the Asia/
44
<PAGE> 51
Pacific region for the Transmission Systems Division of JDS Uniphase. From July
1997 to March 1999, he was a Director of Engineering for the Transmission
Systems Division at JDS Uniphase. From February 1997 to July 1997, Dr. Tsay was
the Director of Operations at Uniphase Telecom Products. From May 1996 to
February 1997, he was a Director Digital Transmission at Uniphase Telecom
Products. From February 1994 to May 1996, Dr. Tsay was the Product Manager of
High Performance Lasers for the Optoelectronics Strategic Business Unit at
AT&T/Lucent Microelectronics. Dr. Tsay received a Master of Science degree in
Manufacturing Systems Engineering from Lehigh University, a Ph.D. in physics
from the University of Rochester and a Bachelor of Science in physics at the
National Tsing-Hua University in Hsin-Chu, Taiwan.
R. DAVID DICIOCCIO has served as a director since March 2000. Since
November 1998, Mr. Dicioccio has served as President of RDD Associates, LLC, an
investor in and strategic advisor to early stage and established technology
companies. From 1992 to 1998, he served as Managing Director and Head of the
Technology and Communications Investment Banking practice at PaineWebber
Incorporated. He has served as a director of Tvia, Inc. since February 2000. Mr.
Dicioccio received an A.B. in Political Science from Stanford University and an
M.B.A. from Harvard University.
PETER T. MORRIS has served as a director since July 2000. From 1992 to
the present, he has been a general partner of New Enterprise Associates, a
venture capital firm. Mr. Morris also serves on the boards of directors of
Accelerated Networks, Inc., iAsiaWorks, Gadzoox Networks, Inc., Packeteer, Inc.,
Virata Corporation and several private companies. Mr. Morris received both a
B.S. in Electrical Engineering and an M.B.A. from Stanford University.
MICHAEL TUNG has served as a director since June 2000. From July 1, 2000
to the present, Mr. Tung has served as the Chief Financial Officer of Foxconn
Optical Technology Inc. From 1992 to June 2000 he was the Chief Financial
Officer of Acer America Corporation. Mr. Tung also serves on the boards of
directors of Foxconn Optical Technology Inc., FOTI Management Inc. and FOTI
Technology Inc. Mr. Tung received a B.A. in Accounting from Tan Kang University
in Taiwan.
JAMES C. YEH has served as a director since our formation in December
1995. In 1995, Mr. Yeh co-founded Advis, Inc., a developer of video
communication and information appliance technologies, and since January 1996 he
has served as its Chairman of the Board. Since January 1991, Mr. Yeh has served
as President of Matics Computer Systems, Inc., a computer PC systems and
peripherals company. Mr. Yeh holds a B.S. in Mathematics from Tamkang University
and an M.S. in Systems Science and Mathematics from Washington University, Saint
Louis.
BOARD OF DIRECTORS, COMMITTEES AND OTHER INFORMATION
We currently have six authorized directors. All directors are elected to
hold office until the next annual meeting of our stockholders and until their
successors have been elected. There are no family relationships among any of our
directors or executive officers.
Immediately following the offering, our board will consist of five
directors divided into three classes, each class serving for a term of three
years, except for the first two classes which initially will serve for one and
two year terms, respectively, as follows:
<TABLE>
<CAPTION>
CLASS EXPIRATION NAME
----- ---------- ----
<S> <C> <C>
Class I......................... 2001 Peter C. Chang
R. David Dicioccio
Class II........................ 2002 Peter T. Morris
Michael Tung
Class III....................... 2003 James C. Yeh
</TABLE>
Directors to replace those whose terms are expiring will be elected at
each annual meeting of stockholders by a vote of the holders of a majority of
the voting power represented at the meeting.
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<PAGE> 52
Compensation Committee and Non-Executive Compensation Committee. Our
board of directors has a compensation committee and a non-executive compensation
committee. Our compensation committee is responsible for, among other things,
determining salaries, incentives and other forms of compensation for directors,
officers and employees and administering various incentive compensation and
benefit plans. Mr. Dicioccio and Mr. Yeh are the current members of the
compensation committee. Our non-executive compensation committee develops and
monitors compensation arrangements and grants option awards for employees that
are not officers or directors, and administers our non-executive compensation
plans. Mr. Chang is the sole director on the non-executive compensation
committee. Prior to fiscal 2000, the responsibilities of the compensation
committee and the non-executive compensation committee were fulfilled by the
full board of directors.
Audit Committee. Our audit committee reviews our annual audit and meets
with our independent auditors to review our internal accounting procedures and
financial management practices. Mr. Dicioccio and Mr. Morris are the current
members of the audit committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other entity, nor has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
Except as we otherwise describe below, we have not paid any cash
compensation to members of our board of directors for their services as
directors.
We reimburse the directors for reasonable expenses in connection with
attendance at board and committee meetings. Directors also receive an initial
grant of an option to purchase 30,000 shares of our common stock at the fair
market value of our common stock as determined by the board of directors on the
date of grant, which vests ratably over 36 months, and an option to purchase
30,000 additional shares of our common stock every three years at the fair
market value of our common stock as determined by the board of directors on the
date of grant, which vests ratably over 36 months.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to our chief
executive officer, our named executive officer. The total annual salary and
bonus paid to each of our other executive officers did not exceed $100,000 for
services rendered in all capacities to us during the fiscal year ended December
31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
---------------- UNDERLYING
NAME AND POSITION(S) SALARY BONUS OPTIONS
-------------------- ------- ----- ------------
<S> <C> <C> <C>
Peter C. Chang.............................................. $66,000 -- 412,500
Chief Executive Officer and President
</TABLE>
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<PAGE> 53
The following table summarizes annualized salary paid to our chief
executive officer and to our other executive officers whose total annual salary
will exceed $100,000, or would exceed $100,000 had they been in our employ at
the beginning of the fiscal year, for services rendered in all capacities to us
during the fiscal year ended December 31, 2000. The table also includes options
granted to these executive officers from January 1, 2000 through September 30,
2000.
COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
SECURITIES
ANNUALIZED UNDERLYING
NAME AND POSITION(S) SALARY OPTIONS
-------------------- ---------- ------------
<S> <C> <C>
Peter C. Chang.............................................. $160,000 1,687,500
Chief Executive Officer and President
Gregory Barnes.............................................. 120,000 450,000
Vice President, U.S. Operations
John M. Harland............................................. 150,000 495,000
Vice President, Finance and Chief Financial Officer
David A. Hubbard............................................ 120,000 150,000
Vice President, Sales and Marketing
Wei-shin Tsay, Ph.D. ....................................... 140,000 750,000
Vice President, Product Development
</TABLE>
STOCK OPTIONS
The following tables set forth certain information for the fiscal year
ended December 31, 1999 with respect to stock options granted to our named
executive officer. The percentage of total options granted is based on an
aggregate of 2,103,000 options granted in 1999. Mr. Chang did not exercise any
options during the last fiscal year.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
---------------------------------------------------------- OF STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED OPTION TERM
UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- --------------- ---------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter C. Chang(1)...... 412,500 19.60% $0.13 9/16/2009 8,009,403 12,785,400
</TABLE>
------------
(1) These options are fully vested. The exercise price is equal to 100% of the
fair market value of our common stock, as determined by the board of
directors, on the date of grant. The options have a term of 10 years,
subject to earlier termination in certain events related to termination of
employment. The 5% and 10% assumed rates of appreciation are suggested by
the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of the future common stock price. There can be no
assurance that any of the values reflected in the table will be achieved.
STOCK PLANS
1997 Stock Plan
Our 1997 Stock Plan provides for the granting of incentive stock options
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended, or the Code, to employees, officers and employee directors and the
granting of nonstatutory stock options and stock purchase rights to employees,
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<PAGE> 54
officers, directors, including non-employee directors, and consultants. As of
September 30, 2000, 3,406,667 shares of common stock have been issued upon
exercise of options granted under our 1997 Stock Plan and 2,739,700 options to
purchase shares of common stock were outstanding. Options granted under the 1997
Stock Plan generally become exercisable at the rate of 1/4 of the total number
of shares subject to the options 12 months after the vesting commencement date,
and 1/4 of the total number of shares subject to the options every 12 months
thereafter. The 1997 Stock Plan provides that in the event there is a stock
split, stock dividend or other combination or reclassification of our common
stock, we will make appropriate adjustments in order to preserve the benefits of
options outstanding under the plan. Additionally, if we are involved in a merger
with or into another corporation, options granted under the 1997 Stock Plan
terminate immediately prior to the effective date of such a merger, unless the
surviving or acquiring company assumes them. Our 2000 Stock Plan is intended to
serve as a successor to the 1997 Stock Plan. When our 2000 Stock Plan becomes
effective, no further grants will be made under the 1997 Stock Plan.
2000 Employee Stock Purchase Plan
The board of directors adopted our 2000 Employee Stock Purchase Plan on
September 7, 2000, to be effective upon completion of this offering. We will be
submitting it for approval by our stockholders prior to the completion of this
offering. A total of 2,250,000 shares of common stock have been reserved for
issuance under our employee stock purchase plan. The number of shares reserved
for issuance under the 2000 Employee Stock Purchase Plan will be increased on
the first day of each of our fiscal years from 2001 by the lesser of:
- 1,500,000 shares; or
- 1% of our outstanding common stock on the last day of the immediately
preceding fiscal year.
Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, is administered by the board of
directors or by a committee appointed by the board. Our employees (including
officers and employee directors but excluding 5% or greater stockholders) are
eligible to participate if they are customarily employed for more than 20 hours
per week and for at least five months in any calendar year. Our 2000 Employee
Stock Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 20% of an employee's compensation. The
maximum number of shares a participant may purchase during a single accumulation
period is 2,000 shares.
The 2000 Employee Stock Purchase Plan will be implemented by a series of
overlapping offering periods of 24 months' duration, with new offering periods,
other than the first offering period, commencing in May and November of each
year. Two accumulation periods, consisting of the six month periods commencing
on May 1 and November 1, will begin each year. During each accumulation period,
payroll deductions will accumulate, without interest. On the last trading day of
each accumulation period, accumulated payroll deductions will be used to
purchase common stock. The initial offering period is expected to commence on
the date of this offering and end on October 31, 2002. The initial accumulation
period is expected to begin on the date of this offering and end on April 30,
2001.
The purchase price will be equal to 85% of the fair market value per
share of common stock on either the last trading day of the month in which the
accumulation period expired or the last trading day before the commencement of
the applicable offering period, whichever is less. Employees may withdraw from
the plan and receive a refund of their accumulated payroll deductions at any
time. Participation in our 2000 Employee Stock Purchase Plan ends automatically
on termination of employment with Alliance Fiber Optic Products, Inc.
Immediately prior to the effective time of a corporate reorganization, the
participation period then in progress shall terminate and stock will be
purchased with the accumulated payroll deductions, unless the 2000 Employee
Stock Purchase Plan is assumed by the surviving corporation or its parent
corporation pursuant to the plan of merger or consolidation.
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<PAGE> 55
2000 Stock Incentive Plan
The board of directors adopted our 2000 Stock Incentive Plan on September
7, 2000, to be effective upon completion of this offering. We will be submitting
it for approval by our stockholders prior to the completion of this offering. A
total of 2,250,000 shares of common stock are currently reserved for issuance
under the 2000 Stock Plan pursuant to the direct award or sale of shares or the
exercise of options granted under the 2000 Stock Plan. If any option granted
under the 2000 Stock Plan expires or terminates for any reason without having
been exercised in full, then the unpurchased shares subject to that option will
once again be available for additional option grants. Also, if any option
granted under the 2000 Stock Plan expires or terminates for any reason without
having been exercised in full, then the number of shares available for issuance
under the 2000 Stock Plan will be increased by a number equal to the unpurchased
shares subject to that option.
Under the 2000 Stock Plan, all of our employees, outside directors and
consultants are eligible to purchase shares of common stock and to receive
awards of shares or grants of nonstatutory options. Employees are also eligible
to receive grants of incentive stock options, or ISOs, intended to qualify under
Section 422A of the Internal Revenue Code of 1986, as amended, or the Code. The
2000 Stock Plan is administered by the Compensation Committee of our the Board
of Directors, which selects the persons to whom shares will be sold or awarded
or options will be granted, determines the number of shares to be made subject
to each sale, award or grant, and prescribes other terms and conditions,
including the type of consideration to be paid to us upon sale or exercise and
vesting schedules in connection with each sale, award or grant.
The exercise price under the nonstatutory options must be at least par
value of the common stock on the date of grant. The exercise price under ISOs
cannot be lower than 100% of the fair market value of the common stock on the
date of grant and, in the case of ISOs granted to holders of more than 10% of
the voting power of the Company, not less than 110% of such fair market value.
The term of an option cannot exceed 10 years, and the term of an ISO granted to
a holder of more than 10% of our voting power cannot exceed five years.
401(K) PLAN
Effective January 1999, we established a tax-qualified employee savings
and retirement plan for which our employees will generally be eligible. Under
our 401(k) Plan, employees may elect to reduce their current compensation and
have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
Plan permits, but does not require, additional matching contributions to the
401(k) Plan by us on behalf of all participants in the 401(k) Plan. To date, we
have made no matching contributions. The 401(k) Plan is intended to qualify
under Section 401 of the Code, so that contributions 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 contributions by us, if any, will be
deductible by us when made.
INDEMNIFICATION AGREEMENTS
We plan to enter into agreements to indemnify our directors and executive
officers. We believe that these agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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<PAGE> 56
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
From August 1997 through August 2000, we sold shares of our preferred
stock in private financings as follows:
- 3,150,000 shares of Series A preferred stock at $2.34 per share in
January 1998 (as adjusted for a 2-for-1 stock split in April 1999);
- 3,000,000 shares of Series B preferred stock at $3.00 per share in
January 2000; and
- 7,500,000 shares of Series C preferred stock at $8.25 per share in July
and August 2000.
Each share of preferred stock will convert automatically into one share
of common stock upon the closing of this offering. The purchasers of the
preferred stock include the following directors, executive officers, holders of
more than 5% of our securities and their affiliated entities:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
-----------------------------------
INVESTOR SERIES A SERIES B SERIES C
-------- --------- --------- ---------
<S> <C> <C> <C>
R. David Dicioccio....................... -- -- 150,000
John M. Harland(1)....................... -- -- 32,250
Entities affiliated with CPY &
Associates............................. -- 1,470,000 --
Foxconn Holding Limited.................. -- 750,000 --
Entities affiliated with New Enterprise
Associates............................. -- -- 3,000,000
Transpac Nominees PTE Ltd................ 3,150,000 -- --
</TABLE>
------------
(1) Includes 18,000 shares held in the name of Mr. Harland's minor children.
The purchasers of the above shares of preferred stock are entitled to
registration rights. See "Description of Capital Stock -- Registration Rights."
INDEBTEDNESS OF MANAGEMENT
The individuals listed below elected to pay the exercise price for some
of their outstanding options with full recourse promissory notes secured by the
common stock underlying the options. All of the notes bear interest at 6.50% per
year, except for the note from John M. Harland, which bears interest at 7.00%
per year. As of September 30, 2000, the principal of and interest on these notes
have not been paid. The interest accrued to date and the original total
principal amounts of the promissory notes executed by each executive officer in
favor of the Company are:
<TABLE>
<CAPTION>
INTEREST
SHARES ACCRUED ORIGINAL
EXECUTIVE OFFICER NOTE DATE PURCHASED NOTE DUE TO DATE NOTE AMOUNT
----------------- ---------------- --------- ---------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Peter C. Chang............... January 1, 2000 412,500 January 1, 2004 $2,876 $ 59,000
Peter C. Chang............... January 30, 2000 187,500 January 30, 2004 1,083 25,000
Peter C. Chang............... May 2, 2000 1,500,000 January 1, 2004 5,417 200,000
Gregory Barnes............... June 9, 2000 375,000 June 9, 2004 2,505 125,000
Gregory Barnes............... August 25, 2000 75,000 August 25, 2004 634 100,000
John M. Harland.............. July 26, 2000 495,000 July 26, 2004 4,158 330,000
David A. Hubbard............. April 5, 2000 225,000 April 4, 2004 358 11,250
David A. Hubbard............. August 25, 2000 150,000 August 25, 2004 785 100,000
Wei-shin Tsay................ August 25, 2000 750,000 August 25, 2004 6,338 1,000,000
</TABLE>
CHANGE OF CONTROL ARRANGEMENTS
The stock option agreement with R. David Dicioccio provides that stock
options granted to Mr. Dicioccio will automatically vest if his relationship
with us is involuntarily terminated after a change
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<PAGE> 57
of control of our company, as those terms are defined in the agreement. The
stock option agreement with Peter C. Chang provides that one half of the
unvested stock options granted to Mr. Chang will automatically vest upon a
change of control of our company, as those terms are defined in the agreement.
As of September 30, 2000, an aggregate of 768,700 unvested common stock options
are subject to change of control provisions.
We believe the transactions described above are on terms no less
favorable than could have been obtained from unaffiliated third parties.
For information concerning indemnification of directors and officers, see
"Management -- Indemnification Agreements" and "Description of Capital
Stock -- Limitation of Liability and Indemnification Matters."
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of our common stock on September 30, 2000, and as adjusted to reflect the sale
of the shares of common stock in this offering, by:
- our named executive officer;
- each of our directors;
- each person known to us to be the beneficial owner of more than 5% of
our common stock; and
- all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed
on the tables is c/o Alliance Fiber Optic Products, Inc., 735 North Pastoria
Avenue, California 94085.
We have determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission. Except as indicated by the footnotes
below, we believe, based on the information furnished to us, that the persons
and entities named in the tables below have sole voting and investment power
with respect to all shares of common stock that they beneficially own, subject
to applicable community property laws. We have based our calculation of the
percentage of beneficial ownership on 45,309,999 shares of common stock
outstanding on September 30, 2000 and 51,559,999 shares of common stock
outstanding upon completion of this offering.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding shares
of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of September 30, 2000. We did not deem
these shares outstanding, however, for the purpose of computing the percentage
ownership of any other person. Asterisks represent beneficial ownership of less
than one percent.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON STOCK
SHARES OF BENEFICIALLY OWNED
COMMON STOCK --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICER:
Peter C. Chang(1)........................................... 6,840,000 15.0% 13.2%
R. David Dicioccio(2)....................................... 375,000 * *
Peter Morris(3)............................................. 3,000,000 6.6 5.8
Michael Tung(4)............................................. 12,000,000 26.5 23.3
James Yeh(5)................................................ 4,470,000 9.9 8.7
5% STOCKHOLDERS:
Foxconn Holding Limited(4).................................. 12,000,000 26.5 23.8
Entities affiliated with CPY & Associates(5)................ 4,470,000 9.9 8.7
Transpac Nominees PTE Ltd.(6)............................... 4,350,000 9.6 8.4
Entities affiliated with New Enterprise Associates(3)....... 3,000,000 6.6 5.8
Jackson Liu................................................. 2,520,000 5.5 4.9
OTHER:
Weiss, Peck & Greer Venture Partners(7)..................... 2,099,999 4.6 4.1
All Directors and Executive Officers as a group
(10 persons)(8)........................................... 29,739,750 63.7 56.0
</TABLE>
-------------------------
* Less than 1%.
(1) Includes 1,218,750 shares subject to our right of repurchase, which we may
exercise as to unvested shares previously exercised upon Mr. Chang's
termination of employment, 609,375 shares subject to
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<PAGE> 59
acceleration upon a change of control, 60,000 shares held in the name of Mr.
Chang's minor children and 3,000,000 shares held in the name of the Chang
Family LLC.
(2) Includes 159,325 shares subject to our right of repurchase, which we may
exercise as to unvested shares previously exercised upon Mr. Dicioccio's
termination as a consultant. These 159,325 shares are also subject to
acceleration of vesting in connection with a change of control.
(3) Principal address is 2490 Sand Hill Road, Menlo Park, CA 94025. Includes
2,999,319 shares of common stock held by New Enterprise Associates 9, L.P.
and 681 shares of common stock held by NEA Ventures 2000 L.P. Mr. Morris is
a general partner of New Enterprise Associates. Mr. Morris has dispositive
and voting power for the shares held by New Enterprise Associates 9, L.P.
Mr. Morris disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(4) Principal address is #2 Tsu-yu Street, Tu-cheng, Taipei Hsien, Taiwan.
Includes 12,000,000 shares held by Foxconn Holding Limited. Mr. Tung is the
chief financial officer and a director of Foxconn Optical Technology, Inc.
Mr. Tung disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest therein.
(5) Principal address is 45036 Cougar Circle, Fremont, CA 94539. Includes
3,000,000 shares of common stock held by CPY & Associates, 600,000 shares of
common stock held by CPY USA I, 412,500 shares of common stock held by CPY
USA II, 232,500 shares of common stock held by CPY International and 225,000
shares of common stock held by CPY California. Mr. Yeh is the manager of CPY
& Associates and disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein.
(6) Principal address is 6 Shenton Way #20-09, DBS Building Tower Two, Singapore
068809.
(7) Principal address is 555 California Street, Suite 3130, San Francisco, CA
94104. Includes 2,099,999 shares held by Weiss, Peck & Greer LLC as agent
for Weiss, Peck & Greer Venture Associates VI, L.P. (1,826,800 shares),
Weiss, Peck & Greer Venture Associates VI-A, L.P. (19,908 shares), and
Weiss, Peck & Greer Venture Associates VI Cayman, L.P. (253,291 shares).
Christopher J. Schaepe is a managing member of Venture Investors General
Partner, L.L.C., the general partner of Weiss, Peck & Greer Venture
Associates VI, L.P., Weiss, Peck & Greer Venture Associates VI-A, L.P. and
Weiss, Peck & Greer Venture Associates VI Cayman, L.P. Mr. Schaepe has
dispositive and voting power for these shares, and disclaims beneficial
ownership except to the extent of his pecuniary interest therein.
(8) Includes 3,223,125 shares subject to options.
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<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Upon completion of this offering, assuming reincorporation in Delaware,
and after giving effect to the conversion of all outstanding preferred stock
into common stock and the amendment of our certificate of incorporation, our
authorized capital stock will consist of 375,000,000 shares of common stock, par
value $0.001 per share, and 7,500,000 shares of preferred stock, par value
$0.001 per share. Upon consummation of this offering, no shares of preferred
stock and approximately 51,559,999 shares of common stock (52,497,499 shares if
the underwriters' over-allotment option is exercised in full) will be
outstanding. The following summary is qualified in its entirety by reference to
our certificate of incorporation and bylaws, copies of which are filed as
exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
As of September 30, 2000, there were 45,309,999 shares of common stock
outstanding held by approximately 85 stockholders of record, assuming the
automatic conversion of each outstanding share of preferred stock upon the
closing of this offering, of which 2,171,250 shares are subject to a right of
repurchase. Upon termination of employment with us, we have the right to
repurchase all unvested shares of common stock previously exercised at a price
equal to the original price paid by the stockholder. The holders of our common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders, including the election of directors,
and do not have cumulative voting rights. Accordingly, the holders of a majority
of the shares of common stock entitled to vote in any election of directors can
elect all of the directors standing for election, if they so choose. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably dividends, if any, as
may be declared by our board of directors out of funds legally available
therefor. See "Dividend Policy." Upon our liquidation, dissolution or winding
up, the holders of common stock will be entitled to share ratably in the net
assets legally available for distribution to stockholders after the payment of
all of our debts and other liabilities, subject to the prior rights of any
preferred stock then outstanding. Holders of 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 to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into common stock. See note 1 of notes to consolidated
financial statements for a description of the currently outstanding preferred
stock. Following the conversion, our certificate of incorporation will be
restated to delete all references to the prior series of preferred stock, and
7,500,000 shares of undesignated preferred stock will be authorized. The board
of directors has the authority, without further action by the stockholders, to
issue from time to time the preferred stock in one or more series and to fix the
number of shares, designations, preferences, powers, and other rights of those
shares. 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, and 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 affect adversely the rights and
powers, including voting rights, of the holders of common stock, and may have
the effect of delaying, deferring or preventing a change in control of us. We
have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
After this offering, the holders of 33,600,000 shares of common stock
issued upon conversion of the preferred stock are entitled to contractual rights
to require us to register those shares under the Securities Act. If we propose
to register any of our securities under the Securities Act for our own
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<PAGE> 61
account, holders of those shares are entitled to include their shares in our
registration, provided, among other conditions, that the underwriters of any
such offering have the right to limit the number of shares included in the
registration. These holders have waived their rights to include their shares in
this offering. One hundred and eighty days after the effective date of the
registration statement of which this prospectus is a part, and subject to
limitations and conditions specified in the investor rights agreement with the
holders, holders of at least 25% of all or part of those shares may require us
to prepare and file a registration statement under the Securities Act at our
expense covering those shares, provided that the shares to be included in the
registration have an anticipated aggregate public offering price of at least
$10,000,000. We are not obligated to effect more than two of these
stockholder-initiated registrations. Holders of those shares may also require us
to file additional registration statements on Form S-3, subject to limitations
specified in the investor rights agreement.
DELAWARE ANTI-TAKEOVER LAW AND SELECTED CHARTER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business combination with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns, or within three years prior,
did own, 15% or more of the corporation's voting stock.
Upon the closing of this offering, our directors will be divided into
three classes. The number of directors will be distributed among the three
classes so that each class will consist of one-third of the board of directors.
The classification of the board of directors will have the effect of requiring
at least two annual stockholder meetings, instead of one, to replace a majority
of the directors which could have the effect of delaying or preventing a change
in control of our company. Our restated certificate will authorize only the
board of directors to fill vacancies, including newly created directorships.
Upon the closing of this offering, our certificate of incorporation will
provide that our bylaws may be repealed or amended only by a two-thirds vote of
the board of directors or a two-thirds stockholder vote. Further, the
certificate of incorporation will require that all stockholder action be taken
at a stockholders' meeting. In addition, those provisions of the certificate of
incorporation may only be amended or repealed by the holders of at least
two-thirds of the voting power of all the then-outstanding shares of stock
entitled to vote generally for the election of directors voting together as a
single class. The provisions described above, together with the ability of the
board of directors to issue preferred stock as described above, may have the
effect of deterring a hostile takeover or delaying a change in our control or
management.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation that limit
the liability of our directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the Delaware General Corporation Law, or Delaware Law. The Delaware Law
provides that directors of a company will not be personally liable for monetary
damages for breach of their fiduciary duty as directors, except for liability
- for any breach of their duty of loyalty to us or our stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided Section 174 of the Delaware Law, or
- for any transaction from which the director derived an improper
personal benefit.
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<PAGE> 62
Any amendment or repeal of these provisions requires the approval of the
holders of shares representing at least two-thirds of our shares entitled to
vote in the election of directors, voting as one class.
Our certificate of incorporation and bylaws also provide that we shall
indemnify our directors and officers to the fullest extent permitted by the
Delaware Law. We plan to enter into separate indemnification agreements with our
directors and executive officers that could require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified. We
believe that the limitation of liability provision in our Restated Certificate
of Incorporation and the indemnification agreements will facilitate our ability
to continue to attract and retain qualified individuals to serve as our
directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
LISTING
We propose to list our common stock on the Nasdaq National Market under
the symbol AFOP.
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<PAGE> 63
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. As described below, only a limited number of shares will be
available for sale shortly after this offering due to certain contractual and
legal restrictions on resale. Nevertheless, sales of our common stock in the
public market after the restrictions lapse, or the perception that such sales
may occur, could cause the prevailing market price to decrease or to be lower
than it might be in the absence of those sales or perceptions.
SALE OF RESTRICTED SHARES
Upon completion of this offering, we will have 51,559,999 outstanding
shares of common stock. The 6,250,000 shares of common stock being sold in this
offering will be freely tradable, unless they are purchased by any of our
"affiliates," as that term is defined in Rule 144 under the Securities Act, in
which they may only be sold in compliance with the limitations described below.
The remaining shares are "restricted shares" within the meaning of Rule 144
under the Securities Act. These remaining shares are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 144 or Rule
701 under the Securities Act, which are summarized below.
- No shares will be eligible for sale prior to 180 days after the date of
this prospectus;
- 31,965,000 shares will be eligible for sale upon the expiration of the
lock-up agreements, described above, beginning 180 days after the date
of this prospectus; and
- 1,494,712 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
LOCKUP AGREEMENTS
Our directors, executive officers and certain stockholders, who
collectively hold an aggregate of 38,709,949 shares of common stock, have agreed
that they will not sell any common stock owned by them without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for a period of
180 days from the date of this prospectus. Merrill Lynch, Pierce, Fenner & Smith
Incorporated may, in its sole discretion and at any time without notice, release
some or all of the shares subject to lockup agreements prior to the expiration
of the 180 day period.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person deemed to be our affiliate, or a
person holding restricted shares who beneficially owns shares that were not
acquired from us or our affiliate within the previous one year, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the then outstanding shares of common stock, approximately
515,599 shares immediately after this offering, assuming no exercise of
the underwriters' over-allotment option, or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the SEC.
Sales under Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about us. However,
if a person, or persons whose shares are aggregated, is not deemed to have been
our affiliate at any time during the 90 days immediately preceding the sale, he
or she may sell his or her restricted shares under Rule 144(k) without regard to
the limitations described above, if at least two years have elapsed since the
later of the date the shares were acquired from us or from our affiliate.
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<PAGE> 64
RULE 701
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with some restrictions, including the holding period requirement, of
Rule 144. Any employee, officer or director or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract may be entitled
to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell those shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait 90 days after the
date of this prospectus before selling such shares. However, all shares issued
by us pursuant to Rule 701 are subject to lock-up agreements and will only
become eligible for sale upon the expiration of the lock-up agreements.
STOCK OPTIONS
We intend to file a registration statement under the Securities Act
covering approximately shares of common stock reserved for issuance
under the our stock plans. The registration statement is expected to be filed
soon after the date of this prospectus and will automatically become effective
upon filing. Accordingly, shares registered under such registration statement
will be available for sale in the open market, unless such shares are subject to
vesting restrictions with us or the contractual restrictions described above.
REGISTRATION RIGHTS
In addition, after this offering, the holders of approximately 33,600,000
shares of common stock will be entitled to rights to cause us to register the
sale of such shares under the Securities Act. Registration of these shares under
the Securities Act would result in these shares, other than shares purchased by
our affiliates, becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
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<PAGE> 65
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of the material United States
federal income and estate tax consequences of the ownership and disposition of
common stock that may be relevant to you if you are a non-United States Holder.
In general, a "non-United States Holder" is any person or entity that is, for
United States federal income tax purposes, a foreign corporation, a nonresident
alien individual, a foreign partnership or a foreign estate or trust. This
discussion is based on current law, which is subject to change, possibly with
retroactive effect, or different interpretations. This discussion is limited to
non-United States Holders who hold shares of common stock as capital assets.
Moreover, this discussion is for general information only and does not address
all of the tax consequences that may be relevant to you in light of your
personal circumstances, nor does it discuss special tax provisions which may
apply to you if you relinquished United States citizenship or residence.
If you are an individual, you may, in many cases, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to United States federal income tax as if they were United States citizens.
Each prospective purchaser of common stock is advised to consult a tax
advisor with respect to current and possible future tax consequences of
purchasing, owning and disposing of our common stock as well as any tax
consequences that may arise under the laws of any United States state,
municipality or other taxing jurisdiction.
DIVIDENDS
If dividends are paid, as a non-United States Holder, you will be subject
to withholding of United States federal income tax at a 30% rate or a lower rate
as may be specified by an applicable income tax treaty. To claim the benefit of
a lower rate under an income tax treaty, you must properly file with the payor
an IRS Form 1001, or successor form, claiming an exemption from or reduction in
withholding under the applicable tax treaty.
If dividends are considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of yours,
those dividends will not be subject to withholding tax, but instead will be
subject to United States federal income tax on a net basis at applicable
graduated individual or corporate rates, provided an IRS Form 4224, or successor
form, is filed with the payor. If you are a foreign corporation, any effectively
connected dividends may, under certain circumstances, be subject to additional
"branch profits tax" at a rate of 30% or a lower rate as may be specified by an
applicable income tax treaty.
Unless the payor has knowledge to the contrary, dividends paid prior to
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of such country for purposes of the withholding discussed above
and for purposes of determining the applicability of a tax treaty rate. However,
recently finalized Treasury Regulations pertaining to United States federal
withholding tax provide that you must comply with certification procedures, or,
in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures, directly or under
certain circumstances through an intermediary, to obtain the benefits of a
reduced rate under an income tax treaty with respect to dividends paid after
December 31, 2000. In addition, these regulations will require you, if you
provide an IRS Form 4224 or successor form, as discussed above, to also provide
your identification number.
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<PAGE> 66
If you are eligible for a reduced rate of United States withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
As a non-United States Holder, you generally will not be subject to the
United States federal income tax on any gain recognized on the sale or other
disposition of common stock unless:
(1) the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax
treaty applies, is attributable to a United States permanent
establishment of yours (and, in which case, if you are a foreign
corporation, you may be subject to an additional branch profits tax
equal to 30% or a lower rate as may be specified by an applicable
income tax treaty).
(2) you are an individual who holds the common stock as a capital asset
and are present in the United States for 183 or more days in the
taxable year of the sale or other disposition and other conditions
are met; or
(3) we are or have been a United States real property holding
corporation, or a USRPHC, for United States federal income tax
purposes. We believe that we are not currently, and are likely not to
become, a USRPHC. If we were to become a USRPHC, then gain on the
sale or other disposition of common stock by you generally would not
be subject to United States federal income tax provided:
- the common stock was regularly traded on an established securities
market; and
- you do not actually or constructively own more than 5% of the
common stock during the shorter of the five-year period preceding
the disposition or your holding period.
FEDERAL ESTATE TAX
If you are an individual, common stock held at the time of your death
will be included in your gross estate for United States federal estate tax
purposes, and may be subject to United States federal estate tax, unless an
applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the IRS and to each of you the amount of
dividends paid to you and the tax withheld with respect to those dividends,
regardless of whether withholding was required. Copies of the information
returns reporting those dividends and withholding may also be made available to
the tax authorities in the country in which you reside under the provisions of
an applicable income tax treaty or other applicable agreements.
Backup withholding is generally imposed at the rate of 31% on certain
payments to persons that fail to furnish the necessary identifying information
to the payer. Backup withholding generally will not apply to dividends paid
prior to January 1, 2001 to a Non-United States Holder at an address outside the
United States, unless the payor has knowledge that the payee is a United States
person. In the case of dividends paid after December 31, 2000, the recently
finalized Treasury Regulations provide that you generally will be subject to
withholding tax at a 31% rate unless you certify your non-United States status.
The payment of proceeds of a sale of common stock effected by or through
a United States office of a broker is subject to both backup withholding and
information reporting unless you provide the payor with your name and address
and you certify your non-United States status or you otherwise establish an
exemption. In general, backup withholding and information reporting will not
apply to the payment of the proceeds of a sale of common stock by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a United States person, a controlled foreign
corporation, or a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a
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<PAGE> 67
trade or business in the United States, or, in addition, for periods after
December 31, 2000, a foreign partnership that at any time during its tax year
either is engaged in the conduct of a trade or business in the United States or
has as partners one or more United States persons that, in the aggregate, hold
more than 50% of the income or capital interest in the partnership, such
payments will be subject to information reporting, but not backup withholding,
unless such broker has documentary evidence in its records that you are a
non-United States Holder and certain other conditions are met or you otherwise
establish an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against your United States federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
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<PAGE> 68
UNDERWRITING
GENERAL
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, U.S. Bancorp Piper Jaffray Inc., Wit
SoundView Corporation and SG Cowen Securities Corporation, are acting as U.S.
representatives of the U.S. underwriters named below. Subject to the terms and
conditions described in a U.S. purchase agreement among us and the U.S.
underwriters, and concurrently with the sale of shares to the
international managers, we have agreed to sell to the U.S. underwriters, and the
U.S. underwriters severally have agreed to purchase from us, the number of
shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
U.S. UNDERWRITER ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
U.S. Bancorp Piper Jaffray Inc. ............................
Wit SoundView Corporation...................................
SG Cowen Securities Corporation.............................
--------
Total..........................................
========
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, U.S. Bancorp Piper Jaffray Inc., Wit SoundView
Corporation and SG Cowen Securities Corporation are acting as lead managers.
Subject to the terms and conditions in the international purchase agreement, and
concurrently with the sale of shares to the U.S. underwriters pursuant
to the U.S. purchase agreement, we have agreed to sell to the international
managers, and the international managers severally have agreed to purchase
shares from us. The initial public offering price per share and the
total underwriting discount per share are identical under the U.S. purchase
agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
U.S. underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters
propose initially to offer the shares to the public at the initial public
offering price on the cover page of this prospectus and to dealers at that price
less a concession not in excess of $ per share. The U.S. underwriters may
allow, and the
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<PAGE> 69
dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the U.S. underwriters and international managers of
their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to the
company................................ $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by us.
OVER-ALLOTMENT OPTIONS
We have granted options to the U.S. underwriters to purchase up to
additional shares at the public offering price less the underwriting
discount. The U.S. underwriters may exercise these options for 30 days from the
date of this prospectus solely to cover any over-allotments. If the U.S.
underwriters exercise these options, each will be obligated, subject to
conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that U.S. underwriter's initial amount
reflected in the above table.
We have also granted options to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to
additional shares to cover any over-allotments on terms similar to those granted
to the U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered by this prospectus for
sale to some of our business associates and related persons. If these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing stockholders
and option holders have agreed, with exceptions, not to sell or transfer any
common stock for 180 days after the date of this
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prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other individuals have agreed not to directly or
indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "AFOP."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
between us and the U.S. representatives and lead managers. In addition to
prevailing market conditions, the factors to be considered in determining the
initial public offering price are:
- the valuation multiples of publicly traded companies that the U.S.
representatives and lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
the underwriters and selling group members from bidding for or purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
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<PAGE> 71
In connection with the offering, the underwriters may make short sales of
the common stock. Short sales involve the sale by the underwriters at the time
of the offering 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 options. The U.S. representatives may close out any
covered short position by either exercising the over-allotment options or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the U.S. representatives will consider,
among other things, the price of shares available for purchase in the open
market as compared to the public offering price at which they may purchase the
shares through the over-allotment option. Naked short sales are sales in excess
of the over-allotment option. The U.S. representatives 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 U.S. representatives are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering.
Similar to other purchase transactions, the purchases by the U.S.
representatives to cover syndicate short positions may have the effect of
raising or maintaining the market price of the common stock or preventing or
retarding a decline in the market price of the common stock. As a result, the
price of the common stock may be higher than it would otherwise be in the
absence of these transactions.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the U.S.
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
ELECTRONIC DISTRIBUTION OF PROSPECTUS
A prospectus in electronic format may be made available on websites
maintained by one or more underwriters or selected dealers. The U.S.
representatives may agree to allocate a number of shares to underwriters or
selected dealers to sell to their online brokerage account holders. Other than
the prospectus in electronic format, the information on the websites is not part
of this prospectus.
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<PAGE> 72
LEGAL MATTERS
Selected legal matters with respect to the validity of the common stock
offered by this prospectus will be passed upon for us by Pillsbury Madison &
Sutro LLP, Palo Alto, California. An entity in which attorneys and former
attorneys of Pillsbury Madison & Sutro LLP are members and certain attorneys of
Pillsbury Madison & Sutro LLP beneficially own an aggregate of 60,000 shares of
the common stock of Alliance Fiber Optic Products, Inc. Selected legal matters
relating to the offering will be passed upon for the underwriters by Brown &
Wood LLP, San Francisco, California.
EXPERTS
The financial statements as of December 31, 1998, 1999 and June 30, 2000
and for each of the three years in the period ended December 31, 1999 and the
six months ended June 30, 2000 included in this prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. Please refer to the registration
statement, exhibits and schedules for further information with respect to
Alliance Fiber Optic Products, Inc. and the common stock offered by this
prospectus. Statements contained in this prospectus regarding the contents of
any contract or other document are not necessarily complete. With respect to any
contract or document filed as an exhibit to the registration statement, you
should refer to the exhibit for a copy of the contract or document, and each
statement in this prospectus regarding that contract or document is qualified by
reference to the exhibit. A copy of the registration statement and its exhibits
and schedules may be inspected without charge at the SEC's public reference
room, located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. Our
SEC filings are also available to the public from the SEC's website at
www.sec.gov.
Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.
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<PAGE> 73
ALLIANCE FIBER OPTIC PRODUCTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Alliance Fiber Optic Products, Inc.
The reincorporation of Alliance Fiber Optic Products, Inc. in the State
of Delaware, described in Note 1 to the consolidated financial statements, has
not yet been consummated. When it has been consummated, we will be in a position
to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
consolidated financial position of Alliance Fiber Optic Products, Inc.
and its subsidiary at December 31, 1998 and 1999 and June 30, 2000, and
the results of their consolidated operations and their cash flows for
each of the three years in the period ended December 31, 1999 and the six
months ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing
standards generally accepted in the United States, which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above."
PRICEWATERHOUSECOOPERS LLP
San Jose, California
October 10, 2000
F-2
<PAGE> 75
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
----------------- JUNE 30, AT JUNE 30,
1998 1999 2000 2000
------ ------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $3,985 $ 6,139 $ 4,792
Marketable securities..................................... -- -- 433
Accounts receivable, net.................................. 549 1,755 2,245
Inventories............................................... 1,145 1,433 2,406
Prepaid expenses and other current assets................. 132 142 138
------ ------- -------
Total current assets................................... 5,811 9,469 10,014
Property and equipment, net................................. 2,218 2,561 4,335
Other assets................................................ 78 112 134
------ ------- -------
Total assets........................................... $8,107 $12,142 $14,483
====== ======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 672 $ 1,010 $ 2,170
Accrued expenses and other liabilities.................... 258 494 1,033
Current portion of long-term liabilities.................. -- 90 251
------ ------- -------
Total current liabilities.............................. 930 1,594 3,454
Long-term liabilities....................................... 68 317 663
------ ------- -------
Total liabilities...................................... 998 1,911 4,117
------ ------- -------
Commitments and contingencies (Note 10)
Mandatorily redeemable convertible preferred stock, $0.001
par value; 45,000 shares authorized; 23,100 shares issued
and outstanding at December 31, 1998, 25,890 shares at
December 31, 1999, 26,100 shares at June 30, 2000 and nil
shares at June 30, 2000 (pro forma)....................... 6,115 9,835 10,115
------ ------- -------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 75,000 shares authorized;
5,400 shares issued and outstanding at December 31,
1998, 6,600 shares at December 31, 1999, 10,172 shares
at June 30, 2000 and 36,272 shares at June 30, 2000
(pro forma)............................................ 5 6 10 $ 36
Additional paid-in capital................................ 1,338 2,679 8,389 18,478
Receivables from stockholders............................. -- -- (420) (420)
Deferred stock-based compensation......................... (154) (810) (4,464) (4,464)
Cumulative translation adjustments........................ (1) (14) (65) (65)
Retained earnings (accumulated deficit)................... (194) (1,465) (3,199) (3,199)
------ ------- ------- -------
Total stockholders' equity............................. 994 396 251 $10,366
------ ------- ------- =======
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity.......................................... $8,107 $12,142 $14,483
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 76
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1997 1998 1999 1999 2000
------- ------ ------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 5,263 $4,906 $ 7,551 $2,675 $ 7,414
Cost of revenues...................... 3,562 2,757 4,911 1,986 4,245
------- ------ ------- ------ -------
Gross profit..................... 1,701 2,149 2,640 689 3,169
------- ------ ------- ------ -------
Operating expenses:
Research and development............ 526 1,487 1,532 636 1,908
Sales and marketing................. 559 591 968 413 815
General and administrative.......... 456 593 975 409 822
Stock-based compensation
charge(*)........................ 134 220 620 62 1,476
------- ------ ------- ------ -------
Total operating expenses......... 1,675 2,891 4,095 1,520 5,021
------- ------ ------- ------ -------
Income (loss) from operations......... 26 (742) (1,455) (831) (1,852)
Interest and other income, net........ 151 275 117 60 189
------- ------ ------- ------ -------
Income (loss) before income taxes..... 177 (467) (1,338) (771) (1,663)
Income tax provision (benefit)........ 109 (79) (67) (39) 71
------- ------ ------- ------ -------
Net income (loss)..................... $ 68 $ (388) $(1,271) $ (732) $(1,734)
======= ====== ======= ====== =======
Net income (loss) per share:
Basic............................... $ 0.01 $(0.07) $ (0.21) $(0.13) $ (0.22)
======= ====== ======= ====== =======
Diluted............................. $ -- $(0.07) $ (0.21) $(0.13) $ (0.22)
======= ====== ======= ====== =======
Shares used in computing net income
(loss) per share:
Basic............................... 5,400 5,400 6,120 5,632 7,679
======= ====== ======= ====== =======
Diluted............................. 29,958 5,400 6,120 5,632 7,679
======= ====== ======= ====== =======
Pro forma net income (loss) per share
(unaudited):
Basic and diluted................... $ (0.04) $ (0.05)
======= =======
Shares used in computing pro forma net
income (loss) per share (unaudited):
Basic and diluted................... 29,220 33,480
======= =======
(*) Stock-based compensation charges
included in operating expenses:
Research and development......... $ -- $ -- $ 63 $ 4 $ 237
Sales and marketing.............. 29 55 77 18 75
General and administrative....... 105 165 480 40 1,164
------- ------ ------- ------ -------
$ 134 $ 220 $ 620 $ 62 $ 1,476
======= ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 77
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE EARNINGS
--------------- STOCKHOLDERS' PAID-IN STOCK-BASED TRANSITION (ACCUMULATED
SHARES AMOUNT RECEIVABLE CAPITAL COMPENSATION ADJUSTMENTS DEFICITS)
------ ------ ------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997.......... 5,400 $ 5 $ -- $ 49 $ -- $ -- $ 126
Additional capital contribution..... -- -- -- 204 -- -- --
Deferred stock-based compensation... -- -- -- 494 (494) -- --
Amortization of deferred stock-based
compensation....................... -- -- -- -- 134 -- --
Comprehensive income:
Net income for the year............ -- -- -- -- -- -- 68
Currency translation adjustments... -- -- -- -- -- (21) --
Comprehensive income.............
------ --- ----- ------ ------- ---- -------
Balance at December 31, 1997........ 5,400 5 -- 747 (360) (21) 194
Deferred stock-based compensation... -- -- -- 14 (14) -- --
Issue of warrants................... -- -- -- 577 -- -- --
Amortization of deferred stock-based
compensation....................... -- -- -- -- 220 -- --
Comprehensive loss:
Net loss for the year.............. -- -- -- -- -- -- (388)
Currency translation adjustments... -- -- -- -- -- 20 --
Comprehensive loss...............
------ --- ----- ------ ------- ---- -------
Balance at December 31, 1998........ 5,400 5 -- 1,338 (154) (1) (194)
Issuance of common stock upon
exercise of warrants............... 1,200 1 -- 39 -- -- --
Deferred stock-based compensation... -- -- -- 1,302 (1,302) -- --
Amortization of deferred stock-based
compensation....................... -- -- -- -- 646 -- --
Comprehensive loss:
Net loss for the year.............. -- -- -- -- -- -- (1,271)
Currency translation adjustments... -- -- -- -- -- (13) --
Comprehensive loss...............
------ --- ----- ------ ------- ---- -------
Balance at December 31, 1999........ 6,600 6 -- 2,679 (810) (14) (1,465)
Issuance of common stock upon
exercise of options................ 3,572 4 (420) 472 -- -- --
Deferred stock-based compensation... -- -- -- 5,238 (5,238) -- --
Amortization of deferred stock-based
compensation....................... -- -- -- -- 1,584 -- --
Comprehensive loss:
Net loss for the period............ -- -- -- -- -- -- (1,734)
Currency translation adjustments... -- -- -- -- -- (51) --
Comprehensive loss...............
------ --- ----- ------ ------- ---- -------
Balance at June 30, 2000............ 10,172 $10 $(420) $8,389 $(4,464) $(65) $(3,199)
====== === ===== ====== ======= ==== =======
<CAPTION>
COMPREHENSIVE
TOTAL INCOME (LOSS)
------- -------------
<S> <C> <C>
Balance at January 1, 1997.......... $ 180
Additional capital contribution..... 204
Deferred stock-based compensation...
Amortization of deferred stock-based
compensation....................... 134
Comprehensive income:
Net income for the year............ 68 $ 68
Currency translation adjustments... (21) (21)
-------
Comprehensive income............. $ 47
------- =======
Balance at December 31, 1997........ 565
Deferred stock-based compensation... --
Issue of warrants................... 577
Amortization of deferred stock-based
compensation....................... 220
Comprehensive loss:
Net loss for the year.............. (388) $ (388)
Currency translation adjustments... 20 20
-------
Comprehensive loss............... $ (368)
------- =======
Balance at December 31, 1998........ 994
Issuance of common stock upon
exercise of warrants............... 40
Deferred stock-based compensation... --
Amortization of deferred stock-based
compensation....................... 646
Comprehensive loss:
Net loss for the year.............. (1,271) $(1,271)
Currency translation adjustments... (13) (13)
-------
Comprehensive loss............... $(1,284)
------- =======
Balance at December 31, 1999........ 396
Issuance of common stock upon
exercise of options................ 56
Deferred stock-based compensation... --
Amortization of deferred stock-based
compensation....................... 1,584
Comprehensive loss:
Net loss for the period............ (1,734) $(1,734)
Currency translation adjustments... (51) (51)
-------
Comprehensive loss............... $(1,785)
------- =======
Balance at June 30, 2000............ $ 251
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 78
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ----------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 68 $ (388) $(1,271) $ (732) $(1,734)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................. 75 397 519 261 384
Amortization of deferred stock-based
compensation............................... 134 220 646 62 1,584
Change in assets and liabilities:
Accounts receivable, net................... 100 (69) (1,201) (395) (498)
Inventories................................ (22) (366) (278) (3) (991)
Prepaid expenses and other assets.......... 260 (42) (39) (71) (25)
Accounts payable........................... 358 (118) 338 47 1,160
Accrued expenses and other liabilities..... 92 (73) 236 (31) 539
Other liabilities.......................... -- 30 45 30 42
Minority interest.......................... -- -- -- (6) 5
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities............................ 1,065 (409) (1,005) (838) 466
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in marketable securities............... -- -- -- -- (433)
Acquisition of property and equipment........... (506) (1,707) (862) (435) (2,158)
Purchase of a subsidiary, net of cash
acquired..................................... (512) -- -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities... (1,018) (1,707) (862) (435) (2,591)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings................... -- -- 295 -- 459
Proceeds from issuance of Series A preferred
stock and warrants........................... 960 3,276 -- -- --
Proceeds from issuance of Series B preferred
stock........................................ -- -- 3,720 -- 280
Proceeds from issuance of common stock upon the
exercise of warrants......................... -- -- 40 40 --
Proceeds from exercise of common stock
options...................................... -- -- -- -- 56
------- ------- ------- ------- -------
Net cash provided by financing
activities............................ 960 3,276 4,055 40 795
------- ------- ------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents..................................... (21) 5 (34) (58) (17)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 986 1,165 2,154 (1,291) (1,347)
Cash and cash equivalents at beginning of year.... 1,834 2,820 3,985 3,985 6,139
------- ------- ------- ------- -------
Cash and cash equivalents at end of year.......... $ 2,820 $ 3,985 $ 6,139 $ 2,694 $ 4,792
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid............................... $ 135 $ 81 $ -- $ -- $ 71
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 79
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Alliance Fiber Optic Products, Inc. (the "Company") was incorporated in
California on December 12, 1995 and is to be reincorporated in Delaware in
September 2000. The Company designs, manufactures and markets fiber optic
components for communications equipment manufacturers. The Company's principal
business location is Sunnyvale, California.
In October 1997, the Company acquired 97% of the outstanding common stock
of Transian Technology Ltd. Co. ("Transian"), a Taiwan corporation, for $512,000
in cash, an amount that was approximately equal to the value of the tangible
assets of Transian at the time. In April 1998, the Company invested an
additional $152,000 in cash increasing its ownership to 98.5% of the outstanding
common stock of Transian.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiary, Transian. All intercompany accounts and transactions have
been eliminated in consolidation.
STOCK SPLITS
On April 20, 1999 and October 10, 2000, the Company had a 2-for-1 stock
split and a 3-for-2 stock split, respectively. All share and per share amounts
have been retroactively adjusted to reflect these stock splits.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of June 30, 1999 and the
consolidated statements of operations and of cash flows for the six months ended
June 30, 1999 are unaudited. In the opinion of management, these statements have
been prepared on the same accounting basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of results for these periods. The
data disclosed in the notes to the consolidated financial statements for this
period are unaudited.
FOREIGN CURRENCY TRANSLATION
The Company's operations in Taiwan use the local currency as its
functional currency. All assets and liabilities of the subsidiary are translated
at rates of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange for the period. Gains and losses
resulting from foreign currency translation are recorded as a separate component
of stockholders' equity. Foreign currency transaction gains and losses are
recorded in interest and other income.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased.
F-7
<PAGE> 80
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and debts are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
MARKETABLE SECURITIES
The Company classifies all short-term investments as available-for-sale
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's investments are in high-grade corporate securities. At June 30, 2000,
these investments are carried at cost, which approximates fair value. Material
unrealized gains or losses, if any, are reported in stockholders' equity and
included in other comprehensive income (loss). The cost of securities sold is
based on the specific identification method. For the six months ended June 30,
2000, there were no realized gains or losses on available-for-sale securities.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method using estimated useful
lives of two to five years for machinery and equipment and five years for
furniture and fixtures. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the estimated life of the assets,
generally two to four years, or the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
Pursuant to Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company reviews long-lived assets based upon a gross cash
flow basis and will record for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. The Company has not recorded any impairment charge against the
value of the property, plant and equipment as of June 30, 2000.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of its products to the
customer, provided that the Company has received a signed purchase order, the
price is fixed and collection of resulting receivable is probable. Subsequent to
the sale of the products, the Company has no obligation to provide any
modification or customization upgrades, enhancements or any postcontract
customer support. Provisions for return allowances and warranties are recorded
at the time revenue is recognized based on the Company's historical experience.
F-8
<PAGE> 81
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred.
INCOME TAXES
The Company accounts for deferred income taxes under the liability
approach whereby the expected future tax consequences of temporary differences
between the book and tax basis of assets and liabilities are recognized as
deferred tax assets and liabilities. A valuation allowance is established for
any deferred tax assets for which realization is uncertain. The Company does not
record a deferred tax provision on unremitted earnings of its subsidiary to the
extent that such earnings are considered permanently invested.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and related
interpretations thereof. Under APB No. 25, compensation cost is, in general,
recognized based on the excess, if any, of the fair market value of the
Company's stock on the date of grant over the amount an employee must pay to
acquire the stock. In addition, the Company complies with the disclosure
provisions of Statement of Financial Accounting Standard No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation." Equity instruments issued to
non-employees are accounted for in accordance with the provision of SFAS No. 123
and Emerging Issues Task Force 96-18.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss) for the period by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted average number
of common and potential common equivalent shares outstanding during the period.
The calculation of diluted net income (loss) per share excludes potential common
shares if the effect is anti-dilutive. Potential common shares are composed of
shares of common stock subject to repurchase rights, common stock issuable upon
the exercise of stock options and common stock issuable upon conversion of
mandatorily redeemable convertible preferred stock.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED)
Upon the closing of the Company's initial public offering, the Company's
outstanding mandatorily redeemable convertible preferred stock will
automatically convert into common stock. The pro forma effects of this
transaction are unaudited and have been reflected in the accompanying pro forma
stockholders' equity as of June 30, 2000.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Basic pro forma net loss per share for the year ended December 31, 1999
and the six months ended June 30, 2000 is computed using the weighted average
number of common shares outstanding, including the conversion of the Company's
mandatorily redeemable convertible preferred stock into the Company's common
stock effective upon the closing of the Company's initial public offering, as if
such
F-9
<PAGE> 82
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
conversion occurred at the beginning of the periods presented or the date of
issuance of the mandatorily redeemable convertible preferred stock, whichever is
later.
The calculation of pro forma diluted net loss per share excludes
incremental common stock subject to repurchase rights and common stock issuable
upon the exercise of stock options if the effect would be anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity of a
company during a period from transactions and other events and circumstances
excluding transactions resulting from investments from owners and distributions
to owners. Comprehensive income (loss) is disclosed in the consolidated
statement of stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. The statement is
effective for fiscal years beginning after June 15, 2000. The Company will adopt
the standard no later than the first quarter of fiscal year 2001 and management
does not expect a material impact on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements under certain
circumstances. The Company adopted the provisions of SAB 101 in these
consolidated financial statements for all periods presented.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
44 did not and is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
F-10
<PAGE> 83
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable....................................... $ 549 $ 2,074 $ 2,673
Less: Allowance for doubtful accounts..................... -- (319) (428)
------ ------- -------
$ 549 $ 1,755 $ 2,245
====== ======= =======
INVENTORIES:
Finished goods............................................ $ 499 $ 698 $ 988
Work-in-process........................................... 97 104 182
Raw materials............................................. 549 631 1,236
------ ------- -------
$1,145 $ 1,433 $ 2,406
====== ======= =======
PROPERTY AND EQUIPMENT, NET:
Machinery and equipment................................... $2,243 $ 2,791 $ 4,533
Furniture and fixtures.................................... 151 434 798
Leasehold improvements.................................... 310 341 393
------ ------- -------
2,704 3,566 5,724
Less: Accumulated depreciation............................ (486) (1,005) (1,389)
------ ------- -------
$2,218 $ 2,561 $ 4,335
====== ======= =======
ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued compensation costs................................ $ 221 $ 422 $ 652
Provision for warranty.................................... -- -- 76
Accrued professional fees................................. -- -- 88
Other accruals............................................ 37 72 217
------ ------- -------
$ 258 $ 494 $ 1,033
====== ======= =======
LONG-TERM LIABILITIES:
Long-term portion of bank borrowings...................... $ -- $ 205 $ 503
Minority interest......................................... 16 16 21
Other long-term liabilities............................... 52 96 139
------ ------- -------
$ 68 $ 317 $ 663
====== ======= =======
</TABLE>
F-11
<PAGE> 84
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT
In July 1999, the Company entered into an agreement for an equipment loan
facility for a maximum of $300,000. Loans under this facility bear interest at
prime rate plus 1.25% (10.75% at June 30, 2000). In January 2000, the Company
entered into a second agreement for an equipment loan facility for a maximum of
$500,000. Loans under this facility bear interest at prime rate plus 1% (10.0%
at June 30, 2000). Certain equipment of the Company secures each of these loan
facilities. The Company has borrowed $795,000 under these loan facilities of
which $754,000 was outstanding at June 30, 2000. Amounts due under these loans
are $133,000, $265,000, $265,000 and $105,000 in the years 2000, 2001, 2002 and
2003, respectively.
4. INCOME TAXES
The components of income (loss) before income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1997 1998 1999 2000
---- ----- ------- ----------
<S> <C> <C> <C> <C>
Income (loss) subject to domestic income taxes only... $ 66 $(621) $(1,161) $(2,126)
Income subject to foreign income taxes only........... 111 154 (177) 463
---- ----- ------- -------
$177 $(467) $(1,338) $ 1,663
==== ===== ======= =======
</TABLE>
The income tax provision (benefit) is composed of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1997 1998 1999 2000
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Current
Federal................................................. $ 71 $(86) $(67) $ --
State................................................... 20 -- -- 1
Foreign................................................. 18 7 -- 70
---- ---- ---- -----
$109 $(79) $(67) $ 71
Deferred.................................................. -- -- -- --
---- ---- ---- -----
Total provision (benefit)............................ $109 $(79) $(67) $ 71
==== ==== ==== =====
</TABLE>
F-12
<PAGE> 85
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the effective income tax rates and
the United States statutory federal income tax rate:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1997 1998 1999 2000
------ ------ ------ ----------
<S> <C> <C> <C> <C>
Statutory federal income tax rate....................... 34.0% (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax.................. 5.8 -- -- --
Foreign taxes, at lower rate............................ (14.6) (11.8) 5.2 (6.9)
Permanent differences -- stock compensation............. 25.7 16.1 15.8 30.2
Research and development credits........................ -- (23.6) (2.2) (4.0)
Valuation allowance..................................... 11.3 36.4 9.0 17.8
Other................................................... (0.6) -- 1.2 1.2
----- ----- ----- -------
Effective tax rate...................................... 61.6% (16.9)% (5.0)% 4.3%
===== ===== ===== =======
</TABLE>
Deferred tax assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
--------------------- JUNE 30,
1997 1998 1999 2000
---- ---- ----- ----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ -- $ -- $ 89 $ 178
Credit carryforwards................................... -- 110 140 206
Accruals and allowances................................ 40 100 101 242
---- ---- ----- -----
40 210 330 626
Less: valuation allowance................................ (40) (210) (330) (626)
---- ---- ----- -----
Net deferred tax assets.................................. $ -- $ -- $ -- $ --
==== ==== ===== =====
</TABLE>
Based upon the weight of available evidence, which included the
historical operating performance and the accumulated deficit, the Company
provided a full valuation allowance against net deferred tax assets.
As of June 30, 2000, the Company had approximately $520,000 of federal
net operating loss carryforwards for tax purposes and $206,000 of federal and
state tax credit carryforwards available to reduce future income taxes. The net
operating loss carryforwards will expire at various dates beginning in 2013
through 2020, if not utilized.
Under current tax rules, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating loss that the Company may
utilize in any year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three-year period.
F-13
<PAGE> 86
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)............................ $ 68 $ (388) $(1,271) $ (732) $(1,734)
======= ======= ======= ======= =======
Denominator
Shares used in computing net income (loss)
per share:
Weighted average of common shares
outstanding............................. 5,400 5,400 6,120 5,632 8,150
Less: Weighted average of shares subject
to repurchase right..................... -- -- -- -- (471)
------- ------- ------- ------- -------
Basic..................................... 5,400 5,400 6,120 5,632 7,679
Add: Effect of dilutive securities,
including options, warrants and
mandatorily redeemable preferred
stock................................... 24,558 -- -- -- --
------- ------- ------- ------- -------
Diluted................................... 29,958 5,400 6,120 5,632 7,679
======= ======= ======= ======= =======
Net income (loss) per share:
Basic........................................ $ 0.01 $ (0.07) $ (0.21) $ (0.13) $ (0.22)
Diluted...................................... $ -- $ (0.07) $ (0.21) $ (0.13) $ (0.22)
======= ======= ======= ======= =======
Anti-dilutive securities, including options,
warrants and mandatorily redeemable
convertible preferred stock, not included in
net loss per share calculation............... -- 25,227 26,088 24,747 28,965
======= ======= ======= ======= =======
Pro forma:
Shares used above............................ 6,120 7,679
Pro forma adjustment to reflect weighted
average effect of the assumed conversion of
mandatorily redeemable convertible preferred
stock........................................ 23,100 25,801
------- -------
Shares used in computing pro forma loss per
share attributable to common and preferred
stockholders:
Basic and diluted......................... 29,220 33,480
======= =======
Pro forma loss per share attributable to common
and preferred stockholders:
Basic and diluted......................... $ (0.04) $ (0.05)
======= =======
</TABLE>
F-14
<PAGE> 87
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following outstanding options and mandatorily redeemable convertible
preferred stock were included/excluded, as applicable, from the computation of
diluted net income (loss per share):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Options to purchase common
stock...................... 1,458,000 2,127,000 2,988,000 1,647,000 2,865,000
Mandatorily redeemable
convertible preferred
stock...................... 23,100,000 23,100,000 23,100,000 23,100,000 26,100,000
---------- ---------- ---------- ---------- ----------
24,558,000 25,227,000 26,088,000 24,747,000 28,965,000
========== ========== ========== ========== ==========
</TABLE>
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 45,000,000 shares of mandatorily
redeemable convertible preferred stock, of which 26,100,000 shares have been
designated as Series A and B. The changes in these shares were as follows (in
thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B TOTAL
----------------- ----------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997............................. 19,950 $3,416 -- $ -- 19,950 $ 3,416
Issuance of preferred stock for cash...................... 3,150 2,699 -- -- 3,150 2,699
------ ------ ----- ------ ------ -------
Balance at December 31, 1998.............................. 23,100 6,115 -- -- 23,100 6,115
Issuance of preferred stock for cash...................... -- -- 2,790 3,720 2,790 3,720
------ ------ ----- ------ ------ -------
Balance at December 31, 1999.............................. 23,100 6,115 2,790 3,720 25,890 9,835
Issuance of preferred stock for cash...................... -- -- 210 280 210 280
------ ------ ----- ------ ------ -------
Balance at June 30, 2000.................................. 23,100 $6,115 3,000 $4,000 26,100 $10,115
====== ====== ===== ====== ====== =======
</TABLE>
The rights, preferences, privileges and restrictions with respect to the
Company's mandatorily redeemable convertible preferred stock ("preferred stock")
are as follows:
CONVERSION
Each issued share of preferred stock shall automatically be converted
into one share of common stock, upon (i) the closing of the Company's sale of
common stock pursuant to a registration statement under the Securities Act of
1933, as amended, pursuant to an underwritten firm commitment public offering;
or (ii) a share-for-share merger or consolidation of the Company into or with
another corporation (other than with a wholly owned subsidiary of the Company),
or any other corporate reorganization in which the Company shall not be the
continuing or the surviving entity of such merger, consolidation or
reorganization.
REDEMPTION
Both Series A and Series B preferred stock are redeemable upon a change
in control or sale of substantially all of the assets of the Company at a
redemption price equal to the liquidation preferences as described below.
DIVIDENDS
Holders of preferred stock are entitled to receive, when and as declared
by the Board of Directors, noncumulative dividends at the same rate and at the
same time as any dividends or other distributions are
F-15
<PAGE> 88
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
declared or paid on shares of common stock. No dividends were declared from
December 13, 1995 (inception) through June 30, 2000.
VOTING
The holders of the Series A preferred stock shall have the right to elect
two directors to the five person Board of Directors, and the remaining directors
shall be elected by the holders of common stock. The holders of Series B
preferred stock shall not be entitled to vote with respect to the election of
directors. The holders of the preferred stock shall have the right to vote with
the common stock, on an as-if-converted basis, on all other matters as provided
under applicable law. The holder of each share of preferred stock shall be
entitled to the number of votes equal to the number of shares of common stock
into which such share of preferred stock could be converted on the record date
for the vote or the consent of stockholders and shall have voting rights and
powers equal to the voting rights and powers of the common stock.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the
corporation, either voluntary or involuntary, the holders of preferred stock
shall be entitled to receive, prior and in preference to any distribution of the
assets or surplus funds of the corporation to the holders of common stock by
reason of their ownership thereof, the amount of $0.13 per share (adjusted to
reflect stock splits, stock dividends and recapitalizations), plus all declared
but unpaid dividends on each share of Series A preferred stock (the "Series A
Liquidation Preference") then held by them and $1.33 per share (adjusted to
reflect stock splits, stock dividends and recapitalizations), plus all declared
but unpaid dividends on each share of Series B preferred stock (the "Series B
Liquidation Preference") then held by them. If, upon the occurrence of such an
event, the assets and funds thus distributed among the holders of the preferred
stock shall be insufficient to permit the payment of such holders of the full
Series A and Series B Liquidation Preference, then the entire assets and funds
of the corporation legally available for distribution shall be distributed
ratably among the holders of the preferred stock in proportion to the
preferential amount each such holder is entitled to receive.
WARRANTS
In connection with the issuance of 3,150,000 shares of Series A preferred
stock at $0.86 per share on January 13, 1998, a stockholder was issued warrants
to purchase 1,200,000 shares of the Company's common stock at a price of $0.03
per share. The stockholder exercised the warrants on May 27, 1999.
The fair value of the warrants was determined to be $577,000 in aggregate
using the Black-Scholes option pricing model.
7. STOCK-BASED COMPENSATION PLAN
1997 STOCK OPTION PLAN
In May 1997, the Company adopted a 1997 Stock Plan under which 4,500,000
shares of common stock were reserved for issuance to eligible employees,
directors and consultants upon exercise of the stock options and stock purchase
rights. In January 2000, an additional 6,000,000 shares were reserved for
issuance. Incentive stock options are granted at a price not less than 100% of
the fair market value of the Company's common stock and at a price of not less
than 110% of the fair market value for grants to any person who owned more than
10% of the voting power of all classes of stock on the date of grant.
Nonstatutory stock options are granted at a price not less than 85% of the fair
market value of the common stock and at a price not less than 110% of the fair
market value for grants to a person who owned
F-16
<PAGE> 89
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
more than 10% of the voting power of all classes of stock on the date of the
grant. Options granted under the 1997 Stock Plan generally vest over four years
and are exercisable in not more than ten years (five years for grants to any
person who owned more than 10% of the voting power of all classes of stock on
the date of the grant).
The following table summarizes option activity:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
AVAILABLE FOR NUMBER OF EXERCISE WEIGHTED
GRANT SHARES PRICE AVERAGE
------------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Adoption of 1997 Stock Plan............... 4,500,000 -- $ -- $ --
Granted................................... (2,247,000) 2,247,000 $ 0.03 $0.03
---------- ----------
Balance at December 31, 1997.............. 2,253,000 2,247,000 $ 0.03 $0.03
Canceled.................................. 21,000 (21,000) $ 0.03 $0.03
---------- ----------
Balance at December 31, 1998.............. 2,274,000 2,226,000 $ 0.03 $0.03
Granted................................... (2,103,000) 2,103,000 $ 0.13 $0.13
Canceled.................................. 1,099,500 (1,099,500) $ 0.03 $0.03
---------- ----------
Balance at December 31, 1999.............. 1,270,500 3,229,500 $0.03 - $0.13 $0.08
Amendment of 1997 Plan.................... 6,000,000 -- $ -- $ --
Granted................................... 3,353,700 3,353,700 $0.13 - $0.67 $0.21
Canceled.................................. 600 (600) $ 0.33 $ --
Exercised................................. -- (3,571,875) $0.03 - $0.33 $0.13
---------- ----------
Balance at June 30, 2000.................. 3,917,400 3,010,725 $0.03 - $0.67 $0.16
========== ==========
</TABLE>
Information relating to stock options outstanding at June 30, 2000 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.03 892,500 6.11 $0.03 825,000 $0.03
$0.13 1,444,125 8.93 $0.13 71,250 $0.13
$0.33 550,350 9.68 $0.33 -- $ --
$0.67 123,750 9.89 $0.67 -- $ --
--------- -------
3,010,725 8.27 $0.16 896,250 $0.04
========= =======
</TABLE>
STOCK-BASED COMPENSATION UNDER APB NO. 25
During the year ended December 31, 1999 and the six months ended June 30,
2000 the Company recorded deferred compensation of $1,302,000 and $5,238,000,
respectively. This deferred compensation represents the difference between the
grant price and the deemed fair value for financial statement reporting purposes
of the Company's common stock options granted during this period. Deferred
compensation expense is being amortized using the graded vesting method, in
accordance with SFAS No. 123 and FASB Interpretation No. 28, over the vesting
period of each respective option, generally four years. Under the graded vesting
method, each option grant is separated into portions based on their vesting
terms which results in acceleration of amortization expense for the overall
award. The accelerated
F-17
<PAGE> 90
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortization pattern results in expensing approximately 52% of the total award
in year one, 27% in year two, 15% in year three and 6% in year four.
SFAS NO. 123 COMPENSATION COSTS TO CONSULTANTS
For the year ended December 31, 1997 and the six months ended June 30,
2000, the Company granted options for the Company's common stock of 120,000
shares, and 240,000 shares, respectively, to consultants and advisors under the
1997 Plan. The aggregate exercise prices amounted to $4,000 and $36,000,
respectively. These options vest over periods of one to four years, and the
Company will be required to record the change in the fair value of these options
at each reporting date prior to vesting and then finally at the vesting date of
the option. Deferred stock-based compensation expense in accordance with SFAS
No. 123 and EITF 96-18 related to these options totaled $115,000 at December 31,
1999 and $656,000 at June 30, 2000. Amortization of these deferred stock-based
compensation expenses amounted to $2,000, $26,000 and $22,000 for the years
ended December 31, 1997, 1998 and 1999 and $12,000 and $213,000 for the six
months ended June 30, 1999 and 2000, respectively.
ALLOCATION OF DEFERRED COMPENSATION EXPENSE
Deferred compensation expense related to options issued to employees and
consultants was allocated among the associated expense categories as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ---------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cost of revenues................................ $ -- $ -- $ 26 $-- $ 108
---- ---- ---- --- ------
Research and development........................ -- -- 63 4 237
Sales and marketing............................. 29 55 77 18 75
General and administrative...................... 105 165 480 40 1,164
---- ---- ---- --- ------
Subtotal -- operating expense 134 220 620 62 1,476
---- ---- ---- --- ------
Total $134 $220 $646 $62 $1,584
==== ==== ==== === ======
</TABLE>
PRO FORMA DISCLOSURE UNDER SFAS NO. 123
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123, which also requires that the information
be determined as if the Company had accounted for its employee stock options
granted under the fair value method. The fair value of these options was
estimated using the Black-Scholes option pricing model.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123
using the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate...................... 5%
Expected life (years)........................ 4
Dividend yield............................... 0%
</TABLE>
As the determination of fair value of all options granted after such time
as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding paragraph, the
above results may not be representative of future periods.
F-18
<PAGE> 91
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average grant date fair value of options granted during the
years ended December 31, 1997, 1998 and 1999 and the six months ended June 30,
2000 was $0.31, $0.31, $0.85 and $1.41, respectively.
Had compensation cost been determined based upon the fair value on the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net income (loss) and pro forma basic and diluted net income
(loss) per share under SFAS No. 123 would have been (in thousands, except per
share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------------
1997 1998 1999 1999 2000
----- ------ ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss):
As reported............................. $ 68 $ (388) $(1,271) $ (732) $(1,734)
Pro forma............................... 59 (413) (1,330) (802) (2,017)
Net income (loss) per share
As reported
Basic................................ $0.01 $(0.07) $ (0.21) $(0.13) $ (0.22)
Diluted.............................. -- (0.07) (0.21) (0.13) (0.22)
Pro forma income (loss) per share
Basic................................ $0.01 $(0.08) $ (0.22) $(0.14) $ (0.26)
Diluted.............................. -- (0.08) (0.22) (0.14) (0.26)
</TABLE>
8. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company limits the amount of deposits to any one
financial institution and financial instrument. The Company invests its excess
cash principally in certificates of deposit and money market accounts with
financial institutions in the U.S.
The Company performs ongoing credit evaluations of its customers'
financial condition, and limits the amount of credit extended when deemed
necessary, but generally does not require collateral.
At December 31, 1998 three customers accounted for 20%, 12% and 12% of
accounts receivable. At December 31, 1999, two customers accounted for 10% and
20% of accounts receivable. At June 30, 2000, two customers accounted for 13%
and 14% of accounts receivable.
For the year ended December 31, 1997 three customers accounted for 24%,
12% and 10% of revenues. For the year ended December 31, 1998 two customers
accounted for 13% and 10% of revenues. For the year ended December 31, 1999, one
customer accounted for 11% of revenues. For the six months ended June 30, 2000
no customer accounted for more than 10% of revenues.
9. GEOGRAPHIC SEGMENT INFORMATION
The Company operates in a single industry segment. This industry segment
is characterized by rapid technological change and significant competition.
Certain components used in manufacturing the products have relatively few
alternative sources of supply and establishing additional or replacement
suppliers for such components cannot be accomplished quickly.
F-19
<PAGE> 92
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's revenues generated and
identifiable assets situated in geographic operations (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ---------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
United States.............................. $5,215 $4,470 $6,724 $2,213 $6,809
Taiwan..................................... 48 436 827 462 605
------ ------ ------ ------ ------
Total...................................... $5,263 $4,906 $7,551 $2,675 $7,414
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999 JUNE 30, 2000
------ ------- -------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
United States....................................... $5,576 $ 9,398 $10,051
Taiwan.............................................. 2,531 2,744 4,432
------ ------- -------
Total............................................... $8,107 $12,142 $14,483
====== ======= =======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company leases certain office space under long-term operating leases
expiring at various dates through December 2005. Total rental expenses under
these operating leases were approximately $214,000 for the six months ended June
30, 2000.
Total future minimum lease payments under operating leases as of June 30,
2000, for the years ending December 31, are summarized below (in thousands):
<TABLE>
<S> <C>
2001................................ $ 987
2002................................ 938
2003................................ 885
2004................................ 904
2005................................ 53
------
Total............................... $3,767
------
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
Series C Financing
In July and August 2000, the Company issued 7,050,000 and 450,000 shares,
respectively, of Series C mandatorily redeemable convertible preferred stock at
a price of $3.67 per share, for aggregate proceeds of $27.5 million. As the
450,000 shares issued in August were sold to employees and related parties and
as the value of the stock in August 2000 was deemed to be $7.84 per share, the
Company recorded general and administrative expenses of $1.9 million related to
the sale of those shares. All of the Series C shares will automatically convert
into 7,500,000 shares of common stock upon the closing of an initial public
offering.
F-20
<PAGE> 93
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Promissory Notes to Exercise Stock Options
In July and August 2000, four officers of the Company exercised stock
options by issuing full recourse promissory notes secured by the common stock
underlying the options. The notes, totaling $1.5 million, bear interest at 6.5%
to 7.0% per year.
Options Granted and Deferred Stock Compensation
During July, August and September 2000, the Company granted options to
purchase 1.8 million shares of common stock to employees with exercise prices
ranging from $1.00 to $4.00. Deferred stock compensation charges associated with
these options amounted to $16,797,000.
Bank Debt
In July 2000, the Company obtained two additional credit facilities with a
bank: a $750,000 equipment loan facility and a $1 million line of credit. A
letter of credit in the amount of $641,000 was applied to the line of credit to
secure a building lease. No other borrowings have been made under these
facilities.
Lease Arrangements for Manufacturing Facilities
In July 2000, the Company entered into a lease for an additional 10,500
square feet of space near the Company's existing facility in Sunnyvale,
California. The term of the lease is 48 months and is secured by a $641,000
letter of credit.
Total future minimum lease payments under this arrangement as of September
30, 2000, for the years ending December 31, are summarized below (in thousands):
<TABLE>
<S> <C>
2000................................ $ 245
2001................................ 597
2002................................ 621
2003................................ 646
2004................................ 385
------
Total............................... $2,494
------
</TABLE>
F-21
<PAGE> 94
[INSIDE BACK COVER]
The diagram depicts the relationship between the various segments of a
communications network, including long-haul (long distance connection between
cities), metropolitan (connections within cities) and last mile access
networks (connections to businesses and homes).
Underneath the diagram are four product photographs. The top left photograph
depicts a coupler module. The bottom left and top right photographs each depict
a filter and the bottom right photograph depicts an attenuator.
Our company name appears beneath the four photographs. Beneath our company name
appears the phrase "THE ART AND SCIENCE OF FIBER OPTICS".
<PAGE> 95
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
6,250,000 SHARES
ALLIANCE FIBER OPTIC PRODUCTS, INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
SG COWEN
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 96
[ALTERNATE PAGE]
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 OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000
PROSPECTUS
6,250,000 SHARES
ALLIANCE FIBER OPTIC PRODUCTS, INC.
COMMON STOCK
----------------------
This is Alliance Fiber Optic Products' initial public offering. Alliance
Fiber Optic Products is selling all of the shares. The international managers
are offering shares outside the U.S. and Canada and the U.S.
underwriters are offering shares in the U.S. and Canada.
We expect the public offering price to be between $ and $
per share. Currently, no public market exists for the shares. After the pricing
of the offering, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "AFOP."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Alliance Fiber Optic
Products.................................................. $ $
</TABLE>
The international managers may also purchase up to an additional
shares at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. The
U.S. underwriters may similarly purchase up to an additional shares.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH INTERNATIONAL
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
SG COWEN
----------------------
The date of this prospectus is , 2000.
<PAGE> 97
[ALTERNATE PAGE]
UNDERWRITING
GENERAL
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, U.S. Bancorp Piper Jaffray Inc., Wit SoundView
Corporation and SG Cowen Securities Corporation, are acting as lead managers for
the international managers named below. Subject to the terms and conditions
described in an international purchase agreement among us and the international
managers, and concurrently with the sale of shares to the U.S.
underwriters, we have agreed to sell to the international managers, and the
international managers severally have agreed to purchase from us, the number of
shares listed opposite its name below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
INTERNATIONAL MANAGERS ---------
<S> <C>
Merrill Lynch International.................................
U.S. Bancorp Piper Jaffray Inc. ............................
Wit SoundView Corporation...................................
SG Securities (HK) Limited..................................
--------
Total..........................................
========
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, U.S. Bancorp Piper Jaffray Inc., Wit
SoundView Corporation and SG Cowen Securities Corporation are acting as U.S.
representatives. Subject to the terms and conditions in the U.S. purchase
agreement, and concurrently with the sale of shares to the
international managers pursuant to the international purchase agreement, we have
agreed to sell to the U.S. underwriters, and the U.S. underwriters severally
have agreed to purchase shares from us. The initial public offering
price per share and the total underwriting discount per share are identical
under the international purchase agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the international managers and
U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus, and to dealers at that price less a
concession not in excess of $ per share. The international managers may
allow, and
63
<PAGE> 98
[ALTERNATE PAGE]
the dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to the
company................................ $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by us.
OVER-ALLOTMENT OPTIONS
We have granted options to the international managers to purchase up to
additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days from
the date of this prospectus solely to cover any over-allotments. If the
international managers exercise these options, each international manager will
be obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares proportionate to that international
manager's initial amount reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to U.S. or Canadian persons,
except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares will
not offer to sell or sell shares to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus for
sale to some of our business associates and related persons. If these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing stockholders
and option holders have agreed, with exceptions, not to sell or transfer any
common stock for 180 days after the date of this
64
<PAGE> 99
[ALTERNATE PAGE]
prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other individuals have agreed not to directly or
indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "AFOP."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
between us and the U.S. representatives and the lead managers. In addition to
prevailing market conditions, the factors to be considered in determining the
initial public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
the underwriters and selling group members from bidding for or purchasing our
common stock. However, the U.S. representatives may
65
<PAGE> 100
[ALTERNATE PAGE]
engage in transactions that stabilize the price of the common stock, such as
bids or purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may make short sales of
the common stock. Short sales involve the sale by the underwriters at the time
of the offering 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 options. The U.S. representatives may close out any
covered short position by either exercising the overallotment options or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the U.S. representatives will consider,
among other things, the price of shares available for purchase in the open
market as compared to the public offering price at which they may purchase the
shares through the over-allotment option. Naked short sales are sales in excess
of the over-allotment option. The U.S. representatives 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 U.S. representatives are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering.
Similar to other purchase transactions, the purchases by the U.S.
representatives to cover syndicate short positions may have the effect of
raising or maintaining the market price of the common stock or preventing or
retarding a decline in the market price of the common stock. As a result, the
price of the common stock may be higher than it would otherwise be in the
absence of these transactions.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the U.S.
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not constitute
an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 as amended by the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1997 or is a person to
whom such document may otherwise lawfully be issued or passed on.
66
<PAGE> 101
[ALTERNATE PAGE]
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price on the cover page of
this prospectus.
67
<PAGE> 102
[ALTERNATE PAGE]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
6,250,000 SHARES
ALLIANCE FIBER OPTIC PRODUCTS, INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH INTERNATIONAL
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
SG COWEN
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be
incurred by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 24,668
National Association of Securities Dealers, Inc. filing
fee....................................................... 9,125
Nasdaq National Market listing fee.......................... 95,000
Blue Sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 275,000
Legal fees and expenses..................................... 550,000
Printing and engraving expenses............................. 220,000
Registrar and Transfer Agent's fees......................... 20,000
Miscellaneous fees and expenses............................. 48,000
----------
Total............................................. $1,250,000
==========
</TABLE>
------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article VIII of the Registrant's
Restated Certificate of Incorporation (Exhibit 3(i).3 hereto) and Article 5 of
the Registrant's Bylaws (Exhibit 3(ii).3 hereto) provide for indemnification of
the Registrant's directors, officers, employees and other agents to the extent
and under the circumstances permitted by the Delaware General Corporation Law.
The Registrant has also entered into agreements with our directors and officers
that will require the Registrant, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors or officers to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, our directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) On various dates between August 1997 and August 2000, the Registrant
issued 5,062,500 shares of its common stock to 17 employees, consultants and
directors pursuant to the exercise of options granted under its 1997 Stock Plan.
The exercise prices per share ranged from $.033 to $1.33, for an aggregate
consideration of $2,008,250. The sales of these securities were considered to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions under
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701.
(b) In January 1998, the Registrant issued 3,150,000 shares of Series A
Preferred Stock at $1.04 per share for aggregate consideration of $3,276,000 and
a warrant to purchase 1,200,000 shares of common stock at a purchase price of
$.03 per share (as adjusted for a 2-for-1 stock split in April 1999 to Transpac
Nominees PTE, Ltd. The warrant was exercised on May 27, 1999 for aggregate
consideration of $40,000.
II-1
<PAGE> 104
The sale of these securities was considered exempt from registration under the
Securities Act in reliance of Section 4(2) of the Securities Act or Regulation D
promulgated thereunder.
(c) In January 2000, the Registrant issued 3,000,000 shares of Series B
Preferred Stock at $1.33 per share for aggregate consideration of $4,000,000 to
nine accredited investors, including our affiliates, CPY California, CPY
International, CPY USA I, CPY USA II and Foxconn Holding Limited. The sale of
these securities was considered exempt from registration under the Securities
Act in reliance of Section 4(2) of the Securities Act or Regulation D
promulgated thereunder.
(d) In July and August 2000, the Registrant issued 7,500,000 shares of
Series C Preferred Stock at $3.67 per share for aggregate consideration of
$27,500,000 to 28 accredited investors, including certain of our directors and
executive officers. The sale of these securities was considered exempt from
registration under the Securities Act in reliance of Section 4(2) of the
Securities Act or Regulation D promulgated thereunder.
The recipients of the securities in each of these transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in these
transactions. All recipients had adequate access, through relationships with the
registrant, to information about the registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1 Form of U.S. Purchase Agreement.
1.2* Form of International Purchase Agreement.
3(i).1** Amended and Restated Articles of Incorporation of the
Registrant.
3(i).2 Amended and Restated Certificate of Incorporation of the
Registrant, to be filed following our reincorporation under
Delaware law.
3(i).3** Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be filed upon the Closing of the offering
to which this Registration Statement relates.
3(ii).1** Amended and Restated Bylaws of the Registrant.
3(ii).2 Restated Bylaws of the Registrant to be effective following
our reincorporation under Delaware law.
3(ii).3** Restated Bylaws of the Registrant to be effective upon the
closing of the offering to which this Registration relates.
4.1 Specimen Common Stock Certificate.
4.2** Amended and Restated Rights Agreement dated as of August 31,
2000.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.1** 1997 Stock Plan and form of agreements thereunder.
10.2** Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.3** Lease Agreement dated April 6, 1999 by and between North
Pastoria Partners and the Registrant.
10.4** Lease dated June 26, 2000 by and between Renault & Handley
Employees Investment Co. and the Registrant.
10.5* Alliance Fiber Optic Products, Inc. 2000 Stock Incentive
Plan.
10.6 Alliance Fiber Optic Products, Inc. 2000 Employee Stock
Purchase Plan.
10.7 Alliance Fiber Optics Product, Inc. 1997 Stock Plan Stock
Option Agreement dated May 2, 2000 between Peter C. Chang
and the Registrant.
10.8 Alliance Fiber Optics Product, Inc. 1997 Stock Plan Stock
Option Agreement dated June 15, 2000 between R. David
Dicioccio and the Registrant.
10.9 Form of Full Recourse Promissory Note.
</TABLE>
II-2
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
21.1** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1).
24.1** Power of Attorney (see page II-4).
27.1** Financial Data Schedule.
</TABLE>
------------
* To be filed by amendment
** Previously filed.
(b) Financial Statement Schedules
Schedules other than those referred to above have been omitted because
they are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s)
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.
II-3
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sunnyvale, State of California, on the 11th day of October, 2000.
ALLIANCE FIBER OPTIC PRODUCTS, INC.
By /s/ PETER C. CHANG
--------------------------------------
Peter C. Chang
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ PETER C. CHANG President and Chief Executive October 11, 2000
------------------------------------------ Officer (Principal Executive
Peter C. Chang Officer) and Chairman
/s/ JOHN M. HARLAND* Chief Financial Officer October 11, 2000
------------------------------------------ (Principal Financial and
John M. Harland Accounting Officer)
/s/ R. DAVID DICIOCCIO* Director October 11, 2000
------------------------------------------
R. David Dicioccio
/s/ PETER MORRIS* Director October 11, 2000
------------------------------------------
Peter Morris
/s/ MICHAEL TUNG* Director October 11, 2000
------------------------------------------
Michael Tung
/s/ JAMES YEH* Director October 11, 2000
------------------------------------------
James Yeh
*By: /s/ PETER C. CHANG
-----------------------------------------------------
Peter C. Chang
Attorney-in-fact
</TABLE>
II-4
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1 Form of U.S. Purchase Agreement.
1.2* Form of International Purchase Agreement.
3(i).1** Amended and Restated Articles of Incorporation of the
Registrant.
3(i).2 Amended and Restated Certificate of Incorporation of the
Registrant, to be filed following our reincorporation under
Delaware law.
3(i).3** Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be filed upon the Closing of the offering
to which this Registration Statement relates.
3(ii).1** Amended and Restated Bylaws of the Registrant.
3(ii).2 Restated Bylaws of the Registrant to be effective following
our reincorporation under Delaware law.
3(ii).3** Restated Bylaws of the Registrant to be effective upon the
closing of the offering to which this Registration relates.
4.1 Specimen Common Stock Certificate.
4.2** Amended and Restated Rights Agreement dated as of August 31,
2000.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.1** 1997 Stock Plan and form of agreements thereunder.
10.2** Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.3** Lease Agreement dated April 6, 1999 by and between North
Pastoria Partners and the Registrant.
10.4** Lease dated June 26, 2000 by and between Renault & Handley
Employees Investment Co. and the Registrant.
10.5* Alliance Fiber Optic Products, Inc. 2000 Stock Incentive
Plan.
10.6 Alliance Fiber Optic Products, Inc. 2000 Employee Stock
Purchase Plan.
10.7 Alliance Fiber Optics Product, Inc. 1997 Stock Plan Stock
Option Agreement dated May 2, 2000 between Peter C. Chang
and the Registrant.
10.8 Alliance Fiber Optics Product, Inc. 1997 Stock Plan Stock
Option Agreement dated June 15, 2000 between R. David
Dicioccio and the Registrant.
10.9 Form of Full Recourse Promissory Note.
21.1** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1).
24.1** Power of Attorney (see page II-4).
27.1** Financial Data Schedule.
</TABLE>
------------
* To be filed by amendment
** Previously filed
