<PAGE>
As filed with the Securities and Exchange Commission on October 16, 2000
Registration No. 333-44862
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
OPTICAL COMMUNICATION PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 3674 95-4344224
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
--------------
20961 Knapp Street
Chatsworth, California 91311
(818) 701-0164
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
--------------
Muoi Van Tran
Chief Executive Officer
OPTICAL COMMUNICATION PRODUCTS, INC.
20961 Knapp Street
Chatsworth, California 91311
(818) 701-0164
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Kenneth R. Bender, Esq. Brian C. Erb, Esq.
Allen Z. Sussman, Esq. Richard L. Woodworth, Esq.
Susan B. Kalman, Esq. David A. King, Esq.
Michael W. Chou, Esq. Julie H. Huang, Esq.
Brobeck, Phleger & Harrison LLP Wilson Sonsini Goodrich & Rosati
550 South Hope Street Professional Corporation
Los Angeles, California 90071 650 Page Mill Road
(213) 489-4060 Palo Alto, California 94304
(650) 493-9300
</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. [_]
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS Subject to completion
October 16, 2000
--------------------------------------------------------------------------------
10,500,000 Shares
[LOGO OF OPTICAL COMMUNICATION PRODUCTS, INC.]
Optical Communication Products, Inc.
Class A Common Stock
--------------------------------------------------------------------------------
We are selling 10,500,000 shares of our Class A common stock. This is our
initial public offering of shares of our Class A common stock. No public market
currently exists for any shares of our capital stock. We currently estimate
that the initial public offering price of our Class A common stock will be
between $10.00 and $12.00 per share.
We have two classes of authorized common stock, Class A common stock and Class
B common stock. All of our Class B common stock is beneficially owned by The
Furukawa Electric Company, Ltd. of Japan, and we are controlled by Furukawa.
Holders of our Class A common stock are entitled to one vote per share while
holders of our Class B common stock are entitled to ten votes per share on
matters submitted to a vote of our stockholders.
We have applied to have our Class A common stock listed for quotation on the
Nasdaq National Market under the symbol "OCPI."
Before buying any shares you should read the discussion of material risks of
investing in our Class A common stock in "Risk factors" beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
-------------------------------------------------------
<S> <C> <C>
Public offering price $ $
-------------------------------------------------------
Underwriting discounts and commissions $ $
-------------------------------------------------------
Proceeds, before expenses, to us $ $
-------------------------------------------------------
</TABLE>
The underwriters may also purchase up to 1,575,000 shares of our Class A common
stock from us at the public offering price, less underwriting discounts and
commissions, within 30 days from the date of this prospectus. The underwriters
may exercise this option to only cover over-allotments, if any.
The underwriters are offering our Class A common stock on a firm commitment
basis as described under "Underwriting." Delivery of the shares will be made on
or about , 2000.
UBS Warburg LLC J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
Wit SoundView
The date of this prospectus is , 2000
<PAGE>
[Description of Artwork]
Inside Front Cover
The page depicts a view of several skyscrapers looking from street level up
toward the sky. The phrase "Fiber Optic Modules for Metropolitan Area and
High-Speed Premises Networks" appears at the top of the page. Superimposed on
the center of this page are five photographs of the Company's products in a
semi-circular layout. From the left heading in a counter clockwise direction
the products are: transmitters, receivers, transmitters, transponders and
receivers. The Company's logo appears at the bottom of the page.
Inside Front Gatefold
The inside gatefold is a two page night-time photograph of a downtown skyline
of a large metropolitan city. Across the top of the page is the phrase
"Lighting up metropolitan area and high-premises networks." The Company's logo
appears at the top left corner of the gatefold. Superimposed on the bottom of
the double page are four photographs of the Company's products. The pictures of
the products moving from left to right of the gatefold are: Picture of a
transceiver with the phrase "Premises" appearing above and the phrase "Compact
Transceivers" appearing below.
Picture of a transmitter and receiver with the phrase "Metro Access" appearing
above and the phrase "High-Speed OC-48 Transmitters and Receivers" appearing
below.
Picture of a transmitter and receiver with the phrase "DWDM Transmitters and
Receivers" appearing below.
Picture of a transponder with the phrase "High-Speed OC-48 Transponders"
appearing below.
The phrase "Metro Core" appears above and between the last two products.
<PAGE>
-------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
selling shares of our Class A common stock, whether or not participating in
this offering, may need to deliver a prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary................... 1
The offering......................... 3
Summary financial data............... 5
Risk factors......................... 6
Forward-looking information.......... 21
Use of proceeds...................... 21
Dividend policy...................... 22
Capitalization....................... 23
Dilution............................. 24
Selected financial data.............. 25
Management's discussion and analysis
of financial condition and results
of operations....................... 26
</TABLE>
<TABLE>
<S> <C>
Business............................. 36
Management........................... 56
Related party transactions........... 69
Principal stockholders............... 70
Description of capital stock......... 72
Shares eligible for future sale...... 76
Underwriting......................... 78
Legal matters........................ 81
Experts.............................. 81
Where you can find more information.. 81
Index to financial statements........ F-1
</TABLE>
We have registered the trademark "OCP" in the United States. This prospectus
also refers to trade names and trademarks of other organizations.
-------------------------------------------------------------------------------
<PAGE>
Prospectus Summary
This summary highlights the information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our Class A common stock discussed under "Risk factors."
OUR BUSINESS
We design, manufacture and sell a comprehensive line of high performance,
highly reliable fiber optic subsystems and modules for metropolitan area
networks and high-speed premises networks. Subsystems and modules are
preassembled components that are used to build network equipment. Our
subsystems and modules include optical transmitters, receivers, transceivers
and transponders that convert electronic signals into optical signals and back
to electronic signals, enabling high-speed communication of voice and data
traffic over public and private fiber optic networks. We target metropolitan
area and high-speed premises networks, where we believe our products offer
superior price and performance characteristics. Metropolitan area networks are
communication networks in cities and urban areas that connect telephone
exchanges, Internet service providers, businesses and consumers. High-speed
premises networks are communication networks that connect buildings within a
business or campus setting. We have established a track record of delivering a
comprehensive line of high performance, cost-effective fiber optic subsystems
and modules to our customers supported by volume production capabilities. Our
revenue was $36.0 million for fiscal year 1999 and $69.1 million for the nine
months ended June 30, 2000. Our top 10 customers in terms of revenue, including
sales to their contract manufacturers, consisted of the following communication
original equipment manufacturers and networking equipment manufacturers: 3Com,
ADC Telecommunications, Alcatel, CIENA, Chromatis Networks, Cisco Systems, ECI
Telecom, Lucent Technologies, Marconi Communications and Nortel Networks.
According to Ryan, Hankin & Kent, a leading market research and consulting
firm, Internet traffic capacity in North America is estimated to grow at an
average annual rate of 160% between 2000 and 2003. To accommodate the expected
increase in demand for network bandwidth, communication service providers are
increasingly replacing copper cable-based transmission technology with fiber
optic transmission technology. To date, fiber optic transmission technology is
primarily used in long-haul networks. Long-haul networks connect the
communication networks of metropolitan areas around the world and facilitate
transport of voice and data traffic over long distances, up to thousands of
miles. As voice and data traffic in the metropolitan area and high-speed
premises networks increases, fiber optic technology is increasingly being
deployed in these networks to address growing network congestion. The challenge
faced by providers of subsystems and modules for network systems in the
metropolitan area and high-speed premises markets is to combine the high
performance requirements of the long-haul networks, such as high data-rate
transmissions over long distances, with cost-effective solutions that operate
reliably in harsh outdoor conditions.
We believe that we are in a strong position to take advantage of the developing
metropolitan area and high-speed premises network markets. Ryan, Hankin & Kent
estimates that the market for fiber optic components, which includes components
for the long-haul, metropolitan area and local area network markets, was
approximately $6.6 billion in 1999 and will grow to $22.5 billion in 2003.
Since our inception in 1991, we have devoted resources to developing the design
and production expertise needed to supply the metropolitan area and high-speed
premises network markets and have developed a comprehensive line of products to
address the challenge of these markets. Our products support a wide range of
network applications, transmission speeds, distances and standards. Our
innovative design capabilities enable us to produce optical
1
<PAGE>
subsystems and modules that have the performance, reliability, ruggedness and
cost-effectiveness needed by our customers.
We provide a broad range of solutions that allow our customers to shorten their
design cycle time and bring new products to market more rapidly. By working
closely with our customers, we are able to anticipate the future needs of the
metropolitan area and high-speed premises markets. As an example, we are
developing products that use advanced technologies such as wavelength division
multiplexing, which allows multiple signals to be sent along the same optical
fiber by using different colors of light for each signal, and 10 Gigabit per
second networking, the latest Ethernet standard for high-speed networking. We
believe that we have a competitive advantage over companies that target the
long-haul market, who may not be able to match our cost effectiveness in the
metropolitan area and high-speed premises markets, and whose products are not
specifically designed for these markets, and companies in the local area
network market, whose products may not be able to achieve our performance over
longer distances. Our goal is to become the global leader in the design,
development and manufacture of subsystems and modules for optical network
equipment for metropolitan area and high-speed premises networks.
OUR RELATIONSHIP WITH FURUKAWA
In connection with our formation in 1991, The Furukawa Electric Company, Ltd.
of Japan provided our initial capital investment through a wholly-owned
subsidiary. Furukawa currently beneficially owns 70.3% of our capital stock.
Upon completion of this offering, Furukawa will own all of our outstanding
Class B common stock, which will represent 63.2% of our outstanding shares and
94.5% of the combined voting power of all of our outstanding stock. In the
past, we have purchased substantially all of our requirements for lasers and
the majority of our requirements for other optical components from Furukawa,
and we expect to purchase a majority of these components from Furukawa in the
foreseeable future.
COMPANY INFORMATION
Our principal executive offices are located at 20961 Knapp Street, Chatsworth,
California 91311. Our telephone number is (818) 701-0164. Our Web site is
http://www.ocp-inc.com. The information found on our web site is not a part of
this prospectus.
2
<PAGE>
The offering
The following information assumes that the underwriters do not exercise the
over-allotment option we granted to them to purchase additional shares in the
offering.
<TABLE>
<S> <C>
Class A common stock we are
offering................. 10,500,000 shares
Common stock to be
outstanding after the
offering:
Class A common stock
(one vote per share)... 38,371,440 shares
Class B common stock
(ten votes per
share)................. 66,000,000 shares
Total................. 104,371,440 shares
Proposed Nasdaq National
Market symbol............ OCPI
Use of proceeds............ For general corporate purposes, including
expansion of our manufacturing capacity, expansion
of our research and development operations,
expansion of our sales and marketing activities,
expansion of our international operations and
possible acquisitions. See "Use of proceeds."
</TABLE>
The number of shares of our common stock to be outstanding after this offering
is based upon 27,871,440 shares of our Class A common stock outstanding as of
September 30, 2000, assumes the conversion of our preferred stock into
66,000,000 shares of Class B common stock as of that date and gives effect to
our issuance of 10,500,000 shares of Class A common stock being sold by us in
this offering, and excludes:
.1,575,000 shares issuable upon exercise of the underwriters' over-allotment
option;
.2,520,000 shares issuable upon exercise of options outstanding as of September
30, 2000, at a weighted average exercise price of $0.53 per share under our
1992 Stock Option Plan and our 2000 Stock Option/Stock Issuance Plan;
.9,670,360 shares issuable upon exercise of options outstanding as of September
30, 2000, at a weighted average exercise price of $3.76 per share issued to
our founders outside of our stock option plans;
.9,601,680 additional shares available for future grant as of September 30,
2000 under our 2000 Stock Incentive Plan, which amount includes 3,601,680
shares and 1,000,000 shares available for future grant as of September 30,
2000 under our 1992 Stock Option Plan and our 2000 Stock Option/Stock Issuance
Plan, respectively; and
.300,000 additional shares available for future issuance as of September 30,
2000 under our 2000 Employee Stock Purchase Plan.
Our 2000 Stock Option/Stock Issuance Plan and our 1992 Stock Option Plan will
be succeeded by our 2000 Stock Incentive Plan upon the completion of this
offering. For a description of our various stock option and employee stock
purchase plans, please see "Management--Stock plans/employee benefit programs."
3
<PAGE>
Unless otherwise indicated, all information in this prospectus assumes that:
.the initial public offering price will be $11.00 per share;
.we will reincorporate in the State of Delaware and make related changes in our
charter documents prior to the completion of this offering;
.all of our outstanding preferred stock will be converted into an aggregate of
66,000,000 shares of our Class B common stock prior to the completion of this
offering; and
.the underwriters will not exercise their over-allotment option to purchase up
to 1,575,000 additional shares of our Class A common stock.
4
<PAGE>
Summary financial data
Our summary financial data is presented in the following table to aid you in
your analysis of a potential investment in our Class A common stock. You should
read this data in conjunction with "Management's discussion and analysis of
financial condition and results of operations," our financial statements and
the notes to those financial statements appearing elsewhere in this prospectus.
The pro forma data gives effect to the conversion of our preferred stock into
Class B common stock and our common stock into Class A common stock.
<TABLE>
<CAPTION>
Nine months
Fiscal years ended September 30 ended June 30
------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
Income statement data (In thousands, except per share data)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $5,488 $6,747 $10,126 $19,620 $36,036 $23,325 $69,061
Cost of revenue......... 3,085 3,726 5,797 11,086 20,860 13,991 34,584
------ ------ ------- ------- ------- ------- -------
Gross profit............ 2,403 3,021 4,329 8,534 15,176 9,334 34,477
Total operating
expenses.............. 1,315 1,562 1,397 2,490 3,563 2,403 6,418
------ ------ ------- ------- ------- ------- -------
Income from operations.. 1,088 1,459 2,932 6,044 11,613 6,931 28,059
Other income (expenses),
net................... 58 60 62 119 116 122 137
------ ------ ------- ------- ------- ------- -------
Income before income
taxes................. 1,146 1,519 2,994 6,163 11,729 7,053 28,196
Income taxes............ 503 529 1,205 2,492 4,693 2,901 11,490
------ ------ ------- ------- ------- ------- -------
Net income.............. $ 643 $ 990 $ 1,789 $ 3,671 $ 7,036 $ 4,152 $16,706
====== ====== ======= ======= ======= ======= =======
Earnings per share:
Basic................. $ 0.02 $ 0.04 $ 0.06 $ 0.13 $ 0.26 $ 0.15 $ 0.61
Diluted............... $ 0.01 $ 0.03 $ 0.02 $ 0.04 $ 0.07 $ 0.04 $ 0.16
Pro forma basic....... $ 0.08 $ 0.18
Pro forma diluted..... $ 0.07 $ 0.16
Shares outstanding:
Basic................. 27,221 27,247 27,321 27,321 27,348 27,330 27,439
Diluted............... 99,586 99,788 99,842 100,494 101,132 101,140 103,302
Pro forma basic....... 93,348 93,439
Pro forma diluted..... 101,132 103,302
</TABLE>
<TABLE>
<CAPTION>
Pro forma
Actual Pro forma as adjusted (1)
Balance sheet data (In thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 2,801 $ 2,801 $109,216
Working capital............................... 26,829 26,829 133,244
Total assets.................................. 49,831 49,831 156,246
Long-term portion of debt..................... 2,414 2,414 2,414
Total stockholders' equity.................... 31,899 31,899 138,314
</TABLE>
-------
(1) Adjusted to reflect the sale of 10,500,000 shares of Class A common stock
in this offering, at an assumed public offering price of $11.00 per share
after deducting the estimated underwriting discount and offering expenses,
and our receipt of the net proceeds. See "Use of proceeds" and
"Capitalization."
5
<PAGE>
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Risk factors
You should carefully consider the risks described below together with all of
the other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our Class A common stock could
decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We derive a significant portion of our total revenue from a few significant
customers, and our total revenue may decline significantly if any of these
customers cancels, reduces or delays purchases of our products or extracts
price concessions from us.
Our success depends on our continued ability to develop and maintain
relationships with a limited number of significant customers. We sell our
products into markets dominated by a relatively small number of systems
manufacturers, a fact that limits the number of our potential customers. Our
dependence on orders from a relatively small number of customers makes our
relationship with each customer critical to our business.
For the nine months ended June 30, 2000, our 10 largest customers accounted
for approximately 79.9% of our total revenue, with Cisco Systems and Alcatel
(including sales to their contract manufacturers) accounting for approximately
36.6% and 13.4% of our total revenue, respectively. For the fiscal year ended
September 30, 1999, our 10 largest customers accounted for approximately 69.8%
of our total revenue, with Cisco Systems, Alcatel and 3Com accounting for
approximately 21.6%, 9.6% and 10.4% of our total revenue, respectively. The
percentage of revenue attributable to Cisco Systems during this period also
includes our revenue from two companies, Cerent and Monterey Networks, that
were acquired by Cisco Systems in August 1999. No other customer accounted for
more than 10.0% of our total revenue during the fiscal year ended September
30, 1999. We expect our dependence on revenue from a small number of customers
to continue. We cannot assure you that we will be able to retain our
significant customers or that we will be able to attract additional customers.
See "Business -- Customers."
We do not have long-term sales contracts with our customers. Instead, sales to
our customers are made on the basis of individual purchase orders that our
customers may cancel or defer on short notice without significant penalty. In
the past, some of our major customers canceled, delayed or significantly
accelerated orders in response to changes in the manufacturing schedules for
their systems, and they are likely to do so in the future. Some of our
customers conduct their business by placing orders for comparable products
with more than one supplier and canceling all remaining orders once they have
received sufficient deliveries for their planned production. The reduction,
cancellation or delay of individual customer purchase orders would cause our
revenue to decline. Moreover, these uncertainties complicate our ability to
accurately plan our manufacturing schedule. Additionally, if any of our
customers cancel or defer orders, our operating expenses may increase as a
percentage of revenue.
In the past, our customers have sought price concessions from us, and they are
likely to continue to do so in the future. In addition, some of our customers
may shift their purchases of products from us to our competitors. The loss of
one or more of our significant customers, our inability to successfully
develop relationships with additional customers or future price concessions
could cause our revenue to decline significantly.
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6
<PAGE>
Risk factors
-------------------------------------------------------------------------------
We are dependent on a limited number of suppliers for most of our key
components. If these suppliers are unable to meet our manufacturing
requirements, we may experience production delays leading to delays in
shipments, increased costs and cancellation of orders for our products.
We purchase several key components that we incorporate into our products from
a limited number of suppliers. We also purchase substantially all of our
lasers and a majority of our other optical devices from Furukawa. We do not
have long-term supply contracts with any of our key suppliers. Our dependence
on a small number of suppliers and our lack of long-term supply contracts
exposes us to several risks, including our potential inability to obtain an
adequate supply of quality components, price increases and late deliveries. We
have experienced shortages and delays in obtaining key components in the past
and expect to experience shortages and delays in the future.
Industry capacity is constrained and some of our component suppliers have
placed limits on the number of components they will sell to us. We do not have
any control over these limits, and our suppliers may choose to allocate more
of their production to our competitors. In addition, our suppliers could
discontinue the manufacture or supply of these components at any time.
A disruption in, or termination of, our supply relationship with Furukawa or
any of our other key suppliers, or our inability to develop relationships with
new suppliers would interrupt and delay the manufacturing of our products
which could result in delays in our sales or the cancellation of orders for
our products. We may not be able to identify and integrate alternative
suppliers in a timely fashion, or at all. Any transition to alternative
suppliers would likely result in delays in shipment, quality control issues
and increased expenses, any of which would limit our ability to deliver
products to our customers. Furthermore, if we are unable to identify an
alternative source of supply, we may have to redesign or modify our products,
which would cause delays in shipments, increase design and manufacturing costs
and require us to increase the prices of our products.
Our future operating results are likely to fluctuate from quarter to quarter,
and if we fail to meet the expectations of securities analysts or investors,
our stock price could decline significantly.
Our historical quarterly operating results have varied significantly, and our
future quarterly operating results are likely to continue to vary
significantly from period to period. As a result, we believe that period-to-
period comparisons of our operating results should not be relied upon as an
indicator of our future performance. Some of the factors which could cause our
operating results to vary include:
.fluctuations in demand for, and sales of, our products, which is dependent on
the implementation of fiber optic networks;
.the timing of customer orders, particularly from our significant customers;
.competitive factors, including introductions of new products, product
enhancements and the introduction of new technologies by our competitors, the
entry of new competitors into the fiber optic subsystems and modules market
and pricing pressures;
.our ability to control expenses;
.the mix of our products sold;
.economic conditions specific to the communications and related industries.
-------------------------------------------------------------------------------
7
<PAGE>
Risk factors
-------------------------------------------------------------------------------
We incur expenses from time to time that may not generate revenue until
subsequent quarters. In addition, in connection with new product
introductions, we incur research and development expenses and sales and
marketing expenses that are not matched with revenue until a subsequent
quarter when the new product is introduced. We cannot assure you that our
expenditures on manufacturing capacity will generate increased revenue in
subsequent quarters. If growth in our revenue does not outpace the increase in
our expenses, our quarterly operating results may fall below expectations and
cause our stock price to decline significantly.
Due to these and other factors, we believe that our quarterly operating
results are not an indicator of our future performance. If our operating
results are below the expectations of public market analysts or investors in
future quarters, the trading price of our Class A common stock would be likely
to decrease significantly.
If we do not develop and introduce new products with higher average selling
prices in a timely manner, the overall average selling prices of our products
will decrease.
The market for fiber optic subsystems and modules is characterized by
declining average selling prices for existing products due to increased
competition, the introduction of new products, product obsolescence and
increased unit volumes as manufacturers continue to deploy new network
equipment. We have in the past experienced, and in the future may experience,
period-to-period fluctuations in operating results due to declines in our
overall average selling prices. We anticipate that the selling prices for our
existing products will decrease in the future in response to product
introductions by competitors or us, or other factors, including pressure from
significant customers for price concessions. Therefore, we must continue to
develop and introduce new products that can be sold at higher prices on a
timely basis to maintain our overall average selling prices. Failure to do so
could cause our revenue and gross margins to decline.
We must expand our manufacturing capacity and manufacturing processes in order
to continue to deliver our products to our customers in a timely manner and to
support our revenue growth.
All of our manufacturing operations are conducted at our Chatsworth,
California headquarters. In order to meet increasing customer demand for our
products, we must expand our manufacturing capacity. In this regard, we plan
to expand our manufacturing capacity at our Chatsworth, California facility.
In addition, we expect that we will fully utilize our current manufacturing
capacity and will need to purchase or lease additional manufacturing space by
the end of 2001. The expansion of our manufacturing capacity at different
facilities will be expensive and will require management's time. We have
declined to accept, and we have lost orders in the past, and we may decline or
lose orders in the future if we do not have access to sufficient manufacturing
capacity. We intend to hire, train and manage significant numbers of
additional manufacturing personnel in order to increase our manufacturing
capacity. There are numerous risks associated with rapidly increasing
manufacturing capacity, including:
.our inability to procure and install the necessary manufacturing equipment;
.a lack of qualified manufacturing personnel;
.difficulties achieving adequate yields from new manufacturing lines;
.our inability to match future order volumes with capacity; and
.difficulties associated with managing and coordinating disparate geographic
manufacturing facilities, which may arise in the future.
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8
<PAGE>
Risk factors
-------------------------------------------------------------------------------
Communication service providers and fiber optic 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
sufficient quantities of our products to satisfy a customer's anticipated
needs, we may lose the opportunity to fulfill a particular customer order and
the opportunity for significant future sales to that customer. In addition, we
will be unable to pursue many large orders if we do not have sufficient
manufacturing capacity to enable us to commit to provide customers with
specified quantities of products.
If we are unable to expand our manufacturing capacity in a timely manner or if
we do not accurately project demand, we will have excess capacity or
insufficient capacity, either of which will negatively impact our ability to
meet our financial targets. In addition, if adequate sales do not materialize
after we expand our manufacturing capacity, our long-term operating results
will be negatively impacted.
If our customers do not approve our manufacturing process and qualify our
products, we will lose significant customer sales and opportunities.
Customers generally will not purchase any of our products before they qualify
them and approve our manufacturing process and quality control system. Our
customers may require us to register under international quality standards,
such as ISO 9002. Delays in product qualification or loss of ISO 9002
certification may cause a product to be dropped from a long-term supply
program and result in a significant lost revenue opportunity. If particular
customers do not approve of our manufacturing process, we will lose the sales
opportunities with those customers.
If we fail to predict our manufacturing requirements accurately, we could
incur additional costs or experience manufacturing delays, which could cause
us to lose orders or customers.
We currently use historical data, a backlog of orders and estimates of future
requirements to determine our demand for components and materials. We must
accurately predict both the demand for our products and the lead time required
to obtain the necessary components and materials. Lead times for components
and materials vary significantly, depending on factors such as the specific
supplier, the size of the order, contract terms and demand for each component
at a given time. We generally maintain excess inventory of parts which
increases our inventory carrying costs. However, if we were to underestimate
our purchasing requirements, manufacturing could be interrupted, resulting in
delays in shipments.
Our markets are highly competitive, and our customers may choose to purchase
our competitors' products rather than our products or develop internal
capabilities to produce their own fiber optic subsystems and modules.
The market for fiber optic subsystems and modules is highly competitive and we
expect competition to intensify in the future. Our primary competitors include
Agilent Technologies, ExceLight Communications, Finisar, Infineon
Technologies, IBM, Lucent Technologies, Luminent, Molex, Stratos Lightwave and
Tyco International. We also face indirect competition from public and private
companies providing products that address the same fiber optic network
problems that our products address. The development of alternative solutions
to fiber optic transmission problems by our competitors, particularly systems
companies that also manufacture modules, such as Alcatel, Fujitsu, Lucent
Technologies and Nortel Networks, could significantly limit our growth and
harm our competitive position.
Many of our current competitors and potential competitors have longer
operating histories and significantly greater financial, technical, sales and
marketing resources than we do. As a result, these competitors are able to
devote greater resources to the development, promotion, sale and support of
their products. In addition, our competitors that have large market
capitalizations or cash reserves are in a much better position to acquire
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other companies in order to gain new technologies or products that may
displace our products. Any of these potential acquisitions could give our
competitors a strategic advantage. In addition, many of our competitors have
much greater brand name recognition, more extensive customer bases, more
developed distribution channels and broader product offerings than we do.
These companies can use their broader customer bases and product offerings and
adopt aggressive pricing policies to gain market share.
Existing and potential customers, especially in Japan and other international
markets, are also potential competitors. These customers have the internal
capabilities to integrate their operations by producing their own optical
subsystems and modules or by acquiring our competitors or the rights to
produce competitive products or technologies, which may allow them to reduce
their purchases or cease purchasing from us.
We expect our competitors to introduce new and improved products with lower
prices, and we will need to do the same to remain competitive. We may not be
able to compete successfully against either current or future competitors with
respect to new products. We believe that competitive pressures may result in
price reductions, reduced margins and our loss of market share. See
"Business -- Competition."
Our continued success in generating revenue depends on the growth of fiber
optic metropolitan area networks and high-speed premises networks.
Our fiber optic subsystems and modules are used primarily in metropolitan area
networks and high-speed premises networks. These markets are rapidly evolving,
and it is difficult to predict their potential size or future growth rate. In
addition, we are uncertain as to the extent to which fiber optic technologies
will be used in these markets. Our success in generating revenue will depend
on the growth of these markets and their adoption of fiber optic technologies.
If these markets grow more slowly than we expect, or if the use of fiber optic
technologies in these markets does not expand, our growth would not likely
continue, and our ability to execute our business plan would be impaired.
If we are unable to obtain test equipment or replacement parts when we require
them, we may not be able to fill our customers" orders.
Our operations are highly dependent upon our ability to obtain test equipment
and related replacement parts from a limited number of suppliers. The market
for our test equipment is characterized by periods of intense demand, limited
supply and long delivery cycles. We do not have binding supply agreements with
our test equipment suppliers, but rather acquire our test equipment on a
purchase order basis, which exposes us to substantial risks of being unable to
obtain test equipment when it is needed and at reasonable prices. We have in
the past, and we may in the future, experience delays in obtaining test
equipment which will delay our ability to manufacture our products. If we are
unable to obtain required test equipment or replacement parts in a timely
manner, or if the installation of this equipment or parts is disrupted, we may
be unable to fill our customers' orders.
Our sales cycle runs from our customers' initial design to production for
commercial sale. This cycle is long and unpredictable and may cause our
revenue and operating results to vary from our forecasts.
The period of time between our initial contact with a customer and the receipt
of a purchase order from that customer may span to more than a year and varies
by product and customer. During this time, customers may perform, or require
us to perform, extensive evaluation and qualification testing of our products.
Generally, they consider a wide range of issues before purchasing our
products, including interoperation with other subsystems and components,
product performance and reliability. We may incur substantial sales and
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marketing expenses and expend significant management effort while potential
customers are qualifying our products. Even after incurring these costs, we
ultimately may not sell any or only small amounts of our products to a
potential customer. If sales forecasts to specific customers are not realized,
our revenue and results of operations may be negatively impacted.
If we do not achieve acceptable manufacturing yields in a cost-effective
manner, or we are required to develop new manufacturing processes to improve
our yields, our operating results would be impaired.
The manufacture of our products involves complex and precise processes. As a
result, it may be difficult to cost-effectively meet our production goals. In
addition, changes in our manufacturing processes or those of our suppliers, or
our suppliers' inadvertent use of defective materials, could significantly
reduce our manufacturing yields, increase our costs and reduce our product
shipments. To increase our gross margin, while offering products at prices
acceptable to customers, we will need to develop new manufacturing processes
and techniques that will involve higher levels of automation.
If we are unsuccessful in defending against Methode's lawsuit for patent
infringement, we may be required to pay significant monetary damages to
Methode and may be enjoined from manufacturing and selling some of our
products.
In October 1999, Methode Electronics, Inc. filed a lawsuit against Infineon
Technologies Corporation and us in the U.S. District Court for the Northern
District of California seeking unspecified damages, including monetary
damages, injunctive relief, attorneys' fees and costs arising from our alleged
infringement of five patents assigned to Methode. Two of the patents are
alleged to relate to the technology incorporated in our 1x9 pin configuration
products, such as our singlemode SONET/SDH transceiver products. The remaining
three patents are alleged to relate to technology incorporated in our gigabit
interface converter, or GBIC, products, such as our Gigabit Ethernet and Fibre
Channel products.
Methode has amended its complaint to add Stratos Lightwave Inc., a Methode
spin-off and assignee of the patents-in-suit, as an additional plaintiff and
to allege that we infringe a sixth patent, which purportedly relates to
certain aspects of our GBIC products. Methode has since withdrawn its motion
to amend with respect to the sixth patent, though Methode remains free to
reassert the claim at a later time, whether in the current action or in a
separate proceeding. For the nine months ended June 30, 2000, sales of our 1x9
pin configuration products alleged to infringe the Methode patents accounted
for 28.7% of our total revenue. Sales of our products alleged to infringe the
other Methode patents represented an immaterial amount of our total revenue
for the nine months ended June 30, 2000.
We intend to defend ourselves vigorously in this lawsuit. However, the outcome
of this lawsuit is uncertain. The lawsuit is in the early stages. Accordingly,
our expenses and other resources expended on this lawsuit have been immaterial
to date. As this lawsuit progresses, we expect to incur greater legal fees and
expenses. In addition, our defense of this lawsuit is expected to divert the
efforts and attention of our key management and technical personnel. As a
result, our defense of this lawsuit, regardless of its eventual outcome, will
likely be costly and time consuming. If Methode's patents are found to be
valid and enforceable and our products are found to infringe, we may be
enjoined from manufacturing or selling some of our products, we may be liable
for significant monetary damages and/or we may be required to obtain a license
from Methode in order to use its patented technology, any of which could
disrupt our ability to manufacture and sell our products. If we are required
to obtain a license to any of Methode's patents, such license may not be
available from Methode on commercially reasonable terms, if at all. See
"Business -- Legal proceedings" for additional details.
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We could be subjected to additional litigation regarding intellectual property
rights, which may divert management attention, cause us to incur significant
costs or prevent us from selling our products.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights in the networking
technologies industry. Many companies aggressively use their patent portfolios
to bring infringement claims against competitors. As a result, we may be a
party to litigation or be involved in disputes over our alleged infringement
of others' intellectual property in the future, in addition to our current
dispute with Methode. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and prevent us from
making or selling some of our products. These lawsuits, regardless of their
merit, would likely be time-consuming and expensive to resolve and would
divert management's time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
.stop selling, incorporating or using our products that use the infringed
intellectual property;
.obtain a license to make, sell or use the relevant technology from the owner
of the infringed intellectual property, which license may not be available on
commercially reasonable terms, if at all; or
.redesign the products to not use the infringed intellectual property, which
may not be technically or commercially feasible.
If we are forced to take any of these actions, we may be limited in our
ability to execute our business plan.
We may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights. These claims could result in costly
litigation and the diversion of our technical and management personnel. In the
process of asserting our intellectual property rights, these rights could be
found to be invalid, unenforceable or not infringed. Failure to successfully
assert our intellectual property rights could result in our inability to
prevent our competitors from utilizing our proprietary rights.
If we are unable to protect our proprietary technology, this technology could
be misappropriated, which would make it difficult for us to compete in our
industry.
Our success and ability to compete is dependent in part on our proprietary
technology. We currently do not have any patents, and we have no pending
patent applications. We rely on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements to establish and
protect our proprietary rights. Existing copyright, trademark and trade secret
laws afford only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States, and policing the unauthorized use of our products
is difficult. Any infringement of our proprietary rights could result in
costly litigation, and any failure to adequately protect our proprietary
rights could result in our competitors offering similar products, potentially
resulting in the loss of some of our competitive advantage and a decrease in
our revenue.
If we are unable to generate adequate additional sales as a result of the
planned expansion of our sales operations, our competitive position may be
harmed and our revenue or margins may decline.
Historically, we have relied primarily on a limited direct sales force,
supported by third party manufacturers' representatives and distributors, to
sell our products. Our sales strategy focuses primarily on developing and
expanding our direct sales force, manufacturers' representatives and
distributors. We will incur significant costs related to the expansion of our
sales operations. If the expansion of our sales operations does not
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generate adequate additional sales, the cost of any expansion may exceed the
revenue generated, and our margins may decline. To the extent we are
unsuccessful in expanding our direct sales force, we will likely be unable to
compete successfully against the significantly larger and well-funded sales
and marketing operations of many of our current or potential competitors. In
addition, if we fail to develop relationships with significant manufacturers'
representatives or distributors, or if these representatives or distributors
are not successful in their sales or marketing efforts, sales of our products
may decrease and our competitive position would be harmed. Our representatives
or distributors may not market our products effectively or may not continue to
devote the resources necessary to provide us with effective sales, marketing
and technical support. Our inability to effectively manage the expansion of
our domestic sales and support staff or maintain existing or establish new
relationships with manufacturer representatives and distributors would harm
our revenue and result in declining margins.
The market for our products is new and is characterized by rapid technological
changes and evolving industry standards. If we do not respond to the changes
in a timely manner, our products likely will not achieve market acceptance.
The market for our products is characterized by rapid technological change,
new and improved product introductions, changes in customer requirements and
evolving industry standards. Our future success will depend to a substantial
extent on our ability to develop, introduce and support cost-effective new
products and technology on a successful and timely basis. We plan to increase
substantially our budget for research and development of new products and
technology. Since these costs are expensed as incurred, we expect a negative
impact on our reported net income. If we fail to develop and deploy new cost-
effective products and technologies or enhancements of existing products on a
timely basis, or if we experience delays in the development, introduction or
enhancement of our products and technologies, our products will no longer be
competitive and our revenue will decline.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products on
a timely basis, if at all. Furthermore, we cannot assure you that our new
products will gain market acceptance or that we will be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Our failure to respond to product announcements,
technological changes or industry changes in standards would likely prevent
our products from gaining market acceptance and harm our competitive position.
If we are not able to effectively manage our growth, we may not be able to
maintain and expand our business.
Our success depends on our ability to effectively manage the growth of our
operations. We have significantly expanded our operations over the past
several years and expect to continue to increase the scope of our operations
for the foreseeable future. In this regard, our headcount has increased 248%
from 89 as of September 30, 1998 to 310 as of September 30, 2000. Our growth
has placed, and will continue to place, a strain on our management systems and
operational resources. As demand for our products grows, we will need to
expand our design and manufacturing capabilities, and our sales, marketing and
technical support personnel. We will also need to improve our financial and
managerial controls, reporting systems and procedures. If we can not manage
our growth effectively, we will not be able to maintain and expand our
business.
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Our success depends on our key personnel, including our executive officers,
the loss of any of whom could harm our business.
Our success depends on the continued contributions of our senior management
and other key research and development, sales and marketing and operations
personnel, including Muoi Van Tran, our Chief Executive Officer, Susie Nemeti,
our Chief Financial Officer, and Mohammad Ghorbanali, our Chief Operating
Officer and Vice President of Manufacturing and Research and Development.
Competition for employees in our industry is intense. We do not have life
insurance policies covering any of our executives. There can be no assurance
that we will be successful in retaining such key personnel, or that we will be
successful in hiring replacements or additional key personnel. All of the
capital stock and options held by the members of our management are fully
vested. Our loss of any key employee, the failure of any key employee to
perform in his or her current position, or the inability of our officers and
key employees to expand, train and manage our employee base would prevent us
from executing our growth strategy. See "Management."
We will need to attract and retain highly qualified managers, sales and
marketing and technical support personnel. Competition for specialized
personnel in our industry is intense and we may not be able to hire sufficient
personnel to achieve our goals or support the anticipated growth in our
business. We have had difficulty hiring the necessary engineering, sales and
marketing and management personnel to support our growth. If we fail to hire
and retain qualified personnel, our product development efforts and customer
relations will suffer. Our key management personnel have limited experience in
managing the growth of technologically complex businesses in a rapidly
evolving environment. If we are unable to manage our growth effectively, we
will incur additional expenses which will negatively impact our operating
results.
Our products may have defects that are not detected until full deployment of a
customer's system. Any of these defects could result in a loss of customers,
damage to our reputation and substantial costs.
We design our products for large and complex fiber optic networks, and our
products must be compatible with other components of the network system, both
current and future. We have experienced in the past, and may continue to
experience in the future, defects in our products. Defects in our products or
incompatibilities in our products may appear only when deployed in networks
for an extended period of time. In addition, our products may fail to meet our
customers' design specifications, or our customers may change their design
specifications after the production of our product. A failure to meet our
customers' design specification often results in a loss of the sale due to the
length of time required to redesign the product. We may also experience
defects in third party components that we incorporate into our products. We
have experienced the following due to our inability to detect or fix errors in
the past:
.increased costs associated with the replacement of defective products,
redesign of products to meet customer design specification and/or refund of
the purchase price;
.diversion of development resources; and
.increased service and warranty costs.
We could also lose customers or fail to achieve market acceptance of our
products in the future if our products contain defects.
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Our products and the systems into which our products are incorporated must
comply with domestic and international governmental regulations, and if our
products do not meet these regulations, our ability to sell our products will
be restricted.
Our products are subject to various regulations of U.S. and foreign
governmental authorities principally in the areas of radio frequency emission
standards and eye safety. Radio frequency emission standards govern allowable
radio interference with other services. Eye safety standards govern the
labelling and certification of laser products to ensure that they are used in
a way that does not create a hazard to the human eye. Our products and the
systems into which they are incorporated must also comply with international
standards and governmental standards of the foreign countries where our
products are used. Our inability, or the inability of our customers, to comply
with existing or evolving standards established by regulatory authorities, or
to obtain timely domestic or foreign regulatory approvals or certificates will
restrict our ability to sell our products.
We are subject to environmental laws and other legal requirements that have
the potential to subject us to substantial liability and increase our cost of
doing business.
Our properties and business operations are subject to a wide variety of
federal, state and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances. We may be
required to incur substantial costs to comply with current or future legal
requirements. In addition, if we fail to obtain required permits or otherwise
fail to operate within these or future legal requirements, we may be required
to pay substantial penalties, suspend our operations or make costly changes to
our manufacturing processes or facilities. We believe our properties and
business operations, are in compliance with applicable environmental laws. We
do not anticipate any material capital expenditures for environmental control
facilities for the remainder of the current fiscal year or our next fiscal
year.
We face risks associated with our international operations that could prevent
us from marketing and distributing our products internationally.
Historically, approximately 80% of our sales have been in North America, and
we have limited experience in marketing and distributing our products
internationally. We intend to expand our international operations in the
future. Significant management attention and financial resources are needed to
develop our international sales, support and distribution channels and
manufacturing. We may not be able to establish or maintain international
market demand for our products.
In addition, international operations are subject to other risks, including:
.greater difficulty in accounts receivable collection and longer collection
periods;
.difficulties and costs of staffing and managing foreign operations with
personnel who have expertise in fiber optic technology;
.unexpected changes in regulatory or certification requirements for optical
networks; and
.political or economic instability.
A portion of our international revenue and expenses may be denominated in
foreign currencies in the future. Accordingly, we could experience the risks
of fluctuating currencies and may choose to engage in currency hedging
activities.
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Disruption of our operations at our Chatsworth, California manufacturing
facility could require us to lease alternative manufacturing facilities or
limit our manufacturing operations.
All of our manufacturing operations are conducted in our Chatsworth,
California headquarters. Due to this geographic concentration, a disruption of
our manufacturing operations, resulting from sustained process abnormalities,
human error, government intervention or natural disasters, such as
earthquakes, fires or floods, or other causes, could require us to cease or
limit our manufacturing operations. See "Business -- Manufacturing" and "--
Facilities."
Our limited experience in acquiring other businesses, product lines and
technologies may make it difficult for us to overcome problems encountered in
connection with any acquisition we may undertake.
We expect to review opportunities to buy other businesses, products or
technologies that would enhance our technical capabilities, complement our
current products or expand the breadth of our markets or which may otherwise
offer growth opportunities. Our acquisition of businesses or technologies will
require significant commitment of resources. We may be required to pay for any
acquisition with cash, but we cannot be certain that additional capital will
be available to us on favorable terms, if at all. In lieu of paying cash, we
could issue stock as consideration for an acquisition that would dilute
existing stockholders' percentage ownership, incur substantial debt or assume
contingent liabilities. We have no experience in acquiring other businesses
and technologies. Potential acquisitions also involve numerous risks,
including:
.problems assimilating the purchased operations, technologies or products;
.unanticipated costs associated with the acquisition;
.diversion of management's attention from our core business;
.adverse effects on existing business relationships with suppliers and
customers;
.risks associated with entering markets in which we have no or limited prior
experience; and
.potential loss of key employees of purchased organizations.
RISKS RELATED TO OUR RELATIONSHIP WITH FURUKAWA
We have business conflicts of interest with Furukawa, the resolution of which
may not be as favorable to us as if we were dealing with an unaffiliated third
party.
We have historically relied on Furukawa's research and development
capabilities to provide us with technologically advanced lasers and fiber
optic components which we purchase from Furukawa for inclusion in our
products, and we expect to continue to rely on Furukawa in the future. We
currently purchase substantially all of our lasers and the majority of our
other optical components from Furukawa. We currently have no written
agreements with Furukawa with respect to our research and development and
supply relationship. We cannot assure you that Furukawa will continue to
provide services and components to us, and if not, whether or on what terms we
could find adequate alternative sources for these services and components. In
addition, our business dealings with Furukawa have been influenced by
Furukawa's control of us. Because we intend to continue to maintain our
relationship with Furukawa after the completion of this offering and Furukawa
will continue to control us, the terms of future transactions with Furukawa
may or may not be comparable to those with unaffiliated third parties. See
"Related party transactions."
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Conflicts of interest may arise between Furukawa and us in a number of areas,
including the nature and quality of services rendered by Furukawa to us,
potential competitive business activities, sales or distributions by Furukawa
of all or any portion of its ownership interest in us, or Furukawa's ability
to control our management and affairs. It is possible that business decisions
made by management that are in the best interest of our stockholders may
conflict with Furukawa's interests. For example, we may decide to enter into
or acquire a line of business competitive with Furukawa, or Furukawa may
decide to enter into or acquire a line of business competitive with us. Any of
these events may alter or eliminate our ability to rely on Furukawa to supply
key components to us in the future, increase our costs of producing our
products and result in increased competition in our markets. We cannot assure
you that we will be able to resolve any conflicts we may have with Furukawa
or, if we are able to do so, that the resolution will be favorable to us.
Furukawa will control the outcome of stockholder voting and there may be an
adverse effect on the price of our Class A common stock due to disparate
voting rights of our Class A common stock and our Class B common stock.
Upon the completion of this offering, Furukawa will beneficially own all of
our outstanding shares of Class B common stock, representing 94.5% voting
control over all stockholder issues. The holders of our Class A common stock
and Class B common stock have identical rights except that holders of our
Class A common stock are entitled to one vote per share while holders of our
Class B common stock are entitled to ten votes per share on matters to be
voted on by stockholders. The differential in the voting rights of our Class A
common stock and Class B common stock could adversely affect the price of our
Class A common stock to the extent that investors or any potential future
purchaser of our shares of Class A common stock give greater value to the
superior voting rights of our Class B common stock. Each share of our Class B
common stock will automatically convert into one share of Class A common stock
if it is transferred to any entity, other than an entity controlling,
controlled by or under common control with Furukawa. In addition, our Class B
common stock will automatically convert into shares of our Class A common
stock if the total number of outstanding shares of Class B common stock falls
below 20% of total number of outstanding shares of our common stock. See
"Description of capital stock." As long as Furukawa has a controlling
interest, it will continue to be able to elect our entire board of directors
and generally be able to determine the outcome of all corporate actions
requiring stockholder approval. As a result, Furukawa will be in a position to
continue to control all matters affecting us, including:
.a change of control, including a merger;
.our acquisition or disposition of assets;
.our future issuances of common stock or other securities;
.our incurrence of debt; and
.our payment of dividends on our common stock.
Furukawa's ability to control us may result in our Class A common stock
trading at a price lower than the price at which it would trade if Furukawa
did not have a controlling interest in us.
In addition, we intend to grant Furukawa registration rights prior to the
completion of this offering which are described under "-- A substantial amount
of our shares will be eligible for sale shortly after this offering."
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Because our chairman and three of our directors are also executives of
Furukawa, they may have conflicts of interest that could harm the future
development of our business.
Our chairman, and Messrs. Matsubara, Okada and Shibata are current members of
our board of directors who are also executives of Furukawa. Upon completion of
this offering, our board of directors will be comprised of a total of seven
directors, three of whom are executives of Furukawa. The Furukawa executives
who are also our directors will have obligations to both companies and may
have conflicts of interest with respect to matters potentially or actually
involving or affecting us, such as acquisitions and other corporate
opportunities that may be suitable for both Furukawa and us.
In addition, our board of directors intends to form an independent director
nominating committee prior to the completion of this offering to select and
nominate persons deemed independent to be our directors. The nominating
committee will be composed of Muoi Van Tran, our Chief Executive Officer, and
two of our directors affiliated with Furukawa. Furukawa's representation on
our board of directors and independent director nominating committee could
create, or appear to create, potential conflicts of interest when its
executives are faced with decisions that could have different implications for
Furukawa and us. Such additional or potential conflicts of interest could harm
the future development of our business.
RISKS RELATED TO THIS OFFERING
We expect our stock price to be volatile.
Prior to this offering, there has been no public market for our Class A common
stock. Accordingly, we cannot assure you that an active trading market will
develop or be sustained or that the market price of our Class A common stock
will not decline. The initial public offering price for the shares of our
Class A common stock will be determined by us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The price at which our Class A common stock will trade after
this offering is likely to be highly volatile and may fluctuate substantially
due to many factors, some of which are:
.actual or anticipated fluctuations in our results of operations;
.changes in securities analysts' expectations or our failure to meet those
expectations;
.announcements of technological innovations by us or our competitors;
.introduction of new products by us or our competitors;
.commencement of or our involvement in litigation;
.developments with respect to intellectual property rights;
.conditions and trends in technology industries;
.changes in the estimation of the future size and growth rate of our markets;
and
.general market conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that affected the market prices for the common stocks of
technology and communications companies. In the past, these market
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fluctuations were unrelated or disproportionate to the operating performance
of these companies. Any significant fluctuations in the future might result in
a significant decline in the market price of our Class A common stock.
Anti-takeover provisions in our charter documents and in Delaware law and
Furukawa's ownership interest could prevent or delay a change in control and,
as a result, negatively impact our stockholders.
We have taken a number of actions that could have the effect of discouraging a
takeover attempt. For example, our certificate of incorporation grants the
board of directors the authority to issue shares of preferred stock and to fix
the rights, preferences and privileges of preferred stock without stockholder
action. Although we have no present intention to issue shares of preferred
stock, issuing our preferred stock could have the effect of making it more
difficult and less attractive for a third party to acquire a majority of our
outstanding voting stock. Preferred stock may also have other rights,
including economic rights senior to the Class A common stock that could have a
material adverse effect on the market value of our Class A common stock. In
addition, provisions of Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
Section 203 of the Delaware General Corporation Law may make the acquisition
of us and the removal of incumbent officers and directors more difficult by
prohibiting stockholders holding 15% or more of our outstanding voting stock
from acquiring us, without our board's consent, for at least three years from
the date they first hold 15% or more of the voting stock. See "Description of
capital stock -- Delaware anti-takeover law and certain charter and bylaw
provisions" for more detailed information.
Furukawa's substantial beneficial ownership position, together with the
authorization of preferred stock, the disparate voting rights between our
Class A common stock and Class B common stock, the classification of our board
of directors and the lack of cumulative voting in our certificate of
incorporation or bylaws, may have the effect of delaying, deferring or
preventing a change in our control and may discourage bids for our Class A
common stock at a premium over the market price of our Class A common stock
and may result in our Class A common stock trading at a price lower than the
price at which it would trade in the absence of these factors.
Management will have broad discretion over the use of proceeds from this
offering.
The net proceeds from this offering will be used for general corporate
purposes. Although we list expanding our manufacturing capacity, expanding our
research and development operations, enhancing our technology, expanding our
sales and marketing activities, expanding our international operations and
possible acquisitions as examples of general corporate purposes, we are not
obligated to pursue any of these opportunities. We have not reserved or
allocated the net proceeds for any specific transaction, and we cannot specify
with certainty how we will use the net proceeds. Accordingly, our management
will have considerable discretion in the application of the net proceeds, and
you will not have the opportunity, as part of your investment decision, to
assess whether the proceeds are being used appropriately. The net proceeds may
be used for corporate purposes that do not increase our operating results or
market value. Until the net proceeds are used, they may be placed in
investments that do not produce income or that lose value. See "Use of
proceeds."
A substantial amount of our shares will be eligible for sale shortly after
this offering.
If our stockholders sell substantial amounts of Class A common stock in the
public market following this offering, the market price of our Class A common
stock could fall. These sales also might make it more difficult for us to sell
equity or equity-related securities at a time and price that we deem
appropriate. Based on shares outstanding as of June 30, 2000, upon completion
of this offering, we will have 38,371,440 shares
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19
<PAGE>
Risk factors
-------------------------------------------------------------------------------
of Class A common stock and 66,000,000 shares of Class B common stock
outstanding. The holders of shares of our Class B common stock may exchange
them for shares of our Class A common stock at any time and from time to time.
If Furukawa were to effect a conversion of all of its shares of our Class B
common stock to shares of our Class A common stock, an additional 66,000,000
shares of our Class A common stock would be eligible for resale in compliance
with Rule 144. Of these shares, the 10,500,000 shares being offered hereby
will be freely tradeable and the remaining shares will become eligible for
sale in the public market pursuant to Rule 144. Substantially all of these
remaining shares are subject to contractual restrictions with the underwriters
that prevent them from being sold until 180 days after the date of this
prospectus without the consent of UBS Warburg LLC.
These remaining shares may be sold on the 181st day after the date of this
prospectus without registration under the Securities Act to the extent
permitted by Rule 144 or other exemptions under the Securities Act. UBS
Warburg LLC may, in its sole discretion, at any time without notice, release
all or any portion of the shares subject to the lock-up agreements, which
would result in more shares being available for sale in the public market at
an earlier date. Sales of common stock by existing stockholders in the public
market, or the availability of such shares for sale, could materially and
adversely affect the market price of our Class A common stock. See "Shares
eligible for future sale" for more detailed information.
In addition, we expect to register for sale 9,601,680 shares of Class A common
stock reserved for issuance under our 2000 Stock Incentive Plan, 300,000
shares of Class A common stock reserved for issuance under our 2000 Employee
Stock Purchase Plan and 12,190,360 shares of Class A common stock reserved for
issuance of outstanding options. As of September 30, 2000, options to purchase
12,190,360 shares of our Class A common stock were outstanding, which amount
includes options granted under our 1992 Stock Option Plan, our 2000 Stock
Option/Stock Issuance Plan and options granted outside of our Stock Option
Plans. Shares acquired upon exercise of these options will be eligible for
sale in the public market from time to time subject to vesting and the 180-day
lock-up restrictions that apply to the outstanding stock. The exercise price
of all of these stock options is lower than the expected initial public
offering price of our Class A common stock. The sale of a significant number
of these shares could cause the price of our Class A common stock to decline.
See "Shares eligible for future sale" for more detailed information.
In connection with the conversion of our Series A preferred stock to our Class
B common stock, prior to the completion of this offering, we intend to enter
into a registration rights agreement with Furukawa which would include demand
registration rights, piggy-back registration rights and other standard rights
and limitations. We expect that the registration rights agreement will provide
that Furukawa may not demand a registration prior to one year from the closing
of this offering. We expect that this registration rights agreement would also
provide that Furukawa will not purchase any shares of our Class A common stock
for 180 days following the closing of this offering. In addition to the
limitations intended to be set forth in the registration rights agreement,
Furukawa has agreed not to sell any of its shares of our common stock for a
period of 180 days following the date of this prospectus without the prior
written consent of UBS Warburg LLC.
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20
<PAGE>
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Forward-looking information
This prospectus may contain forward-looking statements. When used in this
prospectus, the words "anticipate," "believe," "estimate," "will," "intend"
and "expect" and similar expressions identify forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in
those forward-looking statements are reasonable, we can give no assurance that
these plans, intentions or expectations will be achieved. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied, by the forward-looking statements contained in this
prospectus. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth in this
prospectus, including under the heading "Risk factors." All forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements set forth in this
prospectus. Other than with respect to previously issued projections, we are
under no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to
buy shares of our Class A common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our Class A common stock.
Use of proceeds
The net proceeds to us from this offering of our Class A common stock, at an
assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, are estimated to be $106,415,000, or $122,527,250 if the
underwriters' over-allotment option is exercised in full. We expect to use the
net proceeds of the offering for general corporate purposes, including
approximately $25-30 million for the expansion of our manufacturing capacity,
approximately $10-12 million for the expansion of our research and development
operations and the remaining net proceeds, which have not been allocated in
specific amounts, for expansion of sales and marketing activities, expansion
of our international operations and possible acquisitions. We currently have
no commitments or agreements and are not involved in any negotiations with
respect to any acquisitions or international expansions. The amounts and
timing of our actual expenditures will depend on numerous factors, including
the status of our product development efforts, sales and marketing activities,
technological advances, the amount of cash generated or used by our operations
and competition. We may find it necessary or advisable to use the net proceeds
for other purposes, and we will have broad discretion in the application of
the balance of the net proceeds. Pending the uses described above, we intend
to invest the net proceeds in short-term, interest-bearing, investment grade
securities. See "Risk Factors -- Management will have broad discretion over
the use of proceeds from this offering."
Our management team made the determination to offer our shares to the public
to fund our future expansion, to compensate our employees and to attract new
employees. We determined the portion of our business to be sold in this
offering through a combination of negotiations with Furukawa, estimates of our
future expansion plans, evaluation of market conditions and recent offerings
of comparable companies.
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21
<PAGE>
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Dividend policy
While in the past we have paid dividends from time to time to Furukawa, we
currently intend to retain all available funds for use in our business, and do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to dividend policy will be made at the discretion of
our board of directors and will be payable pro rata to all holders of our
Class A common stock and Class B common stock and will depend on a number of
factors, including future earnings, capital requirements, financial condition
and future prospects and other factors the board of directors may deem
relevant. See "Risk Factors -- Furukawa will control the outcome of
stockholder voting and there may be an adverse effect on the price of our
Class A common stock due to the disparate voting rights of our Class A common
stock and Class B common stock."
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22
<PAGE>
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Capitalization
Our capitalization as of June 30, 2000 is set forth in the following table,
(a) on an actual basis, (b) on a pro forma basis to reflect the automatic
conversion of all outstanding common stock into shares of our Class A common
stock and preferred stock into shares of our Class B common stock upon the
effectiveness of this prospectus and (c) the pro forma information on an as
adjusted basis to give effect to the receipt of the estimated net proceeds
from this offering, at an assumed initial public offering price of $11.00 per
share. The table does not include options outstanding as of June 30, 2000 to
purchase 8,888,680 shares of our common stock with a weighted average exercise
price of $0.15. The table also does not include 3,301,680 option grants to the
founders granted on August 29, 2000. You should read this table in conjunction
with "Management's discussion and analysis of financial condition and results
of operations," our financial statements and the notes to those financial
statements, "Description of capital stock," and "Underwriting" appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------
Pro forma
Actual Pro forma as adjusted
(In thousands, except share and
per share data)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt......................... $ 2,414 $ 2,414 $ 2,414
========== ========== ===========
Stockholders' equity:
Preferred stock, no par value;
70,000,000 shares authorized;
66,000,000 shares issued and
outstanding, actual; no shares
issued and outstanding pro forma,
and pro forma as adjusted.......... $ 1,650 -- --
Common stock, no par value;
150,000,000 shares authorized;
27,871,440 shares issued and
outstanding, actual; no shares
issued and outstanding pro forma,
and pro forma as adjusted.......... 269 -- --
Preferred stock, $0.001 par value;
10,000,000 shares authorized; no
shares issued and outstanding,
actual, pro forma, and pro forma as
adjusted........................... -- -- --
Class A common stock, $0.001 par
value; 200,000,000 shares
authorized; no shares issued and
outstanding, actual;
27,871,440 shares issued and
outstanding, pro forma; and
38,371,440 shares issued and
outstanding, pro forma as
adjusted........................... -- $ 28 $ 38
Class B common stock, $0.001 par
value; 66,000,000 shares
authorized; no shares issued and
outstanding, actual; 66,000,000
shares issued and outstanding,
pro forma and pro forma as
adjusted........................... -- 66 66
Additional paid in capital (pro
forma)............................... -- 1,825 108,240
Retained earnings...................... 29,980 29,980 29,980
---------- ---------- -----------
Total stockholders' equity........... 31,899 31,899 138,314
---------- ---------- -----------
Total capitalization................. $ 34,313 $ 34,313 $ 140,728
========== ========== ===========
</TABLE>
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23
<PAGE>
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Dilution
Our pro forma net tangible book value as of June 30, 2000 was approximately
$0.34 per share of our common stock. Our net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of
our total liabilities and divided by the total number of shares of our common
stock outstanding, as of June 30, 2000. In making this calculation, we gave
effect to the conversion of all 66,000,000 outstanding shares of our preferred
stock into our Class B common stock prior to the completion of this offering.
After giving effect to our sale in this offering of 10,500,000 shares of our
Class A common stock at an assumed initial public offering price of $11.00 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses, our pro forma net tangible book value as of
June 30, 2000 would have been $1.33 per share of our common stock. This
represents an immediate increase in net tangible book value of $0.99 per share
to our existing stockholders and an immediate dilution of $9.67 per share to
you. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
Pro forma net tangible book value per share before this
offering..................................................... $0.34
Increase attributable to investors in this offering............ 0.99
-----
Pro forma net tangible book value after the offering............. 1.33
------
Dilution per share to investors in this offering................. $ 9.67
======
</TABLE>
The differences between our existing stockholders and investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid for both common
and preferred stock is summarized on a pro forma basis, as of June 30, 2000
before underwriters' discount and offering expenses in the following table.
The following table does not include 12,190,360 shares of Class A common stock
available for issuance upon the exercise of outstanding options as of
September 30, 2000.
See "Management -- Stock plans/employee benefit programs" and note 8 to our
financial statements.
<TABLE>
<CAPTION>
Shares Total
purchased consideration
--------------- ---------------- Average
Number Percent Amount Percent Price
(in thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 93,871 90% $ 1,919 2% $ 0.02
Investors in this offering............ 10,500 10 115,500 98 11.00
------- ---- -------- ---- ------
Totals................................ 104,371 100% $117,419 100% $ 1.13
======= ==== ======== ==== ======
</TABLE>
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24
<PAGE>
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Selected financial data
The selected financial data set forth below should be read in conjunction with
the financial statements of the Company and related notes thereto and
"Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus. The selected income
statement data and balance sheet data are derived from the Company's audited
financial statements except for the years ended September 30, 1995 and 1996
and nine months ended June 30, 1999 which are unaudited. The unaudited
information has been prepared on the same basis as our audited financial
statements and, in the opinion of management, contains all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of our operating results for these periods and our financial
condition as of these dates. The pro forma data and the pro forma share and
earnings per share data for September 30, 1999 and June 30, 2000 gives effect
to the conversion of 66,000,000 shares of preferred stock and 27,871,440
shares of common stock into Class B common stock and Class A common stock,
respectively.
<TABLE>
<CAPTION>
Nine months
Fiscal years ended September 30 ended June 30
------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
Income statement data (In thousands, except per share data)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $5,488 $6,747 $10,126 $19,620 $36,036 $23,325 $69,061
Cost of revenue......... 3,085 3,726 5,797 11,086 20,860 13,991 34,584
------ ------ ------- ------- ------- ------- -------
Gross profit............ 2,403 3,021 4,329 8,534 15,176 9,334 34,477
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 342 342 465 779 1,134 778 1,656
Sales and marketing.... 300 373 563 999 1,364 971 1,980
General and
administrative........ 673 847 369 712 1,065 654 2,782
------ ------ ------- ------- ------- ------- -------
Total operating
expenses.............. 1,315 1,562 1,397 2,490 3,563 2,403 6,418
------ ------ ------- ------- ------- ------- -------
Income from operations.. 1,088 1,459 2,932 6,044 11,613 6,931 28,059
Other income, net....... 58 60 62 119 116 122 137
------ ------ ------- ------- ------- ------- -------
Income before income
taxes.................. 1,146 1,519 2,994 6,163 11,729 7,053 28,196
Income taxes............ 503 529 1,205 2,492 4,693 2,901 11,490
------ ------ ------- ------- ------- ------- -------
Net income.............. $ 643 $ 990 $ 1,789 $ 3,671 $ 7,036 $ 4,152 $16,706
====== ====== ======= ======= ======= ======= =======
Earnings per share:
Basic.................. $ 0.02 $ 0.04 $ 0.06 $ 0.13 $ 0.26 $ 0.15 $ 0.61
Diluted................ $ 0.01 $ 0.03 $ 0.02 $ 0.04 $ 0.07 $ 0.04 $ 0.16
Pro forma earnings per
share
Basic.................. $ 0.08 $ 0.18
Diluted................ $ 0.07 $ 0.16
Shares Outstanding:
Basic.................. 27,221 27,247 27,321 27,321 27,348 27,330 27,439
Diluted................ 99,586 99,788 99,842 100,494 101,132 101,140 103,302
Pro forma basic........ 93,348 93,439
Pro forma diluted...... 101,132 103,302
</TABLE>
<TABLE>
<CAPTION>
September 30 June 30, 2000
------------------------------------ -----------------
1995 1996 1997 1998 1999 Actual Pro forma
Balance sheet data (In thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $1,109 $1,195 $1,661 $ 1,863 $ 2,447 $ 2,801 $ 2,801
Working capital......... 2,114 2,582 3,971 7,214 11,970 26,829 26,829
Total assets............ 3,308 4,134 5,970 11,661 26,149 49,831 49,831
Long-term portion of
debt................... 288 -- -- -- 2,750 2,414 2,414
Stockholders' equity.... 2,022 2,801 4,384 8,055 15,096 31,899 31,899
</TABLE>
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25
<PAGE>
-------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
You should read the following discussion of our financial condition and
results of operations in conjunction with our financial statements and the
notes to those statements included elsewhere in this prospectus. This
discussion may contain forward-looking statements that involve risks and
uncertainties. As a result of many factors, such as those set forth under
"Risk factors" and elsewhere in this prospectus, our actual results may differ
materially from those anticipated in the forward-looking statements.
OVERVIEW
We design, manufacture and sell a comprehensive line of high performance,
highly reliable fiber optic subsystems and modules for fiber optic
transmission systems used to address the bandwidth limitations in metropolitan
area networks and high-speed premises networks. Our subsystems and modules
include optical transmitters, receivers, transceivers and transponders that
convert electronic signals into optical signals and back to electronic
signals, enabling high-speed communication of voice and data traffic over
public and private networks. We began our operations and shipped our first
products in November of 1991 and have been profitable since our inception.
We are currently a 70.3% owned subsidiary of Furukawa. The remaining 29.7% of
our outstanding shares are owned by our management and others. Upon completion
of this offering, Furukawa will beneficially own all of our outstanding Class
B common stock, which will represent 63.2% of our outstanding shares of common
stock and 94.5% of the combined voting power of all of our outstanding common
stock. Furukawa will be in a position to continue to influence and control all
matters affecting our company. Since our inception, we have purchased
substantially all of our lasers and the majority of our other fiber optic
components from Furukawa. We have also relied on Furukawa's research and
development capabilities to provide us with technologically advanced lasers
and fiber optic components which we purchase from Furukawa for inclusion in
our products. We intend to maintain our relationship with Furukawa after this
offering. See "Risk factors -- We are dependent on a limited number of
suppliers for most of our key components. If these suppliers are unable to
meet our manufacturing requirements, we may experience production delays
leading to delays in shipments, increased costs and cancellation of orders for
our products," and "-- Risks related to our relationship with Furukawa."
We operate in one industry segment, the design and manufacture of fiber optic
subsystems and modules. We sell our products to fiber optic communication
equipment manufacturers, directly and through contract manufacturers who
incorporate them into systems they assemble for equipment manufacturers. We
define our customers as equipment manufacturers who have purchased our
products directly or ordered our products for incorporation into systems
produced by contract manufacturers. We recognize revenue upon product
shipment, and sales returns and allowances have been insignificant. For the
nine months ended June 30, 2000, our 10 largest customers accounted for
approximately 79.9% of our total revenue, with Cisco Systems and Alcatel
accounting for approximately 36.6% and 13.4% of our total revenue,
respectively. No other customer accounted for more than 10.0% of our total
revenue for the nine months ended June 30, 2000. Although our revenue from
sales to our other customers continues to increase, we expect that significant
customer concentration will continue for the foreseeable future. Our sales are
made on a purchase order basis rather than by long term purchase commitments.
Our customers may cancel or defer purchase orders without penalty on short
notice. See "Risk factors -- We derive a significant portion of our total
revenue from a few significant
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26
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
-------------------------------------------------------------------------------
customers, and our total revenue may decline significantly if any of these
customers cancels, reduces or delays purchases of our products or extracts
price concessions from us."
In October 1999, Methode Electronics, Inc. filed a lawsuit against Infineon
Technologies Corporation and us seeking unspecified damages, including
monetary damages, injunctive relief, attorneys' fees and costs arising from
our alleged infringement of some of the claims contained in patents assigned
to Methode, including patents relating to our 1x9 pin configuration products.
This lawsuit is in the early stages and our expenses and other resources
expended on this lawsuit have been immaterial to date. Accordingly, the
lawsuit has not had a material effect on our business operations. As the
lawsuit progresses, we expect to incur greater legal fees and expenses. In
addition, the defense of this lawsuit is expected to divert the efforts and
attention of our key management and technical personnel. For the nine months
ended June 30, 2000, sales of our 1x9 products alleged to infringe the Methode
patents accounted for 28.7% of our total revenue. Sales of our other products
alleged to infringe the Methode patents represented an immaterial amount of
our total revenue for the nine months ended June 30, 2000. See "Risk
factors -- If we are unsuccessful in defending against Methode's lawsuit for
patent infringement, we may be required to pay significant monetary damages to
Methode and may be enjoined from manufacturing and selling some of our
products."
Our revenue increased to $69.1 million in the nine months ended June 30, 2000
from $23.3 million in the nine months ended June 30, 1999. This increase was
due substantially to an increase in demand from our existing customers and, to
a lesser extent, an increase in the percentage of our revenue represented by
newer products with higher average selling prices. We do not expect our rate
of year-to-year growth in revenue to be sustainable in future periods.
With the rapid growth of the fiber optic networking industry, our component
suppliers have allocated specific quantities of components they will sell to
us, which may be insufficient to support our planned growth. In addition, our
manufacturing capacity is limited, and we may not be able to increase our
capacity at a rate to support our planned growth. We plan to expand our
manufacturing capacity at our present facility and expand into additional
facilities by the end of 2001. In addition, we plan to increase our
manufacturing shifts, increase the automation of our processes, and increase
subcontracting of circuit board assemblies to quality offshore subcontractors.
See "Risk Factors -- We must expand our manufacturing capacity and
manufacturing processes in order to continue to deliver our products to our
customers in a timely manner and to support our revenue growth."
The average selling prices of our products generally decrease as the products
mature from factors such as increased competition, the introduction of new
products and increased unit volumes. We anticipate that average selling prices
of our existing products will continue to decline in future periods although
the timing and degree of the declines cannot be predicted with any certainty.
We must continue to develop and introduce new products that incorporate
features that can be sold at higher average selling prices on a timely basis.
Our cost of revenue consists principally of materials, as well as salaries and
related expenses for manufacturing personnel, manufacturing overhead and
provisions for obsolete inventory. We purchase several key components for our
products from a limited number of suppliers. Due to industry-wide constraints
in capacity, some of these component suppliers have placed limits on the
number of components they will sell to us. As a result, we have periodically
experienced shortages and delivery delays for these materials which has caused
us to maintain additional inventory of some limited source components to
decrease the risk of shortage. We expect to continue to manage these
limitations similarly in the future. As a result, we have excess inventory of
these components which leads to higher inventory carrying costs and higher
provisions for obsolete inventory. We have not experienced supply constraints
from Furukawa. See "Risk factors -- "If we fail to predict our manufacturing
requirements accurately, we could incur additional costs or experience
manufacturing delays,
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27
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
-------------------------------------------------------------------------------
which could cause us to lose orders or customers' and "We are dependent on a
limited number of suppliers for most of our key components. If these suppliers
are unable to meet our manufacturing requirements, we may experience
production delays leading to delays in shipments, increased costs and
cancellation of orders for our products.' "
Our research and development expenses consist primarily of salaries and
related expenses for design engineers and other technical personnel, cost of
developing prototypes, fees paid to consultants and depreciation of test and
prototyping equipment. Our research and development expenses also consist of
materials and overhead costs related to major product development projects. We
charge all research and development expenses to operations as incurred. We
believe that continued investment in research and development is critical to
our future success. Accordingly, we intend to expand our internal research and
development capabilities in the future to develop new products. As a result,
we expect that our research and development expenses in absolute dollar
amounts and as a percentage of revenue will increase significantly in future
periods. See "Risk factors --The market for our products is new and is
characterized by rapid technological changes and evolving industry standards.
If we do not respond to the changes in a timely manner, our products likely
will not achieve market acceptance."
Sales and marketing expenses consist primarily of personnel costs, commissions
paid to independent manufacturers' representatives, product marketing and
promotion costs. We intend to substantially expand our sales and marketing
operations and efforts, both domestically and internationally, in order to
increase sales and market awareness of our products. In December 1999, we
opened a sales office in Franklin, Massachusetts, and in July 2000, we opened
sales offices in Bury St. Edmunds, England and Richardson, Texas. We also
intend to open additional sales offices in San Jose, California and Ottawa,
Canada. We believe that investment in sales and marketing is critical to our
success and expect these expenses to increase in the future. See "Risk
factors -- If we are unable to generate adequate additional sales as a result
of the planned expansion of our sales operations, our competitive position may
be harmed and our revenue or margins may decline."
General and administrative expenses consist primarily of salaries and related
expenses for our administrative, finance and human resources personnel,
professional fees and other corporate expenses. We expect that, in support of
our continued growth and our operations as a public company, general and
administrative expenses will continue to increase for the foreseeable future.
General and administrative expenses are also likely to be affected in future
periods by significant legal fees, stock compensation and expenses incurred in
connection with pending litigation.
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28
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth income statement data for the periods indicated
as a percentage of revenue:
<TABLE>
<CAPTION>
Fiscal years
ended Nine months
September 30 ended June 30
------------------- --------------
1997 1998 1999 1999 2000
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue............................ 57.2 56.5 57.9 60.0 50.1
Gross profit............................... 42.8 43.5 42.1 40.0 49.9
Operating expenses:
Research and development................. 4.6 4.0 3.1 3.3 2.4
Sales and marketing...................... 5.6 5.1 3.8 4.2 2.9
General and administrative............... 3.6 3.6 3.0 2.8 4.0
Total operating expenses................... 13.8 12.7 9.9 10.3 9.3
Income from operations..................... 29.0 30.8 32.2 29.7 40.6
Other income (expenses), net............... 0.6 0.6 0.3 0.5 0.2
Income before income taxes................. 29.6 31.4 32.5 30.2 40.8
Income taxes............................... 11.9 12.7 13.0 12.4 16.6
Net income............................ 17.7% 18.7% 19.5% 17.8% 24.2%
</TABLE>
Nine months ended June 30, 2000 and 1999
Revenue -- Revenue increased 196.1% to $69.1 million in the nine months ended
June 30, 2000 from $23.3 million in the nine months ended June 30, 1999. This
increase was due substantially to an increase in demand from our existing
customers and, to a lesser extent, to an increase in the percentage of our
revenue represented by newer products with higher average selling prices, such
as our OC-3, OC-12 and OC-48 products. Sales of our products for metropolitan
area networks increased to 82.0% of revenue for the nine months ended June 30,
2000 from 58.0% of revenue for the nine months ended June 30, 1999. We do not
expect that our rate of year-to-year growth in revenue will be sustainable in
future periods, as the average selling prices for existing products may
decline in response to product introductions by competitors or us, or other
factors, including pressure from significant customers for price concessions.
We believe that the increase in customer demand for our products in recent
years reflects increased demand for components due to growth in the deployment
of fiber optic networks worldwide.
Cost of Revenue -- Cost of revenue increased 147.2% to $34.6 million in the
nine months ended June 30, 2000 from $14.0 million in the nine months ended
June 30, 1999. Gross margin increased to 49.9% from 40.0% during this period.
The increase in gross margin was due to the following three factors: a
decrease in labor costs as a percentage of revenue to 2.2% from 3.5% due to
higher productivity in our new facility, lower component costs as a percentage
of revenue to 40.4% from 46.7% due to higher volume purchases and a decrease
in overhead as a percentage of revenue to 7.5% from 9.8%. Provisions for
obsolete inventory increased 58.1% to $605,000 from $383,000 during this
period as we increased inventory to maintain a supply of components. We do not
expect to maintain current gross margins in future periods as the average
selling prices for existing products are expected to decline in response to
product introductions by competitors and pressure from significant customers
for price concessions.
Research and Development -- Research and development expenses increased 112.9%
to $1.7 million in the nine months ended June 30, 2000 from $778,000 in the
nine months ended June 30, 1999. This increase was primarily due to increased
recruiting and hiring of engineering personnel, including expenses related to
employee benefits and bonuses. We also incurred development costs of $84,000
paid to Furukawa for the
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automation of our product testing procedure. Research and development as a
percentage of revenue decreased to 2.4% from 3.3% over this period because of
a significant growth in revenue. We expect research and development expense to
increase significantly as a percentage of revenue as we expand our research
and development efforts.
Sales and Marketing -- Sales and marketing expenses increased 103.9% to $2.0
million in the nine months ended June 30, 2000 from $971,000 in the nine
months ended June 30, 1999. This increase was due to increased employee
benefits and bonuses, including commissions paid to independent manufacturers'
representatives as a result of an increase in the sales of our high-
performance subsystems and modules and the addition of a sales office in
Franklin, Massachusetts. Sales and marketing expenses as a percentage of
revenue decreased to 2.9% from 4.2% over this period because of a significant
growth in revenue. We expect that sales and marketing expenses will increase
as a percentage of revenue as we expand our sales and marketing efforts.
General and Administrative -- General and administrative expenses increased
325.4% to $2.8 million in the nine months ended June 30, 2000 from $654,000 in
the nine months ended June 30, 1999. This increase was the result of an
increase in employee benefits and bonuses to $836,000 from $180,000, an
increase in legal and other professional fees to $313,000 from $48,000 and an
increase in reserves to provide for uncollectible receivables to $1.1 million
from $184,000 during this period. Although we intend to control these costs,
we expect the dollar level of these costs to increase as a result of increased
legal fees, accounting costs and other costs associated with being a public
company.
Income Taxes -- The provision for income taxes increased 296.1% to $11.5
million in the nine months ended June 30, 2000, based on an effective tax rate
of 40.8%, from $2.9 million in the nine months ended June 30, 1999, based on
an effective tax rate of 41.1%.
Fiscal Years Ended September 30, 1999 and 1998
Revenue -- Revenue increased 83.7% to $36.0 million in the fiscal year ended
September 30, 1999 from $19.6 million in the fiscal year ended September 30,
1998. This $16.4 million increase was primarily due to an increase in demand
from our existing customers and an increase in overall sales of our
transceiver products, which carry a higher average selling price, from $10.9
million to $25.2 million during this period. We believe that the increase in
customer demand for our products in recent years reflects increased demand for
components due to growth in the deployment of fiber optic networks worldwide.
Cost of Revenue -- Cost of revenue increased 88.2% to $20.9 million in the
fiscal year ended September 30, 1999 from $11.1 million in the fiscal year
ended September 30, 1998 and gross margin decreased to 42.1% from 43.5% during
this period due to an increase in the price of components.
Research and Development -- Research and development expenses increased 45.6%
to $1.1 million in the fiscal year ended September 30, 1999 from $779,000 in
the fiscal year ended September 30, 1998. This increase was due to an increase
in the number of personnel, supplies, and equipment dedicated to research and
development. Research and development as a percentage of revenue decreased due
to a significant growth in revenue.
Sales and Marketing -- Sales and marketing expenses increased 36.5% to $1.4
million in the fiscal year ended September 30, 1999 from $999,000 in the
fiscal year ended September 30, 1998. We increased the number of our sales and
marketing personnel and commissions paid to independent manufacturers'
representatives over this period as a result of an increase in the level of
our sales. Sales and marketing expenses as a percentage of revenue decreased
because revenue growth has increased significantly.
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General and Administrative -- General and administrative expenses increased
49.6% to $1.1 million in the fiscal year ended September 30, 1999 from
$712,000 in the fiscal year ended September 30, 1998. This increase was
primarily the result of an increase in consulting and accounting fees and a
$245,000 increase in the provision for uncollectible receivables.
Income Taxes -- The provision for income taxes increased 88.3% to $4.7 million
in the fiscal year ended September 30, 1999 from $2.5 million in the fiscal
year ended September 30, 1998, based on effective tax rates of 40.0% and 40.4%
during those periods.
Fiscal Years Ended September 30, 1998 and 1997
Revenue -- Revenue increased 93.8% to $19.6 million in the fiscal year ended
September 30, 1998 from $10.1 million in the fiscal year ended September 30,
1997. This $9.5 million increase was primarily due to an increase in demand
from our existing customers and an increase in overall sales of our
transceiver products, which carry a higher average selling price, from $2.2
million to $10.9 million during this period. We believe that the increase in
customer demand for our products in recent years reflects increased demand for
components due to growth in the deployment of fiber optic networks worldwide.
Cost of Revenue -- Cost of revenue increased 91.2% to $11.1 million in the
fiscal year ended September 30, 1998 from $5.7 million in the fiscal year
ended September 30, 1997. This increase was primarily due to an increase in
costs related to the sales of our transceiver and SONET transmitter and
receiver modules.
Research and Development -- Research and development expenses increased 67.5%
to $779,000 in the fiscal year ended September 30, 1998 from $465,000 in the
fiscal year ended September 30, 1997. This increase was primarily due to an
increase in the number of personnel and purchases of supplies dedicated to
research and development. Research and development as a percentage of revenue
decreased due to significant growth in revenue.
Sales and Marketing -- Sales and marketing expenses increased 77.4% to $1.0
million in the fiscal year ended September 30, 1998 from $563,000 in the
fiscal year ended September 30, 1997. This increase was due to an increase in
the number of sales and marketing personnel, travel costs and commissions paid
to independent manufacturers' representatives. Sales and marketing expenses as
a percentage of revenue decreased due to a significant growth in revenue.
General and Administrative -- General and administrative expenses increased
93.0% to $712,000 in the fiscal year ended September 30, 1998 from $369,000 in
the fiscal year ended September 30, 1997. This increase was primarily the
result of an increase in professional fees.
Income Taxes -- The provision for income taxes increased 106.8% to $2.5
million in the fiscal year ended September 30, 1998 from $1.2 million in the
fiscal year ended September 30, 1997, based on effective tax rates of 40.4%
and 40.3% during those periods.
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Quarterly Results
The following table sets forth some of our selected financial information for
our seven most recent fiscal quarters. In the opinion of our management, this
unaudited financial information has been prepared on the same basis as the
audited financial information, and includes all adjustments, consisting only
of normal recurring adjustments, necessary to present this information fairly
when read in conjunction with our financial statements and the related notes
contained elsewhere in this prospectus. These operating results are not
necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
Three month periods ended
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------
<CAPTION>
Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1999 1999 1999 1999 2000 2000
(In thousands, except per share data)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Revenue................. $ 6,474 $ 7,244 $ 9,607 $12,711 $14,785 $25,279 $28,997
Cost of revenue......... 3,829 4,549 5,613 6,869 7,911 12,958 13,715
------- ------- ------- ------- ------- ------- -------
Gross profit............ 2,645 2,695 3,994 5,842 6,874 12,321 15,282
Operating expenses:
Research and
development........... 227 270 281 356 406 516 734
Sales and marketing.... 312 302 357 393 510 685 785
General and
administrative........ 189 220 245 411 471 919 1,392
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 728 792 883 1,160 1,387 2,120 2,911
Income from operations.. 1,917 1,903 3,111 4,682 5,487 10,201 12,371
Other income (expenses),
net.................... 36 43 43 (6) 19 35 83
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 1,953 1,946 3,154 4,676 5,506 10,236 12,454
Income taxes............ 804 799 1,298 1,792 2,244 4,171 5,075
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,149 $ 1,147 $ 1,856 $ 2,884 $ 3,262 $ 6,065 $ 7,379
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic.................. $ 0.04 $ 0.04 $ 0.07 $ 0.11 $ 0.12 $ 0.22 $ 0.27
Diluted................ $ 0.01 $ 0.01 $ 0.02 $ 0.03 $ 0.03 $ 0.06 $ 0.07
Shares outstanding:
Basic.................. 27,321 27,321 27,348 27,401 27,401 27,401 27,515
Diluted................ 101,107 101,107 101,207 101,107 103,022 103,022 103,864
As a percentage of
revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 59.1 62.8 58.4 54.0 53.5 51.3 47.3
------- ------- ------- ------- ------- ------- -------
Gross profit............ 40.9 37.2 41.6 46.0 46.5 48.7 52.7
Operating expenses:
Research and
development........... 3.5 3.7 2.9 2.8 2.7 2.0 2.5
Sales and marketing.... 4.8 4.2 3.7 3.1 3.4 2.7 2.7
General and
administrative........ 2.9 3.0 2.6 3.2 3.2 3.6 4.8
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 11.2 10.9 9.2 9.1 9.3 8.3 10.0
Income from operations.. 29.7 26.3 32.4 36.9 37.2 40.4 42.7
Other income, net....... 0.6 0.6 0.4 -- 0.1 0.1 0.3
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 30.3 26.9 32.8 36.9 37.3 40.5 43.0
Income taxes............ 12.4 11.0 13.5 14.1 15.2 16.5 17.5
------- ------- ------- ------- ------- ------- -------
Net income.............. 17.9% 15.9% 19.3% 22.8% 22.1% 24.0% 25.5%
======= ======= ======= ======= ======= ======= =======
</TABLE>
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These quarterly operating results reflect substantial revenue growth,
particularly in the quarter ended March 31, 2000 as compared with the quarter
ended December 31, 1999. Revenue increased 71.0% in the quarter ended March
31, 2000 from the previous quarter due to a large number of sales of our newer
products with higher average selling prices to a major customer and our
increased manufacturing capacity due to our relocation into our Chatsworth,
California facility in November 1999. We do not consider this rate of revenue
growth to be sustainable in future periods as the average selling prices for
existing products may decline in response to product introductions by
competitors or us, or other factors, including pressure from significant
customers for price concessions. Our quarterly operating results also reflect
an increase in our gross margin to 52.7% of revenue in the quarter ended June
30, 2000. We do not expect our future gross margins to exceed the margins that
we have achieved in the quarters ended September 30, 1999, December 31, 1999
and March 31, 2000.
Research and development expenses reflected in our quarterly operating results
range between 2.0% and 3.7% of revenue. We intend to expand our research and
development capabilities to develop new products. As a result, we expect that
our research and development expenses will increase in absolute dollar amounts
and as a percentage of revenue. Sales and marketing expenses ranged between
2.7% and 4.8% over the quarterly periods ended September 30, 1999, December
31, 1999 and March 31, 2000. Because of our plans to expand our sales and
marketing operations, including the addition of two sales offices, we expect
our sales and marketing expenses to increase in future periods.
Our historical operating results have varied significantly, and our future
quarterly operating results are likely to continue to vary significantly from
period-to-period. We believe that period-to-period comparisons of operating
results should not be relied upon as an indicator of our future performance.
Some of the factors which could cause our operating results to vary include
fluctuations in the demand for and sales of our products, the timing of
customer orders, the cancellation of existing orders, competitive factors such
as introductions of new products, our ability to develop, introduce and
manufacture new products in a timely manner, our ability to control expenses,
the availability of components for our products, the mix of our products sold,
changes in industry standards and general economic conditions in the
communications and related industries.
Liquidity and Capital Resources
As of June 30, 2000, our primary source of liquidity was our cash and cash
equivalents balance of $2.8 million. Our unused revolving line of credit
totaling approximately $1.0 million provided an additional source of
liquidity. Since inception, we have financed our operations primarily with
cash generated from operations. Additional financing has been generated
through one private placement of preferred stock, lines of credit and term
loans. As of June 30, 2000, our working capital was $27.0 million with a
current ratio of 2.84. As of June 30, 1999, our working capital was $12.0
million with a current ratio of 2.46. Because of our low debt balances, we
believe that additional cash could be borrowed if necessary; however, cash
flow from operations, cash and equivalents and existing loan facilities are
expected to be sufficient to fund operations for the next 12 months.
As of June 30, 2000, we had a $2.9 million balance outstanding under our term
loan and no balance outstanding under our $1.0 million revolving line of
credit. The term loan and the revolving credit facility bear interest on
amounts outstanding at various time intervals and the market rates based on
our election at a per annum rate equal to either (a) the prime rate or (b)
LIBOR plus 1.8%. The term loan matures July 2006, and the proceeds of the term
loan were used to purchase our primary corporate and manufacturing facility in
Chatsworth, California. The revolving credit facility can be used to fund
working capital requirements.
The term loan and our revolving credit facility contain customary covenants,
including covenants limiting indebtedness and the disposition of assets. To
secure our payment and performance obligations under the term
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loan we have pledged all of our assets as collateral. The term loan and the
revolving credit facility also require that we comply with financial
covenants, which require us to maintain our tangible net worth, cash position
and revenue at specified levels. Our need to comply with these covenants does
not materially affect the operation of our business.
We have current plans to make capital expenditures totaling $1.6 million,
primarily to purchase additional production equipment to continue our
manufacturing capacity expansion.
During the nine months ended June 30, 2000 and June 30, 1999, we generated
cash flow from operations of $6.6 million and $1.5 million, respectively. The
increase in cash generated by operating activities during this period was
caused by increased revenue, partially offset by increases in inventory. For
the years ended September 30, 1999, 1998 and 1997, we generated net cash flow
from operations of $2.2 million, $1.3 million and $1.8 million, respectively.
The increase in cash generated by operations between the years ended September
30, 1999 and 1998 was caused by increased revenue, partially offset by
increased expenditures for parts. The decrease in cash flow from operations
between the years ended September 30, 1998 and 1997 was caused by increases in
inventory and additional operating expenses.
During the nine months ended June 30, 2000 and June 30, 1999, cash used in
investing activities was $6.0 million and $700,000, respectively. Cash used in
investing activities was $4.9 million for the fiscal year ended September 30,
1999, $1.1 million for the fiscal year ended September 30, 1998 and $120,000
for the fiscal year ended September 30, 1997, respectively. The majority of
cash used in investing activities was for capital expenditures for the
purchase of property, plant and equipment to expand and automate our
manufacturing capacity. In July 1999, we paid approximately $4.5 million for
the purchase of our Chatsworth, California facility.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are currently exposed to interest rate risk on our existing term loan and
revolving credit facility. Our variable rate debt consists of term loan
borrowing of $2.9 million. To date we have not utilized our floating rate debt
under the revolving credit facility.
If interest rates were to increase or decrease 1%, the result would be an
annual increase or decrease of interest expense of approximately $29,000.
However, due to the uncertainty of the actions that would be taken and their
possible effects, this analysis assumes no such action. Further, this analysis
does not consider the effect of the change in the level of overall economic
activity that could exist in such an environment.
Sales to foreign customers are denominated in U.S. dollars and as such we have
no foreign currency fluctuation risk.
INFLATION
Inflation has not had a material adverse effect on our results of operations,
however, our results of operations may be materially and adversely affected by
inflation in the future.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statements of financial position and measure
those instruments at fair value. In addition, SFAS No. 133 permits hedge
accounting when certain conditions are met. SFAS No. 133, as amended by SFAS
No. 137 and No. 138, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We believe that SFAS No. 133 will not have a
significant impact on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which summarizes views of the Commission staff in
applying accounting principles generally accepted in the United States to
revenue recognition in financial statements. We believe that our current
revenue recognition principles comply with this bulletin.
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Business
We design, manufacture and sell a comprehensive line of high performance,
highly reliable fiber optic subsystems and modules for the metropolitan area
and high-speed premises markets. Subsystems and modules are preassembled
components that are used to build network equipment. Our subsystems and
modules are integrated into systems which address the bandwidth limitations in
metropolitan area networks and high-speed premises networks. Metropolitan area
networks are communication networks in cities and urban areas that connect
telephone exchanges, Internet service providers, businesses and consumers.
High-speed premises networks are communication networks that connect buildings
within a business or campus setting. Our subsystems and modules include
optical transmitters, receivers, transceivers and transponders that convert
electronic signals into optical signals and back to electronic signals,
enabling high-speed communication of voice and data traffic over public and
private fiber optic networks. Our products support a wide range of network
applications, transmission speeds, distances and standards, including
international transmission standards.
Founded in October 1991, we have established a track record of delivering a
comprehensive line of high performance, cost-effective solutions to our
customers supported by volume production capabilities. We believe that our
close working relationship with leading fiber optic communication equipment
manufacturers allows us to quickly design and build advanced fiber optic
subsystems and modules, enabling our customers to focus on their core
competencies in designing and building overall systems. Our customers include
communication equipment manufacturers, such as 3Com, ADC Telecommunications,
Alcatel, Chromatis Networks, CIENA, Cisco Systems, ECI Telecom, Lucent
Technologies, Marconi Communications and Nortel Networks, some of whom
purchase through contract manufacturers such as ACT Manufacturing,
Flextronics, Jabil Circuits and Solectron.
INDUSTRY BACKGROUND
Increased network traffic
During the past several years, the amount of voice and data transmitted over
communication networks has increased significantly. This growth is primarily
attributed to the rapid growth and popularity of data intensive applications,
such as Internet access, real-time data backup, e-mail, video conferencing,
multimedia file transfers and the movement of large blocks of stored data
across networks. To meet this demand, communication service providers have
upgraded their communication networks to expand capacity, which greatly
reduced transmission costs per bit. This cost reduction has, in turn, further
increased the demand for and usage of communication networks. This cycle,
increased demand fueling increased capacity at reduced costs and increasing
demand further, has enabled the prolonged dramatic growth in voice and data
traffic across networks. Data traffic growth is expected to continue to grow
at a dramatic rate. According to Ryan, Hankin & Kent, a leading market
research and consulting firm, Internet traffic capacity in North America is
estimated to grow between 2000 and 2003 at an average annual growth rate
of 160%.
Evolution of network infrastructure
Communication networks were originally designed to handle voice traffic. The
infrastructure of existing prior generation, or legacy, networks consists of
copper cabling along which voice communications are transmitted in the form of
electronic signals. While copper cabling is generally a reliable transmission
medium, its ability to transmit large volumes of data at high speed is
limited, and it is prone to electromagnetic interference, or EMI, from nearby
electronic equipment and other sources. EMI interferes with the transmission
of a signal and degrades signal quality.
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To overcome the limitations of the legacy copper cable infrastructure and meet
increasing demand for high capacity and high-speed voice and data transmission,
communication service providers have adopted fiber optic technology in their
networks. Fiber optic technology involves the transmission of data in optical
fiber via digital pulses of light, which allows for greater bandwidth over
longer distances than copper cable and higher quality transmissions that are
not subject to EMI.
Widespread deployment of fiber optic technology initially occurred in the long-
haul network. Long-haul networks connect the communications networks of
metropolitan areas around the world and facilitate the transport of large
amounts of voice and data traffic over long distances, up to thousands of
miles. Companies designing equipment for this segment have typically focused on
providing as much bandwidth as possible between any two locations. The long-
haul market was the first to face increasing network congestion as data,
aggregated from expanding metropolitan area and local area networks, began to
overload long-haul networks. Long-haul network managers, focused on maintaining
network performance, were the first to adopt advanced subsystems and modules to
increase the capacity of existing fiber. Long-haul network managers have
typically been concerned more about network performance than transmission
equipment cost. That is because the cost of increasing the capacity of long-
haul networks through adding fiber is expensive relative to upgrading the
transmission equipment to higher data transmission rates.
The build-out of optical long-haul networks through the adoption of advanced
subsystems and modules to increase capacity represents an important step in
improving network infrastructure to support increased demand for new services
and greater traffic volumes. While optical fiber continues to be deployed, and
its transmission capacity expanded in long-haul networks, fiber optic
technologies are increasingly being adopted to support high data-rate
connections to connect end-users to the long-haul networks. These high data-
rate connections consist of three segments: metro core, metro access and
premises.
Communication Network Market Segments
[DESCRIPTION OF DRAWING: Drawing is captioned "Communication Network Market
Segments" and depicts the fiber optic communication network market segments in
three panels. The left panel is entitled "Customer Premise", the center panel
is entitled "Metropolitan" and the right panel is entitled "Long-Haul." The
middle panel is divided into two subpanels, the left subpanel is entitled
"Metro Access Network" and the right subpanel is entitled "Metro Core Network."
In the left panel there are drawings of servers, routers, computers with the
captions "SONET/SDH Digital Loop Carrier", "Cable Modem" and "xDSL" located
underneath the drawings. These drawings are in turn connected by fiber optic
lines to two drawings in the left center subpanel panel of fiber optic rings
with drawings of transmitters, receivers and transceivers encircling the rings.
In the center of a ring is captioned "SONET Ring." These rings are in turn
connected by fiber optic lines to a larger fiber optic ring in the right center
subpanel with drawings of transmitters, receivers and tranceivers encircling
the ring. In the center of this larger ring is captioned "Digital Switch" and
"SONET/DWDM Ring." The ring is in turn connected by a fiber optic line to a
picture in the right panel of a router entitled "Long haul DWDM."]
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Metropolitan area networks
.Metro core networks -- Metro core networks are the distribution points
between long-haul networks and metro access networks. In a typical system, a
long-haul network connects to a city-wide metropolitan area network through
which long-haul data is aggregated by network managers, such as Internet
service providers, and distributed to local users via an access network.
Metro core networks enable enterprises and communication providers to
interconnect network systems over areas from as small as a city block or
corporate campus to a wider geographic area. Metro core networks are one of
the fastest growing sectors in the fiber optics industry. According to Ryan,
Hankin & Kent, the demand for wavelength division multiplexing, or WDM, and
SONET standard transmission transceivers and transponders in metro core
networks in North America is expected to grow between 2000 and 2003 at an
average annual growth rate of 51%.
.Metro access networks -- Metro access networks connect business and
residential end-users to metro core networks. These end-users have
increasingly demanded high-speed connections to take advantage of new data-
intensive computer and multimedia applications and to keep up with higher
speed local area networks that feed into access networks. Access networks
traditionally have used relatively slow copper cable based connections. A
number of high-speed transmission technologies have been developed to improve
the speed of access networks, including digital technologies such as DSL,
ISDN and cable modem technologies. DSL and ISDN technologies utilize the
legacy copper-based infrastructure to provide users with increased bandwidth
at low cost. Cable modems, which connect computers to local cable TV lines,
also provide users with access to high bandwidth at low cost. As these high
data rates and new services become more widely available to end-users, legacy
copper cable connections are expected to become increasingly insufficient to
meet demand. Consequently, communication service providers are beginning to
deploy fiber optic cable directly to end-users or to neighborhood
distribution points, enabling the business or residential end-user to obtain
a wide range of current and future services.
Premises networks
Premises networks consist of local area networks and storage area networks.
Local area networks connect users within a building or groups of buildings.
Storage area networks connect computers and data storage sites within
buildings or groups of buildings. Premises networks were originally developed
as copper cable networks using standards such as Ethernet and Fast Ethernet.
As performance requirements increased, these networks have been upgraded to
multimode fiber, an early generation fiber optic technology. As the
performance required of these networks increases further, they are being
upgraded to even higher performing single mode fiber optics supporting high-
speed networking standards such as Fibre Channel, Gigabit Ethernet and
10 Gigabit Ethernet.
Market Opportunity
With the substantial and increasing volumes of voice and data being
transmitted across long-haul and premises networks, metropolitan area networks
are often the limiting factor in overall network performance. Premises
networks are also increasingly requiring greater bandwidth and performance
capabilities to address congestion caused by increased voice and data traffic
and number of end-users. As a result, network managers are increasingly
upgrading their premises networks to higher speeds using optical transmission
technologies and high-speed networking standards such as Gigabit Ethernet and
Fibre Channel. Ryan, Hankin & Kent estimates that the market for fiber optic
components was approximately $6.6 billion in 1999 and is expected to grow to
over $22.5 billion by 2003.
As demand for bandwidth grows, communication service providers are demanding
increasingly sophisticated systems for metropolitan area networks and high-
speed premises networks. These systems must meet the
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unique requirements of the metropolitan area networks and high-speed premises
networks, such as cost-effectiveness and reliability in harsh environmental
conditions. Historically, metropolitan area network infrastructure has been
supplied by large vertically integrated fiber optic communication equipment
manufacturers, which manufactured their own fiber optic components such as
lasers and photodiodes. The demand for new fiber optic networks has led to the
expansion of production by existing fiber optic communication equipment
manufacturers, as well as the creation of new companies offering cost-
effective fiber optic systems, such as Alidian Networks, Cerent, Chromatis
Networks and Sycamore Networks. These new companies are typically not
vertically integrated and do not employ system design teams to create mixed
analog/digital circuits required for laser and photodiode interfaces.
The market demands on fiber optic communication equipment manufacturers to
produce networking systems for metropolitan area and high-speed premises
networks have given rise to a number of significant technical challenges,
including the following:
.Providing solutions which balance performance and cost. The metropolitan
market requires optical subsystems and modules which are designed
specifically to meet the unique performance and cost requirements of this
market. The highly engineered and expensive solutions provided by long-haul
network equipment manufacturers are too expensive for the metropolitan area
network, and we do not believe that their cost can be reduced easily.
.Providing long distance operation is important in metropolitan area networks
where interconnection distances can range from a few kilometers up to 80
kilometers. Systems that are unable to transmit over long distances require
expensive repeaters to boost and regenerate signals.
.Providing wide operating temperature range is particularly important in
metropolitan area networks where equipment is located in remote locations
with no environmental control. Products that operate from -40 degrees Celsius
to 85 degrees Celsius are a necessity in this market. This is in contrast to
the long-haul network and local area networks where equipment is sited within
temperature controlled buildings.
.Delivering products that address the demand for increasingly smaller packages
to provide higher port density requires greater component miniaturization
expertise.
.Supporting a wide range of data-rates, transmission distance requirements,
network standards, optical interfaces and packaging options requires that
suppliers of fiber optic communication equipment manufacturers offer a broad
range of products.
.Producing increasingly integrated products requires a cross disciplinary
expertise in optics, circuit design, packaging and microwave and radio
frequency.
.Responding to demands for shorter lead times requires manufacturers to design
products and scale production more rapidly.
.Producing systems to handle increasingly higher data-rates in compliance with
Federal Communications Commission standards for EMI emissions requires
advanced fiber optic subsystem and module design.
We believe that a significant opportunity exists for companies that design,
manufacture and sell fiber optic subsystems and modules that meet the unique
challenges of the fiber optic metropolitan area and high-speed premises
networks market.
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OUR SOLUTION
We design, manufacture and sell a comprehensive line of high performance,
reliable fiber optic subsystems and modules that are used in fiber optic
transmission systems. Our subsystems and modules are integrated into systems
which address the bandwidth limitations in metropolitan area networks and
high-speed premises networks. We provide fiber optic communication equipment
manufacturers with high performance, reliable, integrated subsystems and
modules with superior price and performance characteristics, allowing fiber
optic communication equipment manufacturers to focus on their core competency
of designing and building overall systems. Because our competitors specialize
in the long-haul markets, we believe their product offerings are limited to
higher priced, high performance products or similarly priced products which
are unable to match our product performance. We are able to offer products
with both superior price and performance characteristics because our products
are designed for the specific requirements of the metropolitan market.
We provide our customers with the following key benefits:
.High-performance, high reliability, cost-effective products -- Our portfolio
of high performance subsystems and modules enables fiber optic metropolitan
area networks and high-speed premises networks to operate at high data
transmission rates, transmit signals over a variety of distances up to 80 km
and operate in wide temperature ranges of between -40 degrees Celsius to 85
degrees Celsius. Our products are engineered using advanced packaging
technologies, which we believe allows us to deliver some of the industry's
lowest radiated electromagnetic interference, or EMI, solutions. Our products
are qualified under Telecordia (Bellcore) requirements. These are
specifications evolved from a series of documents published by Telecordia
relating to the environmental, electrical and optical testing for fiber optic
transmitters and receivers, to ensure that they offer the high reliability
required for critical applications. We believe we are able to offer cost
effective solutions because our products are engineered to meet the specific
distance, temperature and other performance requirements of the metropolitan
area market.
.Comprehensive product line -- Our comprehensive fiber optic product line
provides fiber optic communication equipment manufacturers with a broad range
of solutions for metropolitan area and high-speed premises networks. Our
subsystems and modules are available with all the common fiber optic
interfaces, and are available in a wide variety of package styles. They
support a wide range of data rates, standards, wavelengths and transmission
distances.
.Innovative design capabilities -- We believe that our expertise in high-speed
electronic circuit design and packaging of fiber optic devices, enhanced by
our close working relationships with customers, enables us to provide
innovative subsystems and modules for the metropolitan area and high-speed
premises networks. Our engineers work closely with Furukawa and other
suppliers to combine advanced semiconductor lasers and custom fiber optic
packaging techniques. We also have expertise in designing the complex
transmitter circuitry that converts a digital logic signal into the proper
signal for the laser or light emitting diode. We design and manufacture our
own fiber optic receiver subassemblies using our proprietary automated
processes. As a result of our fiber optic device design expertise and our
close customer relationships, we are able to quickly adapt our products to
respond to new standards and our customers' requirements for subsystems and
modules.
.Reduced time to market -- Our subsystems and modules allow fiber optic
communication equipment manufacturers to design and assemble fiber optic
interfaces as easily as standard electronic components by eliminating the
need for complex setup of individual lasers or receivers. By designing our
products closely with our customers, our product designs allow our customers
to shorten their design cycle times which allows them to develop and bring
new products to market quickly.
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.Scalable manufacturing capabilities -- Our broad portfolio of products use
modular designs which enable us to rapidly configure and manufacture
subsystems and modules to meet each customers specifications and to rapidly
scale our production to deliver these products in volume. We can easily
customize our products for example by implementing different electrical
connections, or pin configurations, voltages and package sizes as requested
by our customers, without impairing the functionality of our products.
OUR STRATEGY
Our objective is to be the global leader in the design, development and
manufacture of subsystems and modules for fiber optic network equipment for
the metropolitan area networks and high-speed premises networks. Key elements
of our strategy include the following:
.Further expand our position in the metropolitan area and high-speed premises
network markets -- We have established a significant position in the
metropolitan area and high-speed premises network markets by identifying and
focusing on subsystems and modules for these markets. We believe that we have
a unique combination of comprehensive product offerings, management and
design expertise, market understanding and manufacturing capabilities that
provide a competitive advantage in these markets. We believe that our
comprehensive portfolio of over 500 products provides enhanced performance
capabilities in terms of distance, speed, packaging and environmental
durability. Furthermore, we intend to expand our product line to provide
higher performance and higher integration for next generation fiber optic
metropolitan area and high-speed premises networks. We plan to continue to
focus on these markets and leverage our advantages to increase our market
share, enhance our reputation among our customers and further our
technological leadership.
.Strengthen and expand customer relationships -- We have established strong
customer relationships with key fiber optic communication equipment
manufacturers, including 3Com, ADC Telecommunications, Alcatel, Chromatis
Networks, CIENA, Cisco Systems, ECI Telecom, Lucent Technologies, Marconi
Communications and Nortel Networks, and contract manufacturers such as ACT
Manufacturing, Inc., Flextronics, Jabil Circuits and Solectron. We intend to
strengthen our current customer relationships and establish relationships
with new customers by delivering a high level of service and technical
support, thereby, further building our reputation for high quality products
and service. We also expect to enhance our commercial and technical support
for our customers in Europe and Israel by expanding our recently opened
office in England.
.Increase our research and development efforts -- We believe that our ability
to increase our research and development efforts is a critical factor to our
future. In this regard, we intend to recruit and hire additional sources of
technical expertise through increased research and development contracts with
Furukawa and other third parties, and acquire complimentary technologies. In
addition, we are working closely with our customers to anticipate the future
needs of the metropolitan area and high-speed premises markets by developing
products to support technologies such as wavelength division multiplexing, or
WDM, which allows multiple signals to be sent along the same optical fiber by
using different colors of light for each signal and 10 Gb/s networking, the
latest standard for high-speed networking, as these are introduced in our
target markets.
.Expand manufacturing and increase automation -- We intend to continue to
invest in our manufacturing capabilities by expanding our current
manufacturing facilities, opening new facilities and increasing our use of
automated assembly and testing. We believe our current modular products allow
us to expand our manufacturing facilities efficiently, both in terms of cost
and time.
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.Expand our sales and marketing effort -- We plan to expand our sales and
marketing efforts and increase our international operations by:
. expanding our internal sales force, which will include customer
representatives and a technical sales force;
. opening sales offices in North American cities with a growing fiber
optic metropolitan area networks market such as San Jose, California
and Ottawa, Canada, in addition to our existing sales offices in
Franklin, Massachusetts and Richardson, Texas;
. expanding our facility in England to provide increased commercial and
technical support to our customers in Europe and Israel and to
establish a local design center;
. further expanding our network of distributors and sales representatives
in key international and domestic markets; and
. making significant investments in advertising and marketing programs
that we believe will enhance our status with our customers and further
develop our brand-name recognition.
.Continue to leverage our relationship with Furukawa -- We intend to continue
to leverage our strategic relationship with Furukawa. In this regard we plan
to continue to:
. collaborate from time to time in automating key manufacturing and
testing processes; and
. use Furukawa as a primary supplier of packaged lasers and photodiodes,
and highlight their reputation for high performance and quality to our
customers.
.Explore strategic acquisitions -- We intend to pursue selective acquisitions
to strengthen our position in our markets, enhance our technology base,
increase our production capacity and expand our geographic presence. We
intend to seek and acquire companies with synergistic or complementary
technologies, manufacturing capabilities, sales channels and product
offerings. We currently have no commitments or agreements and are not
involved in any negotiations with respect to any such transactions.
PRODUCTS
We offer a comprehensive line of high-performance fiber optic subsystems and
modules, including fiber optic transmitters, receivers, transceivers and
transponders, primarily for use in metropolitan area networks and high-speed
premises networks. Fiber optic subsystems and modules are preassembled
components that are used to build network equipment. Our products convert
electronic signals into optical signals and back into electronic signals,
thereby facilitating the transmission of information over fiber optic
communication networks. Our fiber optic products integrate advanced optical
devices with mixed analog/digital integrated circuits. These circuits allow
continuously varying signals and digital data to be designed in the same
circuit rather than separate circuits. Our products provide subsystem/module
functionality over a wide variety of connectivity speeds, distances, standards
and operating temperature ranges. We were one of the first companies to offer
products with wide temperature range and long reach versions of new standards
such as our 1x9 pin configuration transceiver, a transceiver that has one row
of nine metallic pins that provide the products' electrical connection, and
small form factor LC, a transceiver that conforms to industry standard
specifications. In addition, we have incorporated laser-based, single mode
technology into many of our products. We are developing new products that will
allow our customers to implement next-generation systems incorporating coarse
wavelength division multiplexing, or CWDM, dense wavelength division
multiplexing, or DWDM, and 10 Gbp/s transmission standards. Multiplexers are
integrated circuits that combine signals from many inputs into a single
output, and demultiplexers are integrated circuits that accomplish the
reverse, or create many outputs from a single input.
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Our products are engineered with varying levels of integration to suit our
customers. The lowest level of integration involves separate transmitter and
receiver modules, which provides our customers the greatest flexibility in
product design by allowing them to place the transmitters and the receivers
according to their design specifications. We believe our products' technical
specifications meet or exceed industry standards for fiber optic subsystems
and modules. Transceivers offer the next highest level of integration by
placing both the transmitter and receiver in the same package with a dual
fiber or connector interface. Transponders provide the highest level of
integration by combining the functionality of a transceiver with the addition
of multiplexer and demultiplexer circuits in the same package.
Current products
.Transmitters -- Transmitters convert an electronic digital input signal into
an optical output signal for transmission over a fiber optic network. We
offer separate transmitter modules that provide our customers with the
greatest flexibility in product design by allowing them to place the
transmitters and the receivers according to their design specifications. We
are starting to provide samples of our DWDM transmitters to key customers for
initial testing.
The following table summarizes the capabilities of our optical transmitter
products:
<TABLE>
<CAPTION>
Fiber Transmission
Transmission Standard type(/1/) Transmission speed(Mb/s) distance
--------------------------------------------------------------------------------
<S> <C> <C> <C>
SONET/SDH..................... Single mode 52 2km, 15km,
155 40km, 80km
622
1240
2488
Fast Ethernet................. Multi mode 100/125 2km, 15km,
Single mode 40km, 80km
Gigabit Ethernet.............. Single mode 1250 5km, 10km,
40km, 70km
Fibre Channel................. Single mode 1062 5km, 10km,
40km, 70km
DWDM.......................... Single mode 52 2km, 15km,
2488 40km, 80km
</TABLE>
-------
/1/Single.mode fiber has a smaller core, the area where light travels, and
allows for higher speed and longer distance transmission than multi mode
fiber. Multi mode fiber has a larger core, carries less bandwidth and is
generally used over shorter distances and for lower speed transmissions
than single mode fiber.
.Receivers -- Receivers detect optical signals from a fiber optic network and
convert them into an electronic signal in standard digital/logic format for
further signal processing.
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The following table summarizes the capabilities of our optical receiver
products:
<TABLE>
<CAPTION>
Transmission
Transmission Standard Fiber type speed (Mb/s)
--------------------------------------------------------------------------------
<S> <C> <C>
SONET/SDH.............................................. Multi mode 52
Single mode 155
622
1240
2488
Fast Ethernet.......................................... Multi mode 100/125
Single mode
Gigabit Ethernet....................................... Single mode 1250
Fibre Channel.......................................... Single mode 1062
DWDM................................................... Single mode 2488
</TABLE>
.Transceivers -- Optical transceivers are products that contain both a
transmitter and a receiver and serve as high data-rate interconnects between
network devices, such as hubs, switches, servers and storage elements. Our
optical transceivers are available in a wide variety of fiber optic
interfaces, or form factors, and support a wide range of data-rates,
standards, wavelengths, modes and transmission distances.
The following table summarizes the capabilities of our optical transceiver
products:
<TABLE>
<CAPTION>
Transmission Transmission
Transmission Standard Fiber type speed (Mb/s) distance
--------------------------------------------------------------------------------
<S> <C> <C> <C>
SONET/SDH................................. Multi mode 52 2km, 15km,
Single mode 155 40km, 80km
622
1240
2488
Fast Ethernet............................. Multi mode 100/125 2km, 15km,
Single mode 40km, 80km
Gigabit Ethernet.......................... Multi mode 1250 5km, 10km,
Single mode 40km, 70km
Fibre Channel............................. Multi mode 1062 5km, 10km,
Single mode 40km, 70km
</TABLE>
.Transponders -- Our optical transponders combine the functionality of a
transceiver with integrated circuits for electronic multiplexing and
demultiplexing in the same package. We have provided samples of these
products to customers for initial testing. Multiplexers are paired with
transmitters and allow the system designer to combine multiple low-speed
electronic data streams onto a single optical wavelength, while
demultiplexers and receivers reverse this process. The transmitter portion of
the transponder accepts sixteen 155 Mb/s electronic signals, multiplexes them
together and provides at the output a single 2,488 Mb/s optical signal. The
receiver portion of the transponder performs the reverse function, namely
accepting a single optical signal and providing back sixteen 155 Mb/s
electronic signals. The advantage of this product is the compact overall
design that minimizes the equipment size and the low speed electronic
interface that simplifies our customers printed circuit design. As equipment
speeds increase, this type of product is
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becoming widely used. Our transponder product line is currently being
developed as a single channel product, conforming to SONET/SDH transmission
standards.
<TABLE>
<CAPTION>
Transmission Transmission
Transmission Standard Fiber type speed (Mb/s) distance
--------------------------------------------------------------------------------
<S> <C> <C> <C>
SONET/SDH................................. Single mode 2488 2km, 15km,
40km, 80km
</TABLE>
Products under development
Our product development efforts have, and will continue to be, focused on
developing new products and technologies to support increased transmission
speeds, distances and capacities. We have been developing products to support
future generations of fiber optic metropolitan area and high-speed premises
networks by utilizing wavelength division multiplexing for further increases in
capacity, and we have begun to provide samples of these products to customers
for initial testing. We plan to introduce multi-channel optical transmitters,
receivers and transceivers using both DWDM and CWDM technologies. These are
being designed to allow the mixing of optical signals using different
standards, such as SONET/SDH, asynchronous transfer mode, or ATM and Gigabit
Ethernet, by utilizing different wavelengths. We also plan to introduce more
integrated fiber optic subsystems and modules, such as optical transponders
with DWDM capability, to further advance the product integration levels.
We believe that some of our competitors are developing similar products to
those that we have under development. However, we do not believe that any one
single competitor has all the same products under development as we do. We are
currently developing products in all of these areas. However we may choose to
prioritize or redirect our development to meet market demands. Therefore, it is
not certain that we will introduce products for all of the categories listed
above.
CUSTOMERS
We sell our products to fiber optic communication equipment manufacturers
directly and through contract manufacturers who incorporate them into systems
they assemble for fiber optic communication equipment manufacturers. Contract
manufacturers assemble specific products for fiber optic communication
equipment manufacturers. We define our customers as fiber optic communication
equipment manufacturers who have purchased our products directly or ordered our
products for incorporation into systems produced by contract manufacturers.
Fiber optic communication equipment manufacturers make the purchasing decisions
on substantially all of the products we sell through contract manufacturers.
The following table lists each of our customers that accounted for over
$500,000 of our revenue during the nine months ended June 30, 2000, including
sales to their contract manufacturers:
<TABLE>
<CAPTION>
Customers
--------------------------------------------------------------------------
<S> <C>
3Com ECI Telecom
ADC Telecommunications JDS Uniphase
Alidian Networks Lucent Technologies
Alcatel Marconi Communications
Chromatis Networks Netcom Systems
CIENA Nortel Networks
Cisco Systems Seabridge
</TABLE>
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A small number of customers have historically accounted for a significant
portion of our total revenue. For the nine months ended June 30, 2000, our 10
largest customers accounted for 79.9% of our total revenue, with Cisco Systems
and Alcatel (including sales to each of their contract manufacturers)
accounting for 36.6% and 13.4% of our total revenue, respectively. No other
customer accounted for more than 10.0% of our revenue during the nine months
ended June 30, 2000. For the fiscal year ended September 30, 1999, our
10 largest customers accounted for 69.8% of our total revenue, with Cisco
Systems, Alcatel and 3Com accounting for 21.6%, 9.6% and 10.4% of our total
revenue, respectively. The percentage of revenue attributable to Cisco Systems
during this period also includes our sales to two companies, Cerent and
Monterey Networks, that were acquired by Cisco Systems in August 1999. No
other customer accounted for more than 10.0% of our total revenue during the
fiscal year ended September 30, 1999. We typically do not enter into long-term
contracts with our customers.
A substantial portion of our sales to fiber optic communication equipment
manufacturers are of products which are incorporated into systems produced by
contract manufacturers, including ACT Manufacturing, Inc., Flextronics, Jabil
Circuits and Solectron. For the nine months ended June 30, 2000 and the fiscal
year ended September 30, 1999, sales to fiber optic communication equipment
manufacturers through contract manufacturers accounted for 58.2% and 47.5% of
our total revenue, respectively. Sales to our top two contract manufacturers
in terms of revenue, Flextronics and Solectron, accounted for approximately
29.5% and 11.7%, respectively, of our total revenue for the nine months ended
June 30, 2000 and 6.4% and 10.8%, respectively, for the fiscal year ended
September 30, 1999. No other contract manufacturer accounted for more than
10.0% of our total revenue for the nine months ended June 30, 2000 and the
fiscal year ended September 30, 1999. See "Risk factors -- We derive a
significant portion of our total revenue from a few significant customers, and
our total revenue may decline significantly if any of these customers cancels,
reduces or delays purchases of our products or extracts price concessions from
us."
TECHNOLOGY
The development and manufacture of high-performance fiber optic subsystems and
modules for metropolitan area networks and high-speed premises networks
require diverse technical skills and expertise. We believe that we have a
unique understanding of the fundamental optical devices, their packaging and
high speed circuit design. Our expertise allows us to extend the performance
of low cost packaging and technology, which we originally designed for smaller
local area networks, to provide the high-performance required for fiber optic
metropolitan area networks and high-speed premises networks.
Key elements of our technological capabilities include:
.Optical device technology -- We understand the performance requirements for
optical devices in fiber optic systems. There is a wide range of optical
source and detector technologies available, and these must be optimized for
each application. We have design expertise with six different types of light
sources used to send light along a fiber, and three different types of
detector technologies. Each of these devices has unique performance
characteristics, which must be carefully chosen to meet specific system
requirements.
.Optical packaging/subassembly design -- We work closely with Furukawa and
other suppliers to combine advanced semiconductor laser designs and custom
optical packaging techniques to produce advanced optical subassemblies. Less
than one micron tolerances, or variability in the alignment of components,
are required in these laser packages and reliability specifications require
us to hold these mechanical tolerances over a wide range of temperatures and
the specified life of our products. A micron is one thousandth of a
millimeter. We believe these designs and technologies improve the performance
of our products as well as enhance yields and reduce material costs. We
designed our receiver packages for automated assembly. We also design and
manufacture our optical subassemblies for receivers. This allows us to
provide design flexibility, high-performance and the ability to manufacture
in volume.
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.Links with Furukawa -- We have worked closely with Furukawa to develop new
optical devices for our products using technology that they have developed.
Furukawa supplies us with the majority of the optical devices and the fiber
optic packaging needed for some of the optical subassemblies used in our
products. Furukawa has also worked closely with our engineers to automate key
parts of our assembly and testing processes.
.Electronic circuit design -- We have the expertise to design complex
transmitter circuitry that converts a digital logic signal into the proper
signal for the laser or light emitting diode. This circuit has compensation
and feedback control loops which change the current to maintain constant
optical power output. This electronic signal must also be modulated and the
waveform of the modulation must be carefully controlled to ensure that the
optical output meets the fiber optic communications equipment manufacturer's
defined specifications. Our dense wavelength division multiplexing, or DWDM,
transmitters use advanced circuit designs to stabilize laser temperature to
within 0.1 degrees Celsius, which is necessary to achieve required wavelength
stability. Our sophisticated design techniques enable our receivers to
reproduce electronic signals from optical waveforms that have been attenuated
and distorted by transmission over lengths of up to 80 km of optical fiber.
We have considerable expertise in designing receivers to minimize the effects
of external noise that can significantly affect the performance of a
receiver. Some of these sources are power supplies from adjacent transmitters
and electromagnetic interference, or EMI, within equipment. In addition, we
have expertise in designing avalanche photodiode or, APD, receivers, a type
of high performance light detector, which require complex variable high
voltage power supplies within the receiver module. Our products operate at
speeds up to 2.5 Gb/s and we are working to develop future products to work
at 10 Gb/s. At these speeds, microwave and radio frequency design techniques
must be used to ensure that the waveforms do not degrade and meet the
parameters defined in standards. In addition, we believe our technical
competencies in these areas enable us to produce fiber optic subsystems and
modules with some of the industry's lowest electromagnetic interference
emission levels.
.Fast product development cycle time -- Our products are designed using a
building block approach that allows us to combine different subassemblies in
different ways to provide a wide range of products. Our integrated
subassemblies allow us to quickly adapt our products to respond to new
standards and our customers' requirements for special subsystems and modules.
This ability, in combination with our market knowledge, allows us to select
the commercial opportunities we believe to be the best and provide samples
and production volumes in very short time frames. For example, we recently
provided a customer with a variant of the industry standard 1x9 SC duplex
transceiver to meet its specific requirements. This variant has lengths of
fiber optic cable, or pigtails, instead of standard connectors, on the
transmitter and receiver. We quickly produced this variant by combining our
standard 1x9 SC duplex circuitry with pigtailed laser and receiver
subassemblies from our pigtailed product line. Another example is a
transceiver package that we designed and built for a customer that contains
two receivers, instead of a receiver and a transmitter. Our building block
approach allowed us to supply samples and ramp up production very quickly.
As a result of our technology and innovation, we believe we have been one of
the first to market the following:
.In 1997, we offered SONET/SDH transceivers at 155 Mb/s and 622 Mb/s data
rates in industry standard duplex SC package that can work over an extended
temperature range of -40 degrees Celsius to 85 degrees Celsius.
.In 1997, we offered SONET/SDH transceivers at 155 Mb/s and 622 Mb/s data
rates in industry standard duplex SC package that can incorporate 1310 nm and
1550 nm DFB lasers to transmit over distances of 40 km and 80 km.
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.In 1999, we offered SONET/SDH transceivers at 2500 Mb/s data rate in industry
standard duplex SC package that can meet the SONET specification of
Intermediate Reach distance of 15 km.
MANUFACTURING
We assemble, burn in and test all of our products in our facility in
Chatsworth, California. We also conduct all of our manufacturing engineering,
quality assurance and documentation control at this facility.
We use a number of subcontractors and suppliers, including Furukawa, to supply
subassemblies. We currently rely upon domestic and international contract
manufacturers for most of our printed circuit board assembly. Our
manufacturing supply chain management team manages these relationships
supported by our research and development group. We do not have any long-term
contracts with any of our contract manufacturers and none of them are
obligated to perform assembly services for us for any specific period or at
any specific price, except as may be provided in a particular purchase order.
We provide quality assurance through internal testing procedures throughout
the entire manufacturing process. Furthermore, we believe our quality control
processes and procedures are stringent, including vendor inspection, incoming
material inspection, in-process testing and outgoing inspection. We maintain
ISO 9002 certification. We provide specialized training designed to assure the
competency of our manufacturing personnel.
In the nine-month period ended June 30, 2000, we more than doubled our
production compared to the same nine month period in 1999. We intend to
further increase the quality and capacity of our manufacturing process and are
currently considering implementing the following:
.Increase from two to three manufacturing shifts to increase manufacturing
volume.
.Implement additional automation in testing, die and wire bonding and other
areas to improve the capacity and quality of our products. Furukawa has
provided engineering support to help our engineers develop our existing
automation under the terms of a development contract completed in July 2000.
.Installing a software based production floor tracking system to reduce
paperwork and enable real-time tracking of process yields.
.Creating a manufacturing engineering group to ensure smooth and timely
transfer of new products and processes from research and development to
manufacturing, and to improve production, increase yields and increase
automation.
.Increase subcontracting of circuit board assemblies to quality offshore
subcontractors.
.Establishing additional manufacturing capabilities in the United States, Asia
and Europe.
We purchase several key components for our products from a limited number of
suppliers. The components that we purchase include integrated circuits, or
ICs, lasers, light emitting diodes, or LEDs, vertical cavity surface-emitting
lasers, or VCSELs, photodiode devices and other electronic passive components.
We have periodically experienced shortages and delivery delays for these
materials. Because we operate in an industry where material supplies are
constrained, we maintain an inventory of some limited source components to
decrease the risk of shortage. As a result, we have excess inventory of these
components which leads to a higher provision for obsolete inventory.
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See "Risk factors -- We are dependent on a limited number of suppliers for
most of our key components. If these suppliers are unable to meet our
manufacturing requirements, we may experience production delays leading to
delays in shipments, increased costs and cancellation of orders for our
products," "-- We must expand our manufacturing capacity and manufacturing
processes in order to continue to deliver our products to our customers in a
timely manner and to support our revenue growth," "-- If we fail to predict
our manufacturing requirements accurately, we could incur additional costs or
experience manufacturing delays, which could cause us to lose orders or
customers," "-- If we do not achieve acceptable manufacturing yields in a
cost-effective manner, or we are required to develop new manufacturing
processes to improve our yields, our operating results would be impaired."
RESEARCH AND DEVELOPMENT
We have assembled a team of engineers with specialized experience and
extensive knowledge in fiber optic design, microwave and radio frequency
techniques, fiber optic package design and systems architecture.
We believe increased investment in technology is critical to our future
success. We will continue to focus our research and development activities on
enhancing our existing products and developing new products to meet the
evolving needs of our customers within the metropolitan area and high-speed
premises networks markets. Our interaction with customers throughout the
product design process enables us to anticipate technological trends in the
networking industry and focus our research and development efforts on
addressing these emerging needs. We design products to meet current industry
standards and will continue to support emerging standards that are consistent
with our product strategy.
Our research and development expenses were $1.7 million during the nine months
ended June 30, 2000 and $1.1 million, $779,000 and $465,000 in the fiscal
years ended September 30, 1999, 1998 and 1997, respectively. We believe that
our experienced optic engineers and the modular nature of our products are key
factors allowing us to achieve relatively low research and development
expenses.
In addition, our relationship with Furukawa has provided us with access to
Furukawa's optical device and packaging technology. Furukawa has developed a
number of innovative components that we have integrated in our products and
has assisted in the automation of key portions of our manufacturing process
through a research and development contract. We plan to continue to
collaborate with Furukawa as we expand our internal research and development
capabilities. However, we have no research contracts or agreements with
Furukawa at this time.
We expect to increase our total research and development expenses in the
future to provide resources for one or more of the following activities:
.Development of new product lines with emphasis on increased performance,
higher levels of integration and miniaturization and meeting new industry
standards.
.Fund other development contracts with universities, research institutes and
companies.
As a result of these activities, we expect research and development expenses
to increase significantly in absolute dollars and as a percentage of revenue
for the foreseeable future.
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SALES, MARKETING AND TECHNICAL SUPPORT
We market and sell our products primarily through our direct sales force
supported by independent manufacturers' representatives and distributors. We
focus our marketing on fiber optic communication equipment manufacturers in
the fiber optic metropolitan area and high-speed premises networks markets.
Our direct sales force maintains close contact with our customers and provides
technical support to our manufacturers' representatives and distributors. Our
direct sales force is located in our sales offices in Chatsworth, California,
Franklin, Massachusetts, Bury St. Edmunds, England and Richardson, Texas. We
intend to expand our direct sales force and open additional sales offices in
San Jose, California and Ottawa, Canada. Our customer service department in
our Chatsworth facility provides day-to-day updates on orders and deliveries
to our customers.
We have established contractual relationships with manufacturers'
representatives and distributors in North America, Europe, Israel, Asia and
Australia. Manufacturers' representatives and distributors are third parties
who provide commercial and technical support in selling our products to
customers. Manufacturers' representatives represent us with customers, but
customers place orders directly with us. We pay the manufacturers'
representatives a fee for this service. Distributors perform the same
function, but differ in that the distributor buys products from us and resells
them at a profit to the end customer. We have recently established an office
in England which provides commercial and technical support to our customers in
Europe and Israel. We intend to expand our indirect sales activity by
establishing relationships with additional independent manufacturer's
representatives and distributors. See our financial statements and the notes
to those financial statements for financial information about geographic
areas.
Our marketing efforts are focused on increasing customer awareness of our
brand name, and the features and benefits of our optical subsystems and
modules. The key components of our marketing efforts include:
.Interaction with customers during product development and through detailed
technical interaction during the product sampling phase;
.Expansion of our applications group to provide our customers with complete
technical information on our products as well as design and troubleshooting
assistance and reference designs with chip sets supplied by the major
integrated circuit companies; and
.Participation in major trade show events and conferences in the
communications network industry to promote our broad lines of optical
subsystems and modules.
In addition, we advertise and promote our activities in industry trade
journals and publications targeting design engineers. We also interact with
our customers in industry associations and standards committees to promote and
further enhance Gigabit Ethernet, Fibre Channel and other industry standards
and to increase our visibility as industry experts.
We believe that our technical support during our customers' selection, design,
troubleshooting and production phases has enabled us to establish a large
number of our new customers and achieve design wins. We provide extensive
technical support to our customers during their design and qualification
process through direct contact with our engineers, our applications group and
our Web site, which includes product documentation and application notes.
After the design-in phase, we provide support for our customers during their
manufacturing process. Our account managers and our customer service
department who work closely with our manufacturing and quality groups provide
this support.
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We are strengthening our current customer relationships by continuing to
deliver a high level of service and technical support. We are also leveraging
our reputation for high quality products and service to establish
relationships with new customers. We intend to continue to provide our
customers with comprehensive product support and believe it is critical to
remain competitive.
OUR RELATIONSHIP WITH FURUKAWA
We were incorporated as a California corporation in October 1991. In November
1991, a wholly-owned subsidiary of The Furukawa Electric Co., Ltd. provided
our initial capital investment. Furukawa, a publicly held company incorporated
under the laws of Japan, is one of the world's leading manufacturers of
electric wire and cable, nonferrous metals and related products. It also
provides engineering services, including the installation of power and
telecommunications cables, and is a major manufacturer of fiber optic cable.
Furukawa's stock is publicly traded on the Tokyo Exchange Nikkei in Japan.
We are currently a 70.3% owned subsidiary of Furukawa. Upon completion of this
offering, Furukawa will beneficially own all of our outstanding Class B common
stock, which will represent 63.2% of our outstanding shares of common stock
and 94.5% of the combined voting power of all of our outstanding common stock.
Furukawa will be in a position to continue to influence and control all
matters affecting our company.
Our relationship with Furukawa has allowed us to benefit from the optical
device and packaging technologies developed at its laboratories in Japan which
are incorporated into laser products that we purchase from Furukawa for
inclusion in our products. We have also established a close working
relationship with Furukawa's research and development team through periodic
meetings and discussions to understand our product and manufacturing
requirements. Under these arrangements, Furukawa customizes to our
specifications the components that it supplies to us. For example, Furukawa
has developed laser products with customized features in the areas of package
design and power output. We have not licensed from Furukawa any of its optical
device or other technologies.
We currently purchase substantially all of our lasers and the majority of our
other optical devices, such as laser modules and photodetectors, from Furukawa
using short-term purchase orders. These modules and devices are critical parts
in the manufacture of our subsystems and modules. We have enjoyed a reliable
supply of these critical components from Furukawa in the past. However, we do
not have a long-term supply contract with Furukawa and we have no plans to
enter into a long-term supply contract in the future. Consequently, we may in
the future seek alternative suppliers or to develop our own laser production
capabilities.
From time to time our research and development team works closely with
Furukawa's team to assist in the development of our design and manufacturing
process. For example, in July 2000 we entered into a short-term development
contract with Furukawa to assist us in the purchase, system design, operation,
study, and execution of new equipment orders to automate our product testing
operations. We paid Furukawa $84,000 for these services under the development
contract. We may enter into similar development agreements with Furukawa in
the future. However we have no current commitments and currently have no
development agreements under negotiation with Furukawa. See "Risk factors --
Risk relating to our relationship with Furukawa" and "-- We are dependent on
a limited number of suppliers for most of our key components. If these
suppliers are unable to meet our manufacturing requirements, we may experience
production delays leading to delays in shipments, increased costs and
cancellation of orders for our products."
For the year ended September 30, 1999, we paid $69,000 in management fees to
Furukawa for consulting and advisory services. These services related to
advice provided to our management on issues concerning market trends in the
fiber optic industry and strategic planning.
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Since members of our board of directors are also executives of Furukawa, all
transactions between us and Furukawa will be governed by the provisions of
Section 144 of the Delaware General Corporation Law, which addresses potential
conflicts of interest. Section 144, as applied to us, provides that a
transaction between us and Furukawa would not be void or voidable if:
. the material facts as to the interested director's and Furukawa's
interest in the transaction are disclosed to our board and the board in
good faith authorizes the transaction by the affirmative votes of a
majority of the disinterested directors, or
. the material facts as to the interested director's and Furukawa's
interest in the transaction are disclosed to our stockholders and the
transaction is approved in good faith by a vote of our stockholders, or
. the transaction is fair to us at the time it is authorized, approved or
ratified by the board or our stockholders.
COMPETITION
The metropolitan area and high-speed premises networks markets for optical
subsystems and modules for optical communication network applications is
highly competitive and subject to rapidly changing technology. We believe the
primary competitive factors impacting our business are as follows:
.cost-effective products that balance performance requirements with the cost
of the product;
.timeliness of new product introductions;
.scope and responsiveness of service and technical support;
.established reputation with key customers;
.technical innovation;
.quality and reliability of our products;
.breadth of product offerings;
.gaining design approval during our customers design cycle;
.compatibility with emerging industry standards;
.price characteristics;
.ability to rapidly scale production for high volumes; and
.data-rate, port density and other performance features.
We have established a significant position in the metropolitan area and high-
speed premises network markets by identifying and focusing on fiber optic
subsystems and modules for these markets. We believe that we have a unique
combination of comprehensive product offerings, management and design
expertise, market understanding and manufacturing capabilities that provide us
with a competitive advantage in these markets. We compete primarily with
Agilent Technologies, ExceLight Communications, Finisar, Infineon
Technologies,
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IBM, Lucent Technologies, Luminent, Molex, Stratos Lightwave and Tyco
International. Many of our current and potential competitors have
significantly greater financial, technical, marketing, purchasing and other
resources than we do. We have competitors for all of our current products.
However, we believe that we do not have a single competitor that offers the
same range of products as us and this is the reason we believe that we have a
lead in the metropolitan market. Our products may also compete with
technologies that provide alternatives to optical networking, including fixed
and mobile radio, free space point-to-point optical transmission and copper-
based technologies such as DSL and cable modems. Most of these technologies
provide lower speed and shorter distance capabilities than optical networking
technologies, but may provide advantages such as lower costs and mobile
capabilities. However, in our primary market for high-speed communications, we
do not expect to face significant competition from these technologies in the
future. See "Risk factors -- Our markets are highly competitive, and our
customers may choose to purchase our competitors' products rather than our
products or develop internal capabilities to produce their own fiber optic
subsystems and modules."
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part on our proprietary
technology. We are able to rely on a combination of copyright, trademark and
trade secret laws and confidentiality agreements to establish and protect our
proprietary rights. To date, we have relied primarily on proprietary processes
and know-how to protect our intellectual property. Although we currently do
not have any patents or patent applications pending, our intellectual property
primarily consists of proprietary processes and know-how relating to our
product design processes, assembly drawings, assembly processes and testing
procedures.
We currently do not license to or from any third parties the technology used
in the manufacture of our fiber optic subsystems and modules. In addition, no
technology is transferred or licensed in connection with our supply
relationship with Furukawa. Accordingly, Furukawa owns the technology relating
to the manufacture of its laser and other products we purchase for
incorporation into our products and may license or sell this technology to
other parties. We own the technology relating to the manufacture of our fiber
optic subsystems and modules. A disruption of our supply relationship with
Furukawa would not have a material impact on our rights to the technology
required to produce our products. We have not transferred to Furukawa any
intellectual property rights that would allow it to compete with us in the
metropolitan area markets. However, there can be no assurance that Furukawa
would not develop in the future internal capabilities to manufacture fiber
optic subsystems and modules similar to and competitive with our products.
Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. This litigation could result in substantial costs and diversion of
resources and could significantly harm our business. See "Risk factors -- If
we are unable to protect our proprietary technology, this technology could be
misappropriated, which would make it difficult for us to compete in our
industry." From time-to-time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies and in
various jurisdictions that are important to our business. We are currently
defendants in an alleged infringement lawsuit brought by Methode Electronics,
Inc. and Stratos Lightwave, Inc. For further details see "-- Legal
proceedings." Any claims asserting that our products infringe or may infringe
proprietary rights of third parties, if determined adversely to us, could
significantly harm our business. Any claims, with or without merit, could be
time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, cause product shipment delays or require
us to enter into royalty or licensing agreements, any of which could
significantly harm our business. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us, if at all. In addition, our
agreements with our customers typically require us to indemnify our customers
from any expense or liability resulting
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from claimed infringement of third party intellectual property rights. In the
event a claim against us is successful, we could be liable for significant
monetary damages. If we can not obtain a license to the relevant technology on
acceptable terms or license a substitute technology or redesign our products
to avoid infringement, our business would be significantly harmed. See "Risk
factors -- We could be subjected to additional litigation regarding
intellectual property rights, which may divert management attention, cause us
to incur significant costs or prevent us from selling our products."
LEGAL PROCEEDINGS
On October 15, 1999, Methode Electronics, Inc. filed a lawsuit against
Infineon Technologies Corporation and us in the United States District Court
for the Northern District of California, seeking unspecified damages,
including monetary damages, injunctive relief, attorneys' fees and costs
arising from our alleged infringement of some claims contained in Methode's
U.S. Patents Nos. 5,528,408, 5,717,533, 5,734,558, 5,864,468 and 5,879,173.
The '408 and '468 patents are alleged to relate to technology incorporated in
our 1x9 pin configuration products, such as our singlemode SONET/SDH
transceivers products. These products combine fiber optic transmitters and
receivers in one module that conforms to the internationally agreed SONET/SDH
telecommunications standard protocol. The '533, '558 and '173 patents are
alleged to relate to the technology incorporated in our gigabit interface
converter, or GBIC, products, such as our Gigabit Ethernet and Fibre Channel
products. Our GBICs products are a type of transceiver.
On December 17, 1999, we filed an answer to Methode's complaint denying
Methode's claims of infringement and asserting a number of defenses, including
noninfringement and invalidity of the Methode patents. On June 27, 2000,
Methode filed a motion for leave to amend its complaint to add Stratos
Lightwave Inc., a Methode spin-off and assignee of the patents-in-suit, as an
additional plaintiff and to allege that we infringe U.S. Reissue Patent No.
36,820 (a reissue of U.S. Patent No. 5,546,281) through certain aspects of our
GBIC products. Methode has since withdrawn its motion to amend with respect to
the RE '820 Patent. Methode may later seek to amend its complaint again to
allege infringement of the claims of the RE '820 Patent, or may later file a
separate proceeding against the Company alleging infringement of the reissued
patent's claims. For the nine months ended June 30, 2000, sales of our 1x9 pin
configuration products alleged to infringe the '408 and '468 patents accounted
for 28.7% of our total revenue. For the nine months ended June 30, 2000, sales
of our GBIC products alleged to infringe the '533, '558, '173 and '820 patents
represented an immaterial amount of our total revenue.
This lawsuit is in the early stages. No formal discovery has been conducted,
and a portion of the case relating to the claims involving the '408 and '468
patents relating to our 1x9 pin configuration products have been stayed
pending the completion of the Patent and Trademark Office's re-examination of
the '408 patent. In the re-examination, the Patent and Trademark Office has
been requested to reexamine the claims of this patent in view of prior art
that was not considered by the Patent Office prior to the patent's issuance.
We intend to defend ourselves vigorously in this lawsuit. However, the outcome
of this lawsuit is uncertain. Our defense of this lawsuit, regardless of its
eventual outcome, will likely be costly and time consuming. We expect to incur
greater legal fees and expenses in connection with this lawsuit. If Methode's
patents are found to be valid and enforceable and our products are found to
infringe, we may be enjoined from manufacturing or selling some of our
products, we may be liable for significant monetary damages, and we may have
to obtain a license from Methode in order to use its patented technology, any
of which could harm our business. If we are required to obtain a license to
any of Methode's patents, such license may not be available from Methode on
commercially reasonable terms, if at all. See "Risk Factors -- If we are
unsuccessful in defending against Methode's lawsuit for patent infringement,
we may be required to pay
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significant monetary damages to Methode and may be enjoined from manufacturing
and selling our products found to infringe Methode's patents."
We are not currently involved in any other material legal proceedings, nor
have we been involved in any such proceedings that has had or may have a
significant effect on our company. We are not aware of any other material
legal proceedings threatened or pending against us.
EMPLOYEES
As of September 30, 2000, we had 310 full-time employees and no part-time
employees. Our employees are not represented by any collective bargaining
agreements and we have never experienced a work stoppage. We believe that our
relations with our employees are good.
FACILITIES
Our corporate headquarters, manufacturing, research and development and sales
operations are located in Chatsworth, California, where we own a building of
approximately 65,000 square feet. We currently occupy approximately 50,000
square feet of the building and sub-lease approximately 15,000 square feet to
an unrelated party. We purchased the property in July 1999 with the proceeds
of a $3.3 million term loan that matures in July 2006. The term loan bears
interest on amounts outstanding at a per annum rate equal to LIBOR plus 1.80%.
The term loan and a revolving credit facility are secured by all of our
assets. In addition, we lease small sales facilities under month-to-month
leases in Franklin, Massachusetts and Bury St. Edmunds, England and in
Richardson, Texas, under a lease that expires in July 2001.
We believe that our existing space is adequate for our current operations. We
plan to acquire additional space to meet our manufacturing requirements in the
near future. We believe that suitable replacement and additional spaces will
be available in the future on commercially reasonable terms.
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Management
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is information concerning our current and proposed directors,
executive officers and other key employees as of October 15, 2000. Within 90
days following the completion of this offering, our board of directors intends
to select at least two additional people who are not our employees and are
otherwise independent to serve as directors and Ms. Nemeti, Mr. Ghorbanali and
Mr. Shibata intend to resign.
<TABLE>
<CAPTION>
Name Age Position(s)
------------------------------------------------------------------------------
<C> <C> <S>
Muoi Van Tran............ 49 Chief Executive Officer, President and Director
Susie L. Nemeti.......... 42 Chief Financial Officer, Secretary, Vice
President of Finance and Administrative and
Director
Mohammad Ghorbanali...... 45 Chief Operating Officer, Vice President of
Manufacturing and Research and Development and
Director
David G. Jenkins......... 46 Managing Director of European Operations
Masato Sakamoto.......... 53 Chairman of the Board of Directors
Kunihiro Matsubara....... 56 Director
Yoshihisa Okada.......... 47 Director
Stewart D. Personick(1).. 53 Director
Mitsuyoshi Shibata....... 47 Director
</TABLE>
-------
(1) Has agreed to be appointed a director and member of our audit and
compensation committees upon completion of this offering.
Muoi Van Tran co-founded our company and has been our President since
September 1994, our Chief Executive Officer since March 1999 and a director
since October 1991. Prior to joining us, Dr. Tran was the Director and Vice
President of research, development and engineering and Systems Business Unit
Manager at PCO, Inc., a manufacturer of fiber optic products, from 1984 to
1991. Dr. Tran was a Member of Technical Staff at TRW ElectroOptic Research
Center, a research and development company, from 1981 to 1984 and at Bell
Laboratories, a research center, from 1978 to 1981. Dr. Tran was the Technical
Program Co-Chair of the 1991 Optical Fiber Communications Conference and
General Co-Chair of the jointly-held Optical Fiber Communications and
Integrated Optics and Optical Communications Conference in 1993. Dr. Tran has
over 25 years of experience in the field of fiber optics, and earned his Ph.D.
in electrical engineering from the University of Western Australia.
Susie L. Nemeti co-founded our company and has been our Chief Financial
Officer, Vice President of Finance and Administration and Secretary since
November 1991 and a director since September 1996. Prior to joining OCP, she
was the Manager of Accounting at PCO, Inc., a manufacturer of fiber optic
products, from December 1987 to August 1991. Prior to working with PCO, Inc.,
she worked as a Financial Analyst and Controller for five years in real estate
acquisitions and property management. She earned her bachelor of science
degree in Business Administration and Accounting from the University of
Southern California.
Mohammad Ghorbanali co-founded our company and has been our Vice President of
Manufacturing, Research and Development since November 1991, our Chief
Operating Officer since March 1999 and a director since September 1995. He was
formerly with PCO, Inc., a manufacturer of fiber optic products, from 1985 to
1991 and 1981 to 1985 at Eaton Corporation, a designer and manufacturer of
instrumentation. He has over 15 years experience in the fiber optics field,
and earned his bachelor of science degree in electrical engineering as well as
his masters degree from San Jose State University.
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David G. Jenkins joined our company as our Managing Director of European
Operations in July 2000. Prior to joining our company, from 1989 through July
2000, Dr. Jenkins held several positions with Agilent Technologies and Hewlett
Packard, manufacturers of fiber optic equipment, most recently serving as
Public Networks Marketing Manager. Dr. Jenkins was the Research and
Development Manager/Marketing Manager for BT&D Technologies, a manufacturer of
fiber optic equipment, from its inception in 1987 through its sale to Hewlett
Packard in 1995. From 1984 to 1986, Dr. Jenkins was a Senior Scientist for
Plesscor Optronics Inc., a manufacturer of fiber optic equipment, and from
1978 to 1984, he was the Fiber Optic Research Group Leader for The Plessey
Company Ltd., a manufacturer of fiber optic equipment. Dr. Jenkins has over 22
years of experience in the field of fiber optics and earned his Ph.D. in
electron microscopy from Oxford University.
Masato Sakamoto has been our Chairman of the Board of Directors since January
1998. Since July 1996, Mr. Sakamoto has been the President of Furukawa
Electric North America, Inc. From October 1989 to June 1996, Mr. Sakamoto was
the General Manager of Corporate Planning of mid- to long-term corporate
strategy for Furukawa.
Kunihiro Matsubara has been a director since August 2000. Since January 1997,
Mr. Matsubara has been the General Manager of the Fitel Products Division and
a director of Furukawa. Between April 1995 and January 1997, Mr. Matsubara was
the Deputy General Manager of the Fitel Products Division of Furukawa. Mr.
Matsubara holds a masters degree and bachelor of science degree in electrical
engineering from Yokohama National University, Japan.
Yoshihisa Okada has been a director since June 1998. Since April 1998, Mr.
Okada has been the General Manager of Strategic Planning in Tokyo for
Furukawa. From December 1990 to March 1998, Mr. Okada was the General Manager
for European Business Support in London for Furukawa.
Stewart D. Personick will join our company as a director and member of our
audit and compensation committees upon completion of this offering. Since
September 1998, he has been the E. Warren Colehower Chair Professor of
Telecommunications and Information Networking at Drexel University, and the
Director of Drexel's Center for Telecommunications and Information Networking.
From 1983 to July 1998, Dr. Personick was Vice President at Bell Communication
Research, a research and development company. Dr. Personick has been a fellow
of the Institute of Electrical and Electronics Engineers since 1983, a fellow
of the Optical Society of America since 1988, a member of the U.S. National
Academy of Engineering since 1992 and he received the IEEE/OSA John Tyndall
Award in 2000. Dr. Personick earned his bachelor of electrical engineering
from The City College of New York and his master of science and doctor of
science from the Massachusetts Institute of Technology.
Mitsuyoshi Shibata has been a director since April 1997. Since April 1997, Mr.
Shibata has been the General Manager of the Optical Devices Department at
Furukawa. From 1977 to 1987, he was an engineer at Furukawa. He holds a
bachelor of science degree in metallurgy from Tokyo University.
BOARD OF DIRECTORS
We intend that, within 90 days following the completion of this offering, our
board of directors will be composed of seven members, including three
directors who are not employees and who are otherwise independent of our
company and Furukawa. Each director currently serves until the next annual
meeting of stockholders or until his or her successor is duly elected and
qualified. At each annual meeting of stockholders, the directors' successors
will be elected to serve until the next annual meeting of stockholders. In
addition, our bylaws provide that the authorized number of directors will be
between four and seven, with the exact number to be determined by a majority
of our board of directors or stockholders.
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BOARD COMMITTEES
.Independent director nominating committee -- Our board of directors intends
to establish an independent director nominating committee prior to the
completion of this offering. Unless our board of directors has otherwise
acted, this committee will nominate and select persons deemed independent to
serve as our independent directors. The independent nominating committee will
be composed of Muoi Van Tran, our Chief Executive Officer and President, and
two of our directors affiliated with Furukawa. The independent director
nominating committee will also have the responsibility to search for and
nominate independent director candidates to fill independent director
vacancies on our board.
.Audit committee -- Following the completion of this offering, our board of
directors intends to establish an audit committee to be composed of three
independent directors, including Dr. Personick. The audit committee will
generally meet with and consider suggestions from members of management and
our internal accounting personnel, as well as our independent accountants,
concerning our financial operations.
The audit committee will also have the responsibility to:
. review the audit committee charter at least annually and recommend any
changes to our board of directors;
. review our annual financial statements and any other relevant reports or
other financial information;
. review the regular internal financial reports prepared by management and any
internal auditing department;
. recommend to the board of directors the selection of the independent
accountants and approve the fees and other compensation to be paid to the
independent accountants;
. review and discuss with the accountants all significant relationships the
accountants have with us to determine the accountants' independence;
. review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant; and
. following completion of the annual audit, review separately with the
independent accountants, the internal auditing department, if any, and
management any significant difficulties encountered during the course of the
audit.
.Compensation Committee -- Following the completion of this offering, our
board of directors intends to establish a compensation committee to be
composed of at least two independent directors, including Dr. Personick. The
compensation committee will be responsible for the design, review,
recommendation and approval of compensation arrangements for our directors,
executive officers and key employees, and for the administration of our 2000
Stock Incentive Plan, including the approval of grants under such plan to our
employees, consultants and directors, and our 2000 Employee Stock Purchase
Plan.
Our board of directors may establish other committees to facilitate the
management of our business.
DIRECTOR COMPENSATION
We do not provide cash compensation to any of our directors for serving on our
board of directors or for attendance of meetings of committees of the board of
directors. Non-employee directors are reimbursed for reasonable travel and
other out-of-pocket expenses incurred in connection with attendance at
meetings of the board of directors and committees of the board of directors.
Employee directors are eligible to receive option grants and direct stock
issuances under our 2000 Stock Incentive Plan. Non-employee directors will
each
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receive, from time to time, grant of options to purchase a number of shares of
our Class A common stock determined by our compensation committee. Those
shares will vest upon the optionee's completion of one year of board service
measured from the grant date. See "-- Stock plans/employee benefit programs."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee or other board committee performing
equivalent functions in 1999. All members of our board of directors, including
Messrs. Tran and Ghorbanali and Ms. Nemeti, who are also executive officers,
participated in deliberations concerning executive officer compensation. No
interlocking relationship exists between our board of directors and the board
of directors or compensation committee of any other company other than
Furukawa.
EXECUTIVE COMPENSATION
Summary of cash and other compensation for fiscal years ended September 30,
2000 and 1999
The following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended September 30, 2000 and 1999
by our Chief Executive Officer and the two other executive officers whose
total compensation exceeded $100,000 during the fiscal year ended September
30, 2000.
Executive compensation table (Fiscal year ended September 30, 2000 and 1999)
<TABLE>
----------------------------------------------------------------------------------------
<CAPTION>
Long-term
compensation
Annual compensation Securities
Name and principal ------------------- Other annual underlying All other
position Year Salary Bonus compensation options/SAR compensation
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Muoi Van Tran........... 2000 $ 218,035 $ --(1) $ --(1) 1,330,200 --(1)
Chief Executive Officer 1999 189,400 306,600 17,700 -- --
and President
Mohammad Ghorbanali..... 2000 $ 175,883 $ --(1) $ --(1) 1,088,360 --(1)
Chief Operating Officer 1999 153,800 250,900 17,400 -- --
and Vice President of
Manufacturing and
Research and
Development
Susie L. Nemeti......... 2000 $ 142,715 $ --(1) $ --(1) 883,120 --(1)
Chief Financial 1999 125,600 203,500 14,200 -- --
Officer, Secretary
and Vice President of
Finance and
Administration
</TABLE>
-------
(1) Data required to calculate this information is based on our revenue for
our fiscal year ended September 30, 2000 and other information that is not
yet available.
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Option grants in fiscal year ended September 30, 2000
The following table sets forth information regarding options granted to our
executive officers during the fiscal year ended September 30, 2000. We did not
grant any stock appreciation rights during the fiscal year ended September 30,
2000. Options were granted at an exercise price equal to the fair market value
of our common stock at the date of the grant. In determining the fair market
value of our common stock, the board of directors considered various factors,
including our financial condition and business prospects, operating results,
the absence of a market for the common stock and risks normally associated
with investments in companies engaged in similar businesses.
<TABLE>
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<CAPTION>
Individual Grants
---------------------------------------------------
Number of
Shares of Potential Realizable
Class A % of Total Value at Assumed
Common Options Annual Rates of
Stock Granted to Stock Price Appreciation
Underlying Employees Exercise Price for Option Term
Options in Fiscal Per Share Expiration -------------------------
Name Granted (#) Year 2000 ($/share) Date 5% ($) 10% ($)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Muoi Van Tran........... 1,330,200(1) 36.7 11.00 8/29/10 23,834,311 37,952,158
Mohammad Ghorbanali..... 1,088,360(1) 30.1 11.00 8/29/10 19,501,061 31,052,180
Susie L. Nemeti......... 883,120(1) 24.4 11.00 8/29/10 15,823,603 25,196,444
</TABLE>
-------
(1) All of these options are fully vested and were granted outside of our
stock option plans.
During the fiscal year ended September 30, 2000, we granted options to
purchase 3,301,680 shares of our common stock. The term of each option granted
is generally 10 years from the date of the grant. Options may terminate before
their expiration dates, if the optionee's status as an employee is terminated
or upon the optionee's death or disability. Potential realizable values are
net of exercise price, but before the payment of taxes associated with
exercise. Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and 10%
assumed annual rates of compounded stock price appreciation are mandated by
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of our future Class A common stock prices. These
amounts represent assumed rates of appreciation in the value of the Class A
common stock from the fair market value on the date of grant. Actual gains, if
any, on stock option exercises are dependent on the future performance of the
Class A common stock and overall stock market conditions. The amounts
reflected in the table may not necessarily be achieved.
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Aggregate option exercises in fiscal year 2000 and values at September 30,
2000
The following table sets forth the number and value of unexercised options
held by our executive officers at September 30, 2000. There was no public
trading market for our Class A common stock as of September 30, 2000.
Accordingly, the value of unexercised options has been calculated by
subtracting the exercise price from the fair market value of our Class A
common stock on September 30, 2000, using the assumed initial public offering
price of $11.00 per share as the fair market value, multiplied by the number
of shares underlying the option. None of our executive officers exercised
options in the fiscal year ended September 30, 2000. All of the options held
by our executive officers are fully vested.
<TABLE>
--------------------------------------------------------------------------------------------
<CAPTION>
Number of shares of Class A
common stock underlying Value of unexercised
unexercised options at in-the-money options at
September 30, 2000 September 30, 2000
--------------------------------- ---------------------------------
Name Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Muoi Van Tran........... 4,631,400 -- 36,312,374 --
Mohammad Ghorbanali..... 3,252,240 -- 34,685,750 --
Susie L. Nemeti......... 1,786,720 -- 18,770,585 --
</TABLE>
STOCK PLANS/EMPLOYEE BENEFIT PROGRAMS
1992 Stock Option Plan
Our 1992 Stock Option Plan became effective upon adoption by our board of
directors and approval of our stockholders in September 1992. A total of
6,666,680 shares of our Class A common stock have been authorized for issuance
under our 1992 Stock Option Plan, options for 2,520,000 shares are currently
outstanding under the plan and 3,601,680 shares remain available for future
option grants. Our key employees are eligible to receive option grants under
the plan, and the granted options may be either incentive stock options under
the federal tax laws or non-statutory stock options. However, all options must
have an exercise price not less than 100% of the fair market value of the
option shares on the grant date. No option will have a maximum term in excess
of 10 years, and each option will be subject to earlier termination following
the optionee's cessation of employment. The granted options normally vest in a
series of installments over the optionee's period of continued employment with
us. In the event we are acquired by merger or asset sale, each outstanding
option under the plan will terminate unless assumed by the successor entity.
At the time of the initial public offering of our Class A common stock, our
1992 Stock Option Plan will terminate, and no further option grants will be
made under such plan. All options outstanding under the plan at that time will
continue to be governed by their existing terms.
2000 Stock Option/Stock Issuance Plan
Our 2000 Stock Option/Stock Issuance Plan became effective upon adoption by
our board of directors and approval of our stockholders in August 2000. A
total of 1,000,000 shares of our Class A common stock have been authorized for
issuance under the 2000 Stock Option/Stock Issuance Plan. No options are
currently outstanding under the plan, and 1,000,000 shares remain available
for future grant.
We intend to issue options under the plan shortly before the completion of
this offering, which we estimate will be for a total of approximately
1,000,000 shares. We intend to grant to David Jenkins, our Managing Director
of Europeon Operations, options to purchase 200,000 shares of our Class A
common stock at an exercise price of the lower of $17 or 85% of our expected
initial public offering price per share. We also intend to grant to our other
employees options to purchase an aggregate of approximately 800,000 shares of
our Class A common stock at an exercise price of 85% of our expected initial
public offering price per share.
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Under our 2000 Stock Option/Stock Issuance Plan, options may be granted to our
employees, the independent non-employee members of our board of directors and
independent consultants in our service. The granted options may be either
incentive stock options under the federal tax laws or non-statutory stock
options. No granted option may have an exercise price less than 85% of the
fair market value of the option shares on the grant date or a term in excess
of 10 years. The options normally vest in a series of installments over the
optionee's period of continued service with us. Shares of common stock may
also be issued under our 2000 Stock Option/Stock Issuance Plan to our
employees, independent non-employee board members and consultants through
direct purchases at a purchase price not less than 85% of fair market value or
as a bonus for past services rendered the company. In the event we are
acquired by merger or asset sale, the outstanding options under our 2000 Stock
Option/Stock Issuance Plan will immediately vest unless those options are
assumed by the successor entity or our repurchase rights with respect to the
unvested shares subject to those options are assigned to such entity. At the
time of the initial public offering of our Class A common stock, our
2000 Stock Option/Stock Issuance Plan will terminate, and no option grants can
be made under the plan after such time. All options outstanding under the plan
at that time will continue to be governed by their existing terms.
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our existing 2000 Stock Option/Stock Issuance Plan and
the 1992 Stock Option Plan. Our 2000 Stock Incentive Plan was adopted by our
board and approved by our stockholders on August 29, 2000. The effective date
of the plan coincides with the date of the underwriting agreement for this
offering. At that time, all outstanding options under our predecessor plans
will be transferred to our 2000 Stock Incentive Plan, and no further option
grants will be made under those predecessor plans. The transferred options
will continue to be governed by their existing terms, unless our compensation
committee elects to extend one or more features of our 2000 Stock Incentive
Plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as will be in effect for grants made
under the discretionary option grant program of our 2000 Stock Incentive Plan.
.Share Reserve -- 12,121,680 shares of our Class A common stock are currently
authorized for issuance under our 2000 Stock Incentive Plan. The share
reserve is our estimate of the number of shares carried over from our 2000
Stock Option/Stock Issuance Plan and 1992 Stock Option Plan, plus an
additional increase of approximately 5,000,000 shares. No participant in our
2000 Stock Incentive Plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more
than 500,000 shares of our Class A common stock per calendar year.
.Equity Incentive Programs -- Our 2000 Stock Incentive Plan is divided into
four separate components:
. the discretionary option grant program, under which eligible
individuals in our employ or service may be granted options to purchase
shares of our Class A common stock at an exercise price not less than
100% of the fair market value of those shares on the grant date;
. the stock issuance program, under which individuals may be issued
shares of our Class A common stock directly, through the purchase of
shares at a price not less than 100% of their fair market value at the
time of issuance or as a bonus tied to the attainment of performance
milestones or the completion of a specified period of service;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition
of special below-market stock option grants; and
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. the director fee option grant program, under which our independent non-
employee board members may be given the opportunity to apply a portion
of the directors fees otherwise payable to them in cash each year to
the acquisition of special below-market option grants.
.Eligibility -- Our officers and other employees, our independent non-employee
board members and any consultants we hire are eligible to participate in our
2000 Stock Incentive Plan.
.Administration -- Our board of director's compensation committee will
administer our discretionary option grant program and the stock issuance
program. This committee will determine which eligible individuals are to
receive option grants or stock issuances under those programs, the time or
times when such option grants or stock issuances are to be made, the number
of shares subject to each grant or issuance, the status of any granted option
as either an incentive stock option or a non-statutory stock option under the
federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to
remain outstanding. The compensation committee will also have the exclusive
authority to select the executive officers and other highly compensated
employees who may participate in the salary investment option grant program
in the event that program is activated for one or more calendar years.
.Plan Features -- Our 2000 Plan will include the following features:
. The exercise price for the shares of our Class A common stock subject
to option grants made under our 2000 Stock Incentive Plan may be paid
in cash or in shares of our Class A common stock valued at fair market
value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee. In
addition, the plan administrator may provide financial assistance to
one or more optionees in the exercise of their outstanding options or
the purchase of their unvested shares by allowing such individuals to
deliver a full-recourse, interest-bearing promissory note in payment of
the exercise price and any associated withholding taxes incurred in
connection with such exercise or purchase.
. Our board of director's compensation committee will have the authority
to cancel outstanding options under the discretionary option grant
program, including options transferred from our predecessor plans, in
return for the grant of new options for the same or a different number
of option shares with an exercise price per share based upon the fair
market value of our Class A common stock on the new grant date.
. Stock appreciation rights are authorized for issuance under the
discretionary option grant program. Those rights will provide the
holders with the election to surrender their outstanding options for an
appreciation distribution from us equal to the fair market value of the
vested shares of our Class A common stock subject to the surrendered
option, less the aggregate exercise price payable for those shares.
That appreciation distribution may be made in cash or in shares of
Class A common stock. None of the outstanding options under our
predecessor plans contain any stock appreciation rights.
. The 2000 Stock Incentive Plan will include the following change-in-
control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
. If we are acquired by merger or asset sale, each outstanding option
under the discretionary option grant program which is not to be
assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the discretionary option grant and
stock issuance programs will immediately vest, except to the extent
our repurchase rights with respect to those shares are to be assigned
to the successor corporation.
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. Our board of director's compensation committee will have complete
discretion to structure one or more options under the discretionary
option grant program so those options will vest as to all the option
shares in the event those options are assumed in the acquisition but
the optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of outstanding shares under the stock issuance
program may be accelerated upon similar terms and conditions.
. Our board of director's compensation committee will also have the
authority to grant options which will immediately vest if we are
acquired, whether or not those options are assumed by the successor
corporation.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase
rights will vest in connection with a successful tender offer for more
than 50% of our outstanding voting stock or a change in the majority
of the members of our board of directors through one or more contested
elections for board membership. Such accelerated vesting may occur
either at the time of such transaction or upon the subsequent
termination of the individual's service.
. If we were acquired by merger or sale of substantially all of our
assets, the options currently outstanding under our 1992 Stock Option
Plan would terminate to the extent vested shares were not exercised
prior to such event.
. The options currently outstanding under our 2000 Stock Option/Stock
Issuance Plan will immediately vest if we are acquired by merger or
sale of substantially all our assets, unless those options are assumed
by the acquiring entity or our repurchase rights with respect to any
unvested shares subject to those options are assigned to such entity.
However, a number of those options also contain special acceleration
provision to which the shares subject to those options will
immediately vest upon an involuntary termination of the optionee's
employment within 18 months following an acquisition in which the
repurchase rights with respect to those shares are assigned to the
acquiring entity.
.Salary Investment Option Grant Program -- If our board of director's
compensation committee elects to activate the salary investment option grant
program for one or more calendar years, each of our executive officers and
other highly compensated employees selected for participation may elect,
prior to the start of the calendar year, to reduce his or her base salary for
that calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000. Each selected individual who files a timely election will
automatically be granted, on the first trading day in January of the calendar
year for which his or her salary reduction is to be in effect, an option to
purchase that number of shares of our Class A common stock determined by
dividing the salary reduction amount by two-thirds of the fair market value
per share of our Class A common stock on the grant date. The option will be
exercisable at a price per share equal to one-third of the fair market value
of the option shares on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments
over the calendar year for which the salary reduction is to be in effect.
.Director Fee Option Grant Program -- Should the director fee option grant
program be activated in the future, each independent non-employee board
member will have the opportunity to apply all or a portion of any cash
director fees for the year to the acquisition of a below-market option grant.
The option grant will automatically be made on the first trading day in
January in the year for which the fee would otherwise be payable in cash. The
option will have an exercise price per share equal to one-third of the fair
market value of the option shares on the grant date, and the number of shares
subject to the option will be
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Management
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determined by dividing the amount of the retainer fee applied to the program
by two-thirds of the fair market value per share of our Class A common stock
on the grant date. As a result, the option will be structured so that the
fair market value of the option shares on the grant date less the exercise
price payable for those shares will be equal to the portion of the retainer
fee applied to that option. The option will become exercisable in a series of
12 equal monthly installments over the calendar year for which the fee
election is to be in effect. However, the option will become immediately
exercisable for all the option shares upon the optionee's death or disability
while serving as a board member.
Our 2000 Stock Incentive Plan will also have the following features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board of
directors through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
director fee option grant programs, and these rights may also be granted
to one or more officers as part of their option grants under the
discretionary option grant program. Options with this feature may be
surrendered to us upon the successful completion of a hostile tender
offer for more than 50% of our outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based
upon the highest price per share of our Class A common stock paid in
that tender offer.
. Our board of directors may amend or modify the 2000 Stock Incentive Plan
at any time, subject to any required stockholder approval. The 2000
Stock Incentive Plan will terminate no later than August 28, 2010.
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan was adopted by our board directors in August
2000 and approved by our stockholders in August 2000. The plan will become
effective coincident with the date of the underwriting agreement for this
offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of our
Class A common stock, at semi-annual intervals, with their accumulated payroll
deductions.
.Share Reserve -- 300,000 shares of our Class A common stock will initially be
reserved for issuance under the plan.
.Offering Periods -- The plan will have a series of successive overlapping
offering periods, with a new offering period beginning on the first business
day of May and November each year. Each offering period will have a duration
of 24 months, unless otherwise determined by the compensation committee.
However, the initial offering period may have a duration in excess of 24
months and will start on the date of the underwriting agreement for this
offering and will end on the last business day in October 2002. The next
offering period will start on the first business day in May 2001 and will end
on the last business day of April 2003.
.Eligible Employees -- Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on
the start date of that period. However, employees may participate in only one
offering period at a time.
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.Payroll Deductions -- A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the start date of the offering period in which the participant is
enrolled or, if lower, 85% of the fair market value per share on the semi-
annual purchase date. Semi-annual purchase dates will occur on the last
business day of April and October each year, April 30, 2001 will be the first
purchase date. A participant may not purchase more than 500 shares on any
purchase date, and not more than 75,000 shares may be purchased in total by
all participants on any purchase date. Our board of director's compensation
committee will have the authority to change these limitations for any
subsequent offering period.
.Change in Control -- Should we be acquired by merger or sale of substantially
all of our assets or more than 50% of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price in effect for
each participant will be equal to 85% of the market value per share on the
start date of the offering period in which the participant is enrolled at the
time the acquisition occurs or, if lower, 85% of the fair market value per
share immediately prior to the acquisition.
.Plan Provisions -- The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of October,
2010.
. Our board of directors may at any time amend, suspend or discontinue
the plan. However, amendments may require stockholder approval.
401(k) Retirement Plan
We adopted a Cash or Deferred Profit Sharing Plan Trust 401(k) plan effective
October 1, 1996. The plan covers all full-time employees on our payroll who
are at least 21 years of age. Employees become eligible to participate in the
plan after they have worked for at least 12 months, commencing on the date of
hire. The plan provides for voluntary employee contributions of 20% up to a
maximum of $500 per year, of their annual pre-tax compensation, subject to the
maximum limit allowed by the Internal Revenue Service guidelines, which is
currently $10,500 annually. We may make matching contributions to each
participating employee based on his or her voluntary contributions to the
plan. Our matching contributions to the plan are subject to vesting at the
rate of 20% per year beginning after the employee's second year of employment
with us. The plan is intended to qualify under Section 401 of the Internal
Revenue Code so that contributions by employees or by us to the plan, and
income earned on the plan contributions, are not taxable to employees until
withdrawn from the plan, and so that contributions by us, if any, will be
deductible by us when made. The trustee under the plan, at the discretion of
each participant, invests the employee contributions to the plan in selected
investment options. For the year ended December 31, 1999, we made matching
contributions of approximately $22,700 to the plan.
We may also make, in our discretion, annual profit sharing contributions on
behalf of eligible employees. Each employee who is a plan participant on the
last day of the plan year and who has completed at least 1,000 hours of
service during the year is entitled to a share of any profit sharing
contribution we make for the plan year. Our profit sharing contributions are
subject to vesting at the rate of 20% per year beginning after the employee's
second year of employment with us. Our profit sharing contributions to the
plan for the year ended December 31, 1999 were approximately $276,700.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have included in our certificate of incorporation a provision indicating
that, to the extent permitted by Delaware General Corporation Law, our
directors will not be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as directors, except for liability:
.for any breach of the director's 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;
.under Section 174 of the General Corporation Law of the State of Delaware,
which relates to unlawful dividends; or
.for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide for the indemnification of our directors and executive
officers to the fullest extent permitted by the Delaware General Corporation
Law. We may limit the extent of such indemnification by individual contracts
with our directors and executive officers, but have not done so. We are not,
however, required to indemnify any director or executive officer in connection
with any proceeding initiated by that director or executive officer or any
proceeding by that director of executive officer against us or our directors,
officers, employees or other agents unless (a) indemnification is expressly
required to be made by law, (b) the proceeding was authorized by our board of
directors or (c) indemnification is provided by us, in our sole discretion,
pursuant to the powers vested under the Delaware General Corporation Law. We
are required to advance, prior to the final disposition of any proceeding,
promptly on request, all expenses incurred by any director or executive
officer in connection with that proceeding on receipt of an undertaking by or
on behalf of that director or executive officer to repay those amounts if it
should be determined ultimately that he or she is not entitled to be
indemnified under our bylaws or otherwise.
We will enter into indemnification agreements with our directors and executive
officers prior to the completion of this offering. These agreements contain
provisions that may require us to indemnify these directors and officers
against liabilities that may arise because of their status or service as
directors or officers, except for liabilities arising from willful misconduct
of a culpable nature, advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and obtain
directors' and officers' liability insurance if it is maintained for other
directors or officers. These agreements do not require us to indemnify our
directors and officers in situations where:
.the remuneration paid to the director or executive officer is determined by
final judgment to be in violation of law;
.a judgment is rendered against the director or executive officer for an
accounting of profits made from the purchase or sale of our securities
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934;
.the director's or officer's conduct is adjudged to have been knowingly
fraudulent or deliberately dishonest, or constitutes willful misconduct; or
.a court determines that indemnification under the circumstances is not
lawful.
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EMPLOYMENT AGREEMENTS
We entered into employment agreements in November 1999 with each of Messrs.
Tran and Ghorbanali, and Ms. Nemeti. Under these agreements, Mr. Tran's annual
base salary is $199,281, Mr. Ghorbanali's annual base salary is $163,047 and
Ms. Nemeti's base salary is $132,300. Annual bonuses may be paid to the
executives at the discretion of our board of directors. These agreements may
be terminated by us without cause, and for any reason whatsoever, upon 30
days' notice. Under Messrs. Tran and Ghorbanali's agreements, if we decide not
to renew their agreement, the executive will be entitled to receive an amount
equal to their base salary and benefits at the time of termination for a
period of one year from the date of termination. The agreements can also be
terminated upon mutual written consent of both the executive and us, at which
time the executive is entitled to receive payment of an amount equal to his or
her base salary and benefits at the time of termination for a period of six
months from the date of termination. If we decide not to renew Ms. Nemeti's
agreement, she will be entitled to receive an amount equal to her base salary
and benefits at the time of termination for a period of six months from the
date of termination. If we mutually agree with Ms. Nemeti to terminate her
agreement, she is entitled to receive an amount equal to her base salary and
benefits at the time of termination for a period of three months from the date
of termination. No other severance provisions are provided. We would have no
further obligations to pay any further compensation or benefits whatsoever.
These agreements are automatically renewed on an annual basis, with the base
salary subject to annual review by the board of directors, but in no event
will the executives' minimum compensation be reduced below the annual base
salary for the prior year.
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Related party transactions
We have worked closely with Furukawa, our majority stockholder, in the past,
and we intend to continue to work closely with Furukawa in the future. See
"Risk factors -- Risks related to our relationship with Furukawa."
We purchase substantially all of our lasers and the majority of our other
optical components from Furukawa and its related parties in the regular course
of our business. We also sell some of our subsystems and modules in the
regular course of our business to Furukawa and several of its subsidiaries and
affiliates. Our purchases from these related parties amounted to $8,416,000,
$2,706,000 and $2,089,000 for the years ended September 30, 1999, 1998 and
1997 and $12,029,000 for the nine month period ended June 30, 2000. Our sales
to these related parties amounted to $611,000, $911,000 and $69,000 for the
years ended September 30, 1999, 1998 and 1997 and $1,006,000 for the nine
month period ended June 30, 2000. Accounts receivable due to us from our
related parties were $52,000, $230,000 and $10,000 at September 30, 1999, 1998
and 1997 and $121,000 at June 30, 2000. Accounts payable to our related
parties were $3,184,000, $1,866,000 and $427,000 at September 30, 1999, 1998
and 1997 and $5,995,000 at June 30, 2000. We believe that our purchases from
and our sales to these parties were on terms that were no less favorable than
purchases from and sales to unrelated third parties. In addition, we paid
$69,000 in management fees to Furukawa for consulting and advisory services on
management issues for the year ended September 30, 1999. In July 2000, we
entered into a short-term development contract with Furukawa to assist us in
the purchase, system design, operation, study and execution of new equipment
orders to automate our product testing operations. We paid Furukawa $84,000 in
exchange for their services under the contract, which was completed in July
2000.
Some of our directors are also executives of Furukawa. Mr. Sakamoto is the
President of Furukawa Electric North America, Inc., a wholly-owned subsidiary
of Furukawa. Mr. Matsubara is the General Manager of the Fitel Products
Division of Furukawa. Mr. Okada is the General Manager of Strategic Planning
for Furukawa and Mr. Shibata is the General Manager of Optical Devices
Department of Furukawa. See "Risk factors -- Risks related to our relationship
with Furukawa."
In connection with the conversion of our Series A preferred stock to our Class
B common stock, prior to the completion of this offering we intend to enter
into a registration rights agreement with Furukawa which would include demand
registration rights, piggy-back registration rights and other standard rights
and limitations. We expect that the registration rights agreement will provide
that Furukawa may not demand a registration prior to one year from the closing
of this offering and would also provide that Furukawa will not purchase any
shares of our Class A common stock for 180 days following the closing of this
offering. In addition to the limitations intended to be set forth in the
registration rights agreement, Furukawa has agreed not to sell any of its
shares of our common stock for a period of 180 days following the date of this
prospectus without the prior written consent of UBS Warburg LLC.
We have entered into employment agreements with Messrs. Tran and Ghorbanali
and Ms. Nemeti. See "Management -- Employment agreements."
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<PAGE>
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Principal stockholders
The following table sets forth information regarding the beneficial ownership
of our common stock as of October 15, 2000, as adjusted to reflect the sale of
10,500,000 shares of our Class A common stock in this offering and the
automatic conversion of all shares of our preferred stock to shares of our
Class B common stock prior to the completion of this offering, for each of the
following persons:
.all executive officers;
.all current and proposed directors; and
.each person who is known by us to own beneficially five percent or more of
our Class A common stock prior to this offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or become exercisable within 60 days of September 30,
2000. Those shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person. Unless otherwise
indicated in the table, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder's name. All share numbers and percentages assume no exercise
of the underwriters over-allotment option. Unless otherwise indicated, the
address of each beneficial owner listed below is c/o Optical Communication
Products, Inc., 20961 Knapp Street, Chatsworth, California 91311.
<TABLE>
<CAPTION>
Percentage of
shares
beneficially
Number of owned
shares ------------------
beneficially Before After
Name of beneficial owner owned offering offering
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Executive officers and directors:
Muoi Van Tran (1).......................... 18,740,160 19.0% 17.2%
Susie L. Nemeti (2)........................ 5,649,480 5.9 5.3
Mohammad Ghorbanali (3).................... 12,502,160 12.9 11.6
Masato Sakamoto (4)........................ 66,000,000 70.3 63.2
Kunihiro Matsubara (5)..................... 66,000,000 70.3 63.2
Yoshihisa Okada (5)........................ 66,000,000 70.3 63.2
Stewart D. Personick....................... 0 -- --
Mitsuyoshi Shibata (5)..................... 66,000,000 70.3 63.2
Other 5% stockholders:
Furukawa Electric North America, Inc. (6).. 66,000,000 70.3 63.2
900 Lafayette Street, Suite 506
Santa Clara, CA 95050
All directors and executive officers as a
group (8 persons)(7)....................... 102,891,800 99.4% 90.2%
</TABLE>
-------
(1) Includes 14,108,760 shares of our Class A common stock held by Muoi Van
Tran and Tracy Tam Trang, as Co-Trustees of the Tran Family Trust dated
June 26, 1997 and options to purchase 4,631,400 shares of our Class A
common stock at a weighted average exercise price of $3.16 per share, all
of which are presently exercisable.
(2) Includes options to purchase 1,786,720 shares of our Class A common stock
at a weighted average exercise price of $5.44 per share, all of which are
presently exercisable.
(3) Includes options to purchase 3,252,240 shares of our Class A common stock
at a weighted average exercise price of $3.68 per share, all of which are
presently exercisable .
(4) Consists of 66,000,000 shares of Series A preferred stock held by Furukawa
Electric North America, Inc. The Series A preferred stock will
automatically convert into 66,000,000 shares of our Class B common stock
prior to the completion of this offering. Mr. Sakamoto is the President of
Furukawa Electric North America, Inc. Mr. Sakamoto disclaims beneficial
ownership of these shares.
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70
<PAGE>
Principal stockholders
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(5) Consists of 66,000,000 shares of Series A preferred stock held by Furukawa
Electric North America, Inc., a wholly-owned subsidiary of The Furukawa
Electric Co., Ltd. The Series A preferred stock will automatically convert
into 66,000,000 shares of our Class B common stock prior to the completion
of the offering. Mr. Matsubara is a director and the General Manager of
the Fitel Products Division of The Furukawa Electric Co., Ltd. Mr. Okada
is the General Manager of Strategic Planning for The Furukawa Electric
Co., Ltd. Mr. Shibata is the General Manager of the Optical Devices
Department at The Furukawa Electric Co., Ltd. Messrs. Matsubara, Okada and
Shibata disclaim beneficial ownership of these shares.
(6) Consists of 66,000,000 shares of Series A preferred stock that will
automatically be converted into 66,000,000 shares of our Class B common
stock prior to the completion of this offering.
(7) Includes options to purchase 9,670,360 shares of our Class A common stock
at a weighted average exercise price of $3.76 per share, all of which are
presently exercisable, and 66,000,000 shares of Series A preferred stock
that will automatically be converted into 66,000,000 shares of our Class B
common stock prior to the completion of this offering.
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71
<PAGE>
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Description of capital stock
The following information describes our common stock and preferred stock, as
well as options to purchase our Class A common stock, and provisions of our
certificate of incorporation and our bylaws, all as will be in effect upon the
completion of this offering. This description is only a summary. You should
also refer to our certificate of incorporation and bylaws which have been
filed with the SEC as exhibits to our registration statement, of which this
prospectus forms a part. The descriptions of the common stock and preferred
stock, as well as options to purchase our Class A common stock, reflect
changes to our capital structure that will occur upon the completion of this
offering in accordance with the terms of the certificate of incorporation.
As of September 30, 2000, all outstanding shares of our capital stock were
held of record by eight stockholders. Upon the completion of this offering,
our authorized capital stock will consist of 266,000,000 shares of common
stock, comprised of 200,000,000 shares classified as our Class A common stock,
par value $0.001 per share, and 66,000,000 shares classified as our Class B
common stock, par value $0.001 per share. We will also have 10,000,000 shares
of authorized preferred stock, par value $0.001 per share. As shares of our
Class B common stock are converted into shares of our Class A common stock,
the number of shares classified as Class B common stock will be reduced and
the number of shares classified Class A common stock will be increased on a
one for one basis.
COMMON STOCK
We are authorized to issue 266,000,000 shares of common stock, comprised of
200,000,000 shares classified as our Class A common stock, par value $0.001
per share, and 66,000,000 shares classified as our Class B common stock, par
value $0.001 per share. The number of shares of our Class A common stock will
be increased, and the number of shares of our Class B common stock will be
decreased, on a one for one basis as our shares of Class B common stock are
converted into shares of Class A common stock. Options to purchase an
aggregate of 13,190,360 shares of our Class A common stock will be outstanding
upon completion of this offering, which amount includes approximately
1,000,000 options to be granted to our employees prior to the completion of
this offering. There will be 38,371,440 shares of our Class A common stock
outstanding after giving effect to the sale of the shares offered in this
offering.
.Voting rights -- Holders of our Class A common stock are entitled to one vote
per share. Holders of our Class B common stock are entitled to 10 votes per
share. Holders of our Class A common stock and our Class B common stock vote
together as a single class on all matters presented to the stockholders for
their vote or approval, except as may be required by Delaware law. Delaware
law requires that a class of shares will be entitled to vote separately from
other classes where a proposed amendment to the certificate of incorporation
would increase or decrease the par value of the shares of the class or change
the powers, preferences, or special rights of the shares of the class
adversely. Our certificate of incorporation allows us to increase or decrease
the number of authorized shares of Class A common stock or Class B common
stock by action of the board of directors and the affirmative vote of the
holders of a majority of the voting power of our common stock entitled to
vote.
Furukawa will receive shares of Class B common stock in exchange for shares
of preferred stock which it holds prior to the closing of this offering in
connection with our reincorporation from California to Delaware. Our
management agreed to provide the Class B common stock with superior voting
rights so that Furukawa would continue to control us after this offering and
to deter unsolicited third party bids to acquire us. The ten to one share
voting preference was determined through a combination of negotiations
between Furukawa and our management and a review of the voting rights of
other publicly held companies with disparate voting rights.
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72
<PAGE>
Description of capital stock
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.Dividends -- Holders of record of shares of our common stock are entitled to
receive dividends when, if and as may be declared by the board of directors
out of funds legally available for such purposes, subject to the rights of
preferred stockholders and the terms of our credit facility. No dividends may
be declared or paid on any share of any class of common stock, unless such
dividend, at the same rate per share, is simultaneously declared or paid on
each share of the other class of our common stock. In the case of a stock
dividend or distribution, holders of our Class A common stock are entitled to
receive the same percentage dividend or distribution as holders of our Class
B common stock and vice versa, except that stock dividends and distributions
shall be made in shares of our Class A common stock to the holders of our
Class A common stock and in shares of our Class B common stock to the holders
of our Class B common stock unless the board of directors determines in its
discretion that it is more desirable to distribute shares of our Class A
common stock with respect to our Class B common stock. We presently intend to
retain future earnings, if any, for use in the operation and expansion of our
business and do not anticipate paying cash dividends in the foreseeable
future.
.Convertibility -- Each share of our Class B common stock is convertible, at
the option of its holder, into one fully paid and nonassessable share of our
Class A common stock at any time. Our Class A common stock is not convertible
into our Class B common stock. Each share of our Class B common stock will be
automatically converted into one share of our Class A common stock if that
share is transferred to any entity other than an entity controlling,
controlled by or under common control with Furukawa. Control, for purposes of
automatic conversion, is defined in our certificate of incorporation as
ownership of more than 75% of the equity interest in an entity and 75% of the
voting power on all matters. In addition, our Class B common stock will
automatically convert into shares of our Class A common stock if the total
number of outstanding shares of Class B common stock falls below 20% of total
number of outstanding shares of our common stock. Each share of Class B
common stock that is converted into a share of Class A common stock will be
cancelled and will not be reissued.
.Liquidation rights -- Upon our liquidation, dissolution or winding-up, the
holders of our Class A common stock are entitled to share ratably with the
holders of our Class B common stock in all assets available for distributions
after payment in full to creditors and holders of preferred stock.
.Other provisions -- The holders of our common stock are not entitled to
cumulative voting, preemptive or subscription rights. In any merger,
consolidation or business combination, the consideration to be received per
share by holders of our Class A common stock is identical to that to be
received by holders of our Class B common stock. No class of common stock may
be subdivided, consolidated, reclassified or otherwise changed unless the
other class of common stock concurrently is subdivided, consolidated,
reclassified or otherwise changed in the same proportion and in the same
manner. All outstanding shares are, and the shares of our Class A common
stock sold in the offering will be validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Upon the completion of this offering, our board of directors will have the
authority, without further action by the stockholders, to issue up to
10,000,000 shares of preferred stock in one or more series. Our board of
directors also has the authority to designate the rights, preferences,
privileges and restrictions of each such series, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series.
We could issue our preferred stock in circumstances that might have the effect
of delaying, deferring or preventing a change in control of our company
without further action by the stockholders. We could issue our preferred stock
with voting and conversion rights might also adversely affect the voting power
of the holders
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73
<PAGE>
Description of capital stock
-------------------------------------------------------------------------------
of our Class A common stock. In certain circumstances, we could issue our
preferred stock with the effect of decreasing the market price of our Class A
common stock.
OPTIONS
As of September 30, 2000, options to purchase a total of 12,190,360 shares of
Class A common stock were outstanding. Additional options to purchase a total
of 9,601,680 shares of Class A common stock may be granted under the 2000
Stock Incentive Plan, which amount includes 3,601,680 shares and 1,000,000
shares available for future grant as of September 30, 2000 under our 1992
Stock Option Plan and our 2000 Stock Option/Stock Issuance Plan, respectively.
In addition, 300,000 shares of our Class A common stock may be granted under
our 2000 Employee Stock Purchase Plan. See "Management -- Stock plans/employee
benefit programs."
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Following the completion of this offering, we estimate that there will be
approximately 161,628,560 shares of authorized but unissued Class A common
stock. Of this amount, 21,792,040 Shares of Class A common stock are reserved
for issuance upon exercise of options outstanding or available for future
grant under our stock option plans or outside of our stock option plans, and
300,000 shares of Class A common stock are reserved for future issuance under
our Employee Stock Purchase Plan. In addition, following the completion of
this offering, there will be 66,000,000 shares of authorized Class B common
stock, all of which will be issued and outstanding, and 10,000,000 shares of
authorized preferred stock, of which none will be issued and outstanding. All
of our Class B common stock will be outstanding. If the underwriters' over-
allotment option is exercised in full, we will have approximately 160,053,560
shares of authorized but unissued Class A common stock. Delaware law does not
require stockholder approval for the issuance of authorized shares. However,
the listing requirements of The Nasdaq Stock Market, Inc., which apply so long
as the common stock remains included in that inter-dealer quotation system,
require prior stockholder approval of specified issuances, including issuances
of shares bearing voting power equal to or exceeding 20% of the pre-issuance
outstanding voting power or pre-issuance outstanding number of shares of
common stock. These additional shares could be used for a variety of corporate
purposes, including, but not limited to, facilitating corporate acquisitions.
We currently do not have any plans to issue additional shares of common stock
or preferred stock, other than upon conversion of our Class B common stock or
in connection with employee compensation plans. See "Management -- Stock
plans/employee benefit programs." One of the effects of the existence of
unissued and unreserved common stock and preferred stock may be to enable our
board of directors to issue shares to persons who may agree or be inclined to
vote in concert with current management on issues put to consideration of
stockholders, which issuance could render more difficult or discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise, and protect the continuity of our management and
possibly deprive our stockholders of the opportunity to sell their shares of
common stock at prices higher than prevailing market prices.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this 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 that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder.
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74
<PAGE>
Description of capital stock
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Generally, 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. These provisions may have the effect
of delaying, deferring or preventing a change in control of us without further
action by our stockholders.
Our certificate of incorporation and bylaws contain provisions that could have
the effect of discouraging potential acquisition proposals or making a tender
offer or delaying or preventing a change in control of our company, including
changes a stockholder might consider favorable. In particular, our certificate
of incorporation and bylaws, as applicable, among other things, will:
.provide that the holders of our Class B common stock are entitled to ten
votes per share on matters submitted to a vote of our stockholders;
.provide that special meetings of stockholders can only be called by our
president or secretary at the request in writing of a majority of the members
of our board of directors or holders of at least 10% of the total voting
power of all outstanding shares of stock entitled to vote. In addition, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting by our board of directors
or the stockholders;
.provide for an advance notice procedure with regard to the nomination, other
than by or at the direction of the board of directors, of candidates for
election as directors and with regard to business to be brought before a
meeting of stockholders;
.provide that vacancies on our board of directors may be filled by a majority
of directors in office, although less than a quorum; and
.allow us to issue up to 10,000,000 shares of preferred stock with rights
senior to those of the common stock and that otherwise could adversely affect
the rights and powers, including voting rights, of the holders of common
stock. In some circumstances, this issuance could have the effect of
decreasing the market price of our Class A common stock, as well as having
the anti-takeover effects discussed above.
In addition, provisions of our 2000 Stock Incentive Plan allow for the
automatic vesting of all outstanding options granted under the plan if a
change in control occurs and the acquirer terminates an option holder other
than for cause or if an option holder terminates employment for good reason
circumstances. Such provisions may have the effect of discouraging a third-
party from acquiring us, even if doing so would be beneficial to our
stockholders. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of our board of directors and in
the policies formulated by them, and to discourage some types of transactions
that may involve an actual or threatened change in control of our company.
These provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal and to discourage some tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure our company outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in
our management.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our Class A common stock is American
Stock Transfer & Trust Company.
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75
<PAGE>
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Shares eligible for future sale
Prior to this offering, there has been no market for our Class A common stock.
Future sales of substantial amounts of our Class A common stock in the public
market could adversely affect prevailing market prices. Furthermore, only a
limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale (as described
below), sales of substantial amounts of our Class A common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 38,371,440 shares
of our Class A common stock. Of these shares, the 10,500,000 shares sold in
the offering (plus any shares issued upon exercise of the underwriters' over-
allotment option) will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates" as that term is defined
in Rule 144 under the Securities Act (generally, our officers, directors or
10% stockholders).
The remaining 27,871,440 shares outstanding are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted
securities in the public market, or the availability of such shares for sale,
could adversely affect the market price of the Class A common stock.
Our stockholders and option holders have entered into lock-up agreements
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our Class A common stock or any securities
exercisable for or convertible into our Class A common stock owned by them for
a period of 180 days after the effective date of the registration statement
filed pursuant to this offering without the prior written consent of UBS
Warburg LLC. As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144,
144(k) and 701, shares subject to lock-up agreements may not be sold until
such agreements expire or are waived by the designated underwriters'
representative. Taking into account the lock-up agreements, and assuming UBS
Warburg LLC does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:
.beginning on the effective date of the offering, only the shares sold in this
offering will be immediately available for sale in the public market; and
.an additional 18,201,080 shares will become eligible for sale pursuant to
Rule 144 beginning 180 days after the date of this prospectus. Shares
eligible to be sold by affiliates pursuant to Rule 144 are subject to volume
restrictions as described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of: one percent of the number of shares of
Class A common stock then outstanding (which will equal approximately 383,714
shares immediately after the offering) or the average weekly trading volume of
the Class A common stock during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of us
at any
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76
<PAGE>
Shares eligible for future sale
-------------------------------------------------------------------------------
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Beginning 90 days after the effective date, any employee, officer or director
of or consultant to us who purchased 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 such shares in reliance on Rule
144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144. In addition, we intend to
file registration statements under the Securities Act as promptly as possible
after the effective date to register shares to be issued pursuant to our
employee benefit plans. As a result, any options exercised under our 2000
Stock Incentive Plan or 2000 Employee Stock Purchase Plan or any of our other
benefit plans after the effectiveness of such registration statement will also
be freely tradable in the public market, except that shares held by affiliates
will still be subject to the volume limitation, manner of sale, notice and
public information requirements of Rule 144 unless otherwise resalable under
Rule 701. As of September 30, 2000, there were outstanding options to purchase
approximately 12,190,360 shares of Class A common stock granted under our
stock option plans and granted outside of our stock option plans. See "Risk
Factors -- A substantial amount of our shares will be eligible for sale
shortly after this offering" and "Management -- stock plans/employee benefit
programs."
In addition, we expect to register to sell 12,121,680 shares of Class A common
stock reserved for issuance under our 2000 Stock Incentive Plan, 300,000
shares of Class A common stock reserved for issuance under our 2000 Employee
Stock Purchase Plan and 9,670,360 shares of Class A common stock issuable upon
exercise of options granted outside of our stock option plans. As of September
30, 2000, options to purchase 12,190,360 shares of our Class A common stock
were outstanding. Shares acquired upon exercise of these options will be
eligible for sale in the public market from time to time subject to vesting
and the 180-day lock-up restrictions that apply to the outstanding stock. The
exercise price of all of these stock options is lower than the expected
initial public offering price of our Class A common stock. The sale of a
significant number of these shares could cause the price of our Class A common
stock to decline. See "Shares eligible for future sale" for more detailed
information.
In connection with the conversion of our Series A preferred stock to our Class
B common stock, prior to the completion of this offering, we intend to enter
into a registration rights agreement with Furukawa which would include demand
registration rights, piggy-back registration rights and other standard rights
and limitations. We expect that the registration rights agreement will provide
that Furukawa may not demand a registration prior to one year from the closing
of this offering. We expect that this registration rights agreement would also
provide that Furukawa will not purchase any shares of our Class A common stock
for a specified time period, to be determined in the final agreement,
following the closing of this offering. In addition to the limitations
intended to be set forth in the registration rights agreement, Furukawa has
agreed not to sell any of its shares of our common stock for a period of 180
days following the date of this prospectus without the prior written consent
of UBS Warburg LLC.
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77
<PAGE>
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Underwriting
We and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, J.P. Morgan
Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView Corporation
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number
Underwriter of shares
--------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC......................................................
J.P. Morgan Securities Inc. .........................................
U.S. Bancorp Piper Jaffray Inc.......................................
Wit SoundView Corporation............................................
---
Total..............................................................
===
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional 1,575,000 shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares
in approximately the same proportion as set forth in the table above. The
following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to an additional 1,575,000 shares.
<TABLE>
<CAPTION>
No exercise Full exercise
--------------------------------------------------------------------------------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,000,000.
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
of these securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to $ per
share from the initial public offering price. If all the shares are not sold
at the initial public offering price, the representatives may change the
offering price and the other selling terms. The underwriters have informed us
that they do not expect discretionary sales to exceed 5% of the shares of
Class A common stock to be offered.
Our company and each of, our directors, officers, stockholders and
optionholders have agreed with the underwriters not to offer, sell, contract
to sell, hedge or otherwise dispose of, directly or indirectly, or file with
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78
<PAGE>
Underwriting
-------------------------------------------------------------------------------
the SEC a registration statement under the Securities Act relating to, any
shares of our Class A common stock or securities convertible into or
exchangeable for shares of Class A common stock during the period from the
date of this prospectus continuing through the date 180 days after the date of
this prospectus, without the prior written consent of UBS Warburg LLC.
The underwriters have reserved for sale, at the initial public offering price,
525,000 shares of our Class A common stock being offered for sale to our
customers and business partners. At the discretion of our management, other
parties, including our employees, may participate in the reserved shares
program. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to
the general public on the same terms as the other shares.
Prior to this offering, there has been no public market for our Class A common
stock. The initial public offering price was negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price included:
.the information set forth in this prospectus and otherwise available to the
representatives;
.the history and the prospects for the industry in which we compete;
.the ability of our management;
.our prospects for future earnings, the present state of our development and
our current financial position;
.the general condition of the securities markets at the time of this offering;
and
.recent market prices of, and demand for, publicly traded common stock of
comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of our Class A common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from OCP in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the overallotment option. "Naked" short
sales are any sales in excess of the overallotment option. The underwriters
must close out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the Class A common stock in the open market after pricing that could adversely
affect investors who purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our Class A common
stock while the offering is in progress. The underwriters also may impose a
penalty bid. This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by it because the
representatives have repurchased shares sold by or for the account of that
underwriter in stabilizing or short covering transactions. These activities by
the underwriters may stabilize, maintain or otherwise affect the market price
of our Class A common stock. As a result, the
-------------------------------------------------------------------------------
79
<PAGE>
Underwriting
-------------------------------------------------------------------------------
price of our Class A common stock may be higher than the price that otherwise
might exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
We have agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act and to contribute to payments
that the underwriters may be required to make in respect thereof.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit SoundView Corporation's strategic partner, E*Trade
Securities, Inc. In addition, other dealers purchasing shares from Wit
SoundView in this offering have agreed to make a prospectus in electronic
format available of websites maintained by each of these dealers. The
underwriters may allocate a number of shares to Wit SoundView Corporation for
sale to online brokerage account holders. These online brokerage account
holders will have the opportunity to purchase shares using the Internet in
accordance with procedures established by Wit SoundView Corporation or one or
more selected dealers.
In the past, J.P. Morgan Securities Inc. and/or its affiliates have provided
financial services unrelated to this offering to Furukawa, our majority
stockholder, and J.P. Morgan Securities Inc. and/or its affiliates may do so
in the future. From time to time, J.P. Morgan Securities Inc. and its
affiliates have provided, and may provide in the future, investment banking
and commercial banking services to Furukawa in the ordinary course of their
respective businesses, for which they have received customary fees. In the
past 12 months, J.P. Morgan Securities Inc. and/or its affiliates have
received an aggregate of $200,000 from Furukawa in connection with providing
investment banking services to Furukawa.
-------------------------------------------------------------------------------
80
<PAGE>
-------------------------------------------------------------------------------
Legal matters
Brobeck, Phleger & Harrison LLP, Los Angeles, California, will pass for us on
the validity of the Class A common stock offered hereby. Wilson Sonsini
Goodrich and Rosati, P.C., Palo Alto, California, is acting as counsel for the
underwriters in connection with selected legal matters relating to the shares
of Class A common stock offered by this prospectus.
Experts
The financial statements of Optical Communication Products, Inc. as of
September 30, 1998, 1999 and June 30, 2000 and for the years ended September
30, 1997, 1998 and 1999 and for the nine months ended June 30, 2000 included
in this prospectus and the related financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports included herein and
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
Where you can find more information
We filed a registration statement on Form S-1 under the Securities Act with
the SEC to register the shares of our Class A common stock offered by this
prospectus. This prospectus does not contain all of the information set forth
in the registration statement and the exhibits to the registration statement.
You should refer to the registration statement and the exhibits to the
registration statement for more information about us and our Class A common
stock. Our statements in this prospectus concerning the contents of any
document are not necessarily complete, and in each instance, we refer you to
the copy of the document filed as an exhibit to the registration statement.
Each statement about those documents is qualified in its entirety by this
reference.
Following the offering, we will become subject to the reporting requirements
of the Securities Exchange Act of 1934. In accordance with that law, we will
be required to file reports and other information with the SEC. The
registration statement and exhibits, as well as those reports and other
information when we file them, may be inspected without charge at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the public reference facilities. Copies of all or any part
of the registration statement may be obtained from the SEC's offices upon
payment of fees prescribed by the SEC. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
the site is http://www.sec.gov.
We will furnish to our stockholders annual reports and unaudited quarterly
reports for the first three quarters of each fiscal year. Annual reports will
include audited financial statements prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
statements included in those annual reports will be audited and reported upon,
with an opinion expressed, by our independent auditors.
-------------------------------------------------------------------------------
81
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
--------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------------------------------------------------------------------------------
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets -- September 30, 1998, 1999 and June 30, 2000............. F-3
Statements of Income -- Years ended September 30, 1997, 1998 and 1999 and
the nine months ended June 30, 1999 (unaudited) and 2000............... F-4
Statements of Stockholders' Equity -- Years ended September 30, 1997,
1998 and 1999 and the nine months ended June 30, 2000.................. F-5
Statements of Cash Flows -- Years ended September 30, 1997, 1998 and 1999
and the nine months ended June 30, 1999 (unaudited) and 2000........... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
--------------------------------------------------------------------------------
F-1
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Optical Communication Products, Inc.:
We have audited the accompanying balance sheets of Optical Communication
Products, Inc. (the "Company") as of September 30, 1998, 1999 and June 30,
2000, and the related statements of income, stockholders' equity, and cash
flows for the years ended September 30, 1997, 1998 and 1999 and the nine
months ended June 30, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1998, 1999
and June 30, 2000, and the results of its operations and its cash flows for
the years ended September 30, 1997, 1998, 1999 and the nine months ended June
30, 2000 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Los Angeles, California
August 29, 2000
-------------------------------------------------------------------------------
F-2
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
--------------------------------------------------------------------------------
BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
--------------- June 30,
1998 1999 2000
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 1,863 $ 2,447 $ 2,801
Marketable securities.................... 989 497 4,439
Accounts receivable, less allowance for
doubtful accounts: $52 -- 1998, $297 --
1999 and $1,428 -- 2000................ 4,175 8,185 20,179
Inventories, net......................... 3,384 8,308 13,320
Deferred income taxes.................... 274 662 1,466
Prepaid expenses and other current
assets.................................. 82 81 86
------- ------- -------
Total current assets...................... 10,767 20,180 42,291
Property, plant and equipment, net........ 875 5,940 7,521
Other assets.............................. 19 29 19
------- ------- -------
Total assets.............................. $11,661 $26,149 $49,831
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt........ $ 471 $ 471
Accounts payable......................... $ 467 2,138 2,321
Accounts payable to related parties...... 1,866 3,184 5,995
Accrued bonuses.......................... 530 1,038 3,065
Other accrued expenses................... 690 1,125 1,582
Income taxes payable..................... 254 2,028
------- ------- -------
Total current liabilities................. 3,553 8,210 15,462
------- ------- -------
Long-term debt............................ 2,750 2,414
------- ------- -------
Deferred income taxes..................... 53 93 56
------- ------- -------
Commitments and contingencies (note 7)....
<CAPTION>
Pro Forma
(Note 13)
(unaudited)
<S> <C> <C> <C> <C>
Stockholders' equity:
Preferred stock, no par value; 70,000,000
shares authorized; 66,000,000 shares
issued and outstanding at September 30,
1998, 1999 and June 30, 2000............ 1,650 1,650 1,650 --
Common stock, no par value; 150,000,000
shares authorized; 27,321,440 and
27,401,440 shares issued and outstanding
at September 30, 1998 and 1999,
respectively, and 27,871,440 shares
issued and outstanding at June 30,
2000.................................... 167 172 269 --
Class A -- common stock, $.001 par value;
200,000,000 shares authorized;
27,871,440 shares issued and outstanding
at June 30, 2000 (pro forma)............ 28
Class B -- common stock, $.001 par value;
66,000,000 shares authorized; 66,000,000
shares issued and outstanding at
June 30, 2000 (pro forma)............... 66
Additional paid in capital (pro forma)... 1,825
Retained earnings........................ 6,238 13,274 29,980 29,980
------- ------- ------- -------
Total stockholders' equity................ 8,055 15,096 31,899 31,899
------- ------- ------- -------
Total..................................... $11,661 $26,149 $49,831 $49,831
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-3
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
--------------------------------------------------------------------------------
STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Years Ended September Ended
30, June 30,
------------------------ ---------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------ ---------------
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue............................ $10,126 $19,620 $36,036 $23,325 $69,061
Cost of revenue.................... 5,797 11,086 20,860 13,991 34,584
------- ------- ------- ------- -------
Gross profit....................... 4,329 8,534 15,176 9,334 34,477
------- ------- ------- ------- -------
Expenses:
Research and development.......... 465 779 1,134 778 1,656
Selling and marketing............. 563 999 1,364 971 1,980
General and administrative........ 369 712 1,065 654 2,782
------- ------- ------- ------- -------
Total expenses..................... 1,397 2,490 3,563 2,403 6,418
------- ------- ------- ------- -------
Income from operations............. 2,932 6,044 11,613 6,931 28,059
------- ------- ------- ------- -------
Other income (expense):
Interest income................... 62 121 149 122 217
Interest expense.................. -- (2) (60) -- (188)
Other income...................... -- -- 27 -- 108
------- ------- ------- ------- -------
Other income--net.................. 62 119 116 122 137
------- ------- ------- ------- -------
Income before income taxes......... 2,994 6,163 11,729 7,053 28,196
Income taxes....................... 1,205 2,492 4,693 2,901 11,490
------- ------- ------- ------- -------
Net income......................... 1,789 3,671 7,036 4,152 16,706
Preferred stock dividends.......... 206 -- -- -- --
------- ------- ------- ------- -------
Net income attributable to common
stockholders.................... $ 1,583 $ 3,671 $ 7,036 $ 4,152 $16,706
======= ======= ======= ======= =======
Basic earnings per share........... $ 0.06 $ 0.13 $ 0.26 $ 0.15 $ 0.61
======= ======= ======= ======= =======
Diluted earnings per share......... $ 0.02 $ 0.04 $ 0.07 $ 0.04 $ 0.16
======= ======= ======= ======= =======
Basic shares outstanding........... 27,321 27,321 27,348 27,330 27,439
======= ======= ======= ======= =======
Diluted shares outstanding......... 99,842 100,494 101,132 101,140 103,302
======= ======= ======= ======= =======
Pro forma basic earnings per share
(unaudited)..................... $ 0.08 $ 0.18
======= =======
Pro forma diluted earnings per
share (unaudited)............... $ 0.07 $ 0.16
======= =======
Pro forma basic shares outstanding
(unaudited)..................... 93,348 93,439
======= =======
Pro forma diluted shares
outstanding (unaudited)......... 101,132 103,302
======= =======
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-4
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
--------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------- ----------------- Retained
Shares Amount Shares Amount Earnings Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1,
1996................. 66,000,000 $1,650 27,321,440 $167 $ 984 $ 2,801
Net Income............. 1,789 1,789
Preferred Stock
Dividends........... (206) (206)
---------- ------ ---------- ---- ------- -------
Balance, September 30,
1997................. 66,000,000 1,650 27,321,440 167 2,567 4,384
Net Income............. 3,671 3,671
---------- ------ ---------- ---- ------- -------
Balance, September 30,
1998................. 66,000,000 1,650 27,321,440 167 6,238 8,055
Net Income............. 7,036 7,036
Issuance of common
stock............... 80,000 5 5
---------- ------ ---------- ---- ------- -------
Balance, September 30,
1999................. 66,000,000 1,650 27,401,440 172 13,274 15,096
Issuance of common
stock............... 470,000 97 97
Net Income............. 16,706 16,706
---------- ------ ---------- ---- ------- -------
Balance, June 30, 2000.. 66,000,000 $1,650 27,871,440 $269 $29,980 $31,899
========== ====== ========== ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-5
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended September 30, June 30,
--------------------------- --------------------
1997 1998 1999 1999 2000
-------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income................. $ 1,789 $ 3,671 $ 7,036 $ 4,152 $ 16,706
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation.............. 111 163 305 199 495
Changes in operating
assets and liabilities:
Accounts receivable, net.. (568) (2,304) (4,010) (2,423) (11,994)
Inventories, net.......... (178) (2,208) (4,924) (2,763) (5,012)
Deferred income taxes..... 15 (35) (348) (184) (841)
Prepaid expense and other
current assets........... 107 (48) 1 (23) (5)
Other assets.............. -- -- (10) (10) 10
Accounts payable.......... (62) 193 1,645 819 183
Accounts payable to
related parties.......... 166 1,439 1,318 736 2,811
Accrued bonuses........... 26 383 508 168 2,027
Other accrued expenses.... 86 386 436 157 457
Income taxes payable...... 324 (323) 279 668 1,774
------- -------- -------- ------- --------
Net cash provided by
operating activities...... 1,816 1,317 2,236 1,496 6,611
------- -------- -------- ------- --------
Investing activities:
Purchase of marketable
securities................ (318) (2,810) (1,508) (1,499) (5,442)
Maturities of marketable
securities................ 504 2,326 2,000 1,500 1,500
Purchase of property, plant
and equipment............. (306) (631) (5,370) (695) (2,076)
------- -------- -------- ------- --------
Net cash used in investing
activities................ (120) (1,115) (4,878) (694) (6,018)
------- -------- -------- ------- --------
Financing activities:
Proceeds from long term
debt...................... -- -- 3,300 -- --
Principal payments on long
term debt................. (333) -- (79) -- (336)
Preferred stock dividends.. (206) -- -- -- --
Issuance of common stock... -- -- 5 5 97
------- -------- -------- ------- --------
Net cash provided by (used
in) financing activities.. (539) -- 3,226 5 (239)
------- -------- -------- ------- --------
Increase in cash and cash
equivalents............... 1,157 202 584 807 354
------- -------- -------- ------- --------
Cash and cash equivalents,
beginning of year......... 504 1,661 1,863 1,863 2,447
------- -------- -------- ------- --------
Cash and cash equivalents,
end of year............... $ 1,661 $ 1,863 $ 2,447 $ 2,670 $ 2,801
======= ======== ======== ======= ========
Supplemental disclosures of
cash flow information:
Cash paid during the year
for:
Interest.................. $ 89 -- $ 48 -- $ 188
Income taxes.............. $ 760 $ 2,497 $ 4,710 $ 2,769 $ 10,557
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-6
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION
The accompanying financial statements of Optical Communication Products, Inc.,
a California corporation (the "Company") reflect the results of its operations
for the years ended September 30, 1997, 1998 and 1999 and the nine months
ended June 30, 1999 and 2000. The Company's operations are primarily located
in Chatsworth, California. The Company is a majority-owned subsidiary of
Furukawa Electric Company, Ltd. of Japan. Furukawa beneficially owns 70.3% of
the Company's capital stock at June 30, 2000.
Unaudited Interim Financial Data
The interim financial statements for the nine month period ended June 30, 1999
are unaudited and have been prepared on the same basis as the audited
financial statements and in the opinion of management reflect all adjustments,
consisting of normal recurring items necessary to present fairly the financial
information set forth therein in accordance with accounting principles
generally accepted in the United States of America. The results of operations
for interim periods are not necessarily indicative of results expected for a
full year.
Operations
The Company operates in one industry segment that includes the design and
manufacture of fiber optic components. The Company's products consist of
optical transmitters, receivers, transceivers and transponders which convert
electronic signals into optical signals and back to electronic signals. Many
of the Company's major customers purchase through contract manufacturers.
Contract manufacturers purchase on behalf of the Company's major customers and
to their specifications. Revenue from the Company's three largest direct sale
customers, which may include contract manufacturers or major end user
customers, amounted to 29.5%, 13.4% and 11.7%, respectively, for the nine
months ended June 30, 2000. No one direct sale customer exceeded 10.0% of
revenue in 1999. One direct sale customer amounted to 21.7% of revenue in 1998
and one direct sale customer amounted to 12.7% of revenue in 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted deposits and short-term
investments with an original maturity of three months or less.
Marketable Securities
Marketable securities represent United States treasury notes and treasury
bonds with a maturity of greater than three months. These securities are
classified as held to maturity because the Company has the intent and ability
to hold the securities to maturity. Gross unrealized gains and losses on held-
to-maturity marketable securities are not material. Maturities of held-to-
maturity marketable debt securities range from three months to six months.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market, and net of an allowance for obsolesence.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Provision for depreciation
has been made based upon the estimated useful lives of the assets, which range
from three to thirty-nine years, using the straight-line method.
-------------------------------------------------------------------------------
F-7
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may no
longer be recoverable. If the estimated future cash flows (undiscounted and
without interest charges) from the use of an asset are less than the carrying
value, a write-down would be recorded to reduce the related asset to its
estimated fair value. For purposes of estimating future cash flows from
impaired assets, the Company groups assets at the lowest level for which there
are identifiable cash flows that are largely independent of the cash flows of
other groups of assets. There have been no impairment charges recorded by the
Company.
Income Taxes
Income taxes are provided for taxes currently payable or refundable, and
deferred income taxes arising from future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. Deferred
income tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred income tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. The income tax provision for interim periods
is based upon the estimated effective income tax rate for the full year.
Earnings Per Share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common shares and dilutive
potential common shares outstanding during the period, using the as-if-
converted method for the Company's preferred shares and the treasury stock
method for stock options.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. Sales returns and
warranty claims are not material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which summarizes views of the Commission staff in
applying accounting principles generally accepted in the United States of
America to revenue recognition in financial statements. The Company believes
that its current revenue recognition principles comply with this bulletin.
Research and Development Costs
Costs associated with the development of new products are charged to expense
when incurred.
Preferred and Common Stock
The Company currently has one class of no par common stock and no par Series A
preferred stock which is convertible into common stock. On June 6, 2000, the
Board of Directors authorized a 40-for-1 split of the Company's common stock
and its Series A preferred stock. Share and per share amounts for all periods
have been restated to reflect the stock split (see Note 13).
-------------------------------------------------------------------------------
F-8
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported
therein. Due to the inherent uncertainty involved in making estimates, actual
results reported in future periods may differ from those estimates.
Fair Value of Financial Instruments
The recorded values of accounts receivable, accounts payable and accrued
expenses approximate their fair values based on their short-term nature. The
recorded value of long-term debt and other liabilities approximate fair value,
as interest is tied to market rates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, placed with high credit quality
institutions, and accounts receivable. The Company sells products and extends
credit to customers, primarily in the United States, and periodically monitors
its exposure to credit losses, and maintains allowances for anticipated
losses. Accounts receivable from the Company's three largest customers
amounted to $4,646,000, $4,366,000, and $2,710,000 at June 30, 2000,
respectively. Accounts receivable from the Company's largest customers
amounted to $1,095,000 and $959,000 at September 30, 1999 and 1998,
respectively.
Segment Reporting
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information" establishes standards
for the manner in which public companies report information about operating
segments in annual and interim financial statements. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within a Company for making operating decisions and assessing
financial performance.
The Company's chief executive officer ("CEO") and chief financial officer
("CFO") are its chief operating decision makers. The financial information the
CEO and CFO review is identical to the information presented in the
accompanying financial statements. The Company has determined that it operates
in one reportable segment which includes the design and manufacture of fiber
optic subsystems and modules. The Company does not have foreign operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. In addition, SFAS No.
133 permits hedge accounting when certain conditions are met. SFAS No. 133, as
amended by SFAS No. 137 and No. 138, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company believes that SFAS No.
133, as amended, will not have a significant impact on its financial
statements.
-------------------------------------------------------------------------------
F-9
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVENTORIES
Inventories, net consist of the following:
<TABLE>
<CAPTION>
September 30,
------------- June 30,
1998 1999 2000
(in thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials........................................... $2,322 $4,427 $ 9,676
Work-in-process......................................... 1,200 4,563 4,829
Finished goods.......................................... 204 170 272
------ ------ -------
3,726 9,160 14,777
Allowance for obsolete inventory........................ 342 852 1,457
------ ------ -------
Inventories, net........................................ $3,384 $8,308 $13,320
====== ====== =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------- June 30, Useful
1998 1999 2000 Lives
(in thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land......................................... $1,345 $1,345
Buildings and improvements................... 3,352 3,801 39 years
Machinery and equipment...................... $1,208 1,824 3,336 5 years
Furnitures and fixtures...................... 51 58 121 5 years
Computer hardware and software............... 125 175 227 3 years
------ ------ ------
1,384 6,754 8,830
Less accumulated depreciation................ (509) (814) (1,309)
------ ------ ------
$ 875 $5,940 $7,521
====== ====== ======
</TABLE>
5. LONG-TERM DEBT
On July 15, 1999, the Company entered into a term loan for $3.3 million and a
revolving credit facility agreement with Manufacturer's Bank. The term loan
was used to fund the purchase of the Company's land and building located in
Chatsworth, California. The credit limit of the revolving credit facility is
$1.0 million. The term loan and the revolving credit facility bear interest on
amounts outstanding at various time intervals based on the Company's election
at a per annum rate equal to either (a) the prime rate or (b) LIBOR plus
1.80%. The term loan and the revolving credit facility are secured by all of
the Company's assets. The term loan matures on July 15, 2006 and the revolving
credit facility expires on July 3, 2001. No amounts have been borrowed against
the revolving credit facility.
The term loan and the revolving credit facility also require compliance with
specified financial covenants, including interest coverage ratios and
indebtedness to total capital ratios and other covenants.
-------------------------------------------------------------------------------
F-10
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Long-term debt at consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
(in thousands)
-------------------------------------------------------------------------------
<S> <C> <C>
Term loan due July, 2006 (8.98% at June 30, 2000)....... $3,221 $2,885
Less current portion.................................... 471 471
------ ------
Long-term debt, less current portion.................... $2,750 $2,414
====== ======
</TABLE>
Long-term debt maturities as of June 30, 2000 consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------------------
<S> <C>
Three months ended September 30, 2000........................... $ 135
Fiscal 2001..................................................... 471
Fiscal 2002..................................................... 471
Fiscal 2003..................................................... 471
Fiscal 2004..................................................... 471
Fiscal 2005..................................................... 471
Thereafter...................................................... 395
------
$2,885
======
</TABLE>
--------------------------------------------------------------------------------
F-11
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
6. EARNINGS PER SHARE (in thousands, except per share data)
The following is a reconciliation of the numerator and denominator used to
compute basic and diluted earnings per share ("EPS"):
<TABLE>
<CAPTION>
Nine Months
Years Ended September Ended
30, June 30,
----------------------- ---------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------- ---------------
Basic EPS:
Numerator -- Income attributable to
common stockholders................. $ 1,583 $ 3,671 $ 7,036 $ 4,152 $16,706
Denominator -- Weighted average common
shares outstanding.................. 27,321 27,321 27,348 27,330 27,439
======= ======= ======= ======= =======
Basic EPS.............................. $ 0.06 $ 0.13 $ 0.26 $ 0.15 $ 0.61
======= ======= ======= ======= =======
Diluted EPS:
Numerator -- Income attributable to
common stockholders................. $ 1,583 $ 3,671 $ 7,036 $ 4,152 $16,706
Preferred stock dividends............. 206 -- -- -- --
======= ======= ======= ======= =======
Total.................................. $ 1,789 $ 3,671 $ 7,036 $ 4,152 $16,706
======= ======= ======= ======= =======
Denominator -- Weighted average common
shares outstanding................... 27,321 27,321 27,348 27,330 27,439
Preferred stock........................ 66,000 66,000 66,000 66,000 66,000
Common stock options................... 6,521 7,173 7,784 7,810 9,863
------- ------- ------- ------- -------
Diluted shares outstanding............. 99,842 100,494 101,132 101,140 103,302
======= ======= ======= ======= =======
Diluted EPS............................ $ 0.02 $ 0.04 $ 0.07 $ 0.04 $ 0.16
======= ======= ======= ======= =======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain of its facilities. Lease payments are made monthly.
The Company's leases are renewable either monthly or annually. Rent expense
for these leases for the years ended September 30, 1997, 1998 and 1999, was
$89,000, $92,000 and $105,000, respectively, and for the nine months ended
June 30, 1999 and 2000 was $79,000 and $11,000, respectively. The Company
previously rented its operating facilities in Chatsworth, California prior to
purchasing the land and building in fiscal year 1999.
Legal Proceedings
The Company is involved in litigation arising in the ordinary course of its
business. On October 15, 1999, Methode Electronics, Inc. ("Methode") filed a
lawsuit against the Company and Infineon Technologies Corporation in the
United States District Court for the Northern District of California, seeking
unspecified damages, injunctive relief, attorneys' fees and costs arising from
the alleged infringement of Methode's U.S. patents. On December 17, 1999, the
Company filed an answer to the complaint denying the claims of infringement
against the Company and asserting a number of defenses, including invalidity
of the Methode patents.
-------------------------------------------------------------------------------
F-12
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
This lawsuit is in the very early stages and no formal discovery has been
conducted. Further, claims involving patents related to certain products have
been stayed pending completion of Patent and Trademark Office re-examination
of the patent. Because of the very early stage of this litigation the Company
and legal counsel are unable to predict the outcome. An unfavorable resolution
of this lawsuit could have a material adverse impact on the Company.
8. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
The Company's Series A preferred stock is convertible on a one-to-one basis
into common stock (See Note 13).
Stock Options
In September 1992, the Company's board of directors approved a stock option
plan for the issuance of 6,666,680 shares of the Company's common stock to
certain key employees. This plan provides that options may have a term of up
to 10 years, and become exercisable and vest in annual increments of 25
percent per year over four years. In addition, key executives were granted
6,368,680 founders' stock options which were separate from the Company's stock
option plan and are fully vested. There were 3,346,680 and 3,601,680 options
available under the Company's 1992 stock option plan at September 30, 1999 and
June 30, 2000, respectively. Stock option activity including the options
granted outside the plan are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Price Exercise
of Options per Option Price
------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding -- October 1,
1996................................. 7,248,680 $0.00025 to $0.07 $0.01
Options granted....................... 460,000 $0.10 $0.10
--------- ----------------- -----
Options outstanding -- September 30,
1997................................. 7,708,680 $0.00025 to $0.10 $0.02
Options granted....................... 1,380,000 $0.19 $0.19
--------- ----------------- -----
Options outstanding -- September 30,
1998................................. 9,088,680 $0.00025 to $0.19 $0.04
Options granted....................... 760,000 $0.39 $0.39
Options exercised..................... (80,000) $0.06 $0.06
Options canceled...................... (160,000) $0.06 to $0.19 $0.10
--------- ----------------- -----
Options outstanding -- September 30,
1999................................. 9,608,680 $0.00025 to $0.39 $0.07
Options granted....................... 320,000 $2.88 $2.88
Options exercised..................... (470,000) $0.01 to $0.19 $0.18
Options canceled...................... (570,000) $0.01 to $0.39 $0.25
--------- ----------------- -----
Options outstanding -- June 30, 2000... 8,888,680 $0.00025 to $2.88 $0.15
========= ================= =====
</TABLE>
-------------------------------------------------------------------------------
F-13
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
The following table summarizes information regarding options outstanding at
June 30, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Remaining Weighted Weighted
Number Range of Contractual Life Average Average
Outstanding Exercise Prices In Years Exercise Price Options Exercise Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6,368,680 $0.00025 2.99 $0.00025 6,368,680 $0.00025
40,000 0.01 1.50 0.01 40,000 0.01
680,000 0.06 - 0.07 5.32 0.07 680,000 0.07
380,000 0.10 6.97 0.10 308,333 0.10
540,000 0.19 8.00 0.19 270,000 0.19
560,000 0.39 9.00 0.39 202,500 0.39
320,000 2.88 9.59 2.88 -- --
--------- ---------------- ---- -------- --------- --------
8,888,680 $0.00025 - $2.88 7.42 $ 0.15 7,869,513 $ 0.03
========= ================ ==== ======== ========= ========
</TABLE>
All stock options are granted at the fair market value of the Company's common
stock at the grant date. The weighted average estimated fair value of options
granted in 1997, 1998, 1999 and the nine months ended June 30, 2000 was $0.10,
$0.19, $0.39 and $2.88. The Company accounts for its stock option plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Had compensation cost been determined on the basis
of fair value pursuant to SFAS No. 123, "Accounting for Stock-Based
Compensation," net income and earnings per share would have been:
<TABLE>
<CAPTION>
September 30, June 30,
-------------------- --------------
1997 1998 1999 1999 2000
(in thousands, except per share
amounts)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income:
As reported............................... $1,789 $3,671 $7,036 $4,152 $16,706
Pro forma................................. $1,784 $3,656 $7,002 $4,127 $16,670
Basic earnings per share
As reported............................... $ 0.06 $ 0.13 $ 0.26 $ 0.15 $ 0.61
Pro forma................................. $ 0.06 $ 0.13 $ 0.26 $ 0.15 $ 0.61
Diluted earnings per share
As reported............................... $ 0.02 $ 0.04 $ 0.07 $ 0.04 $ 0.16
Pro forma................................. $ 0.02 $ 0.04 $ 0.07 $ 0.04 $ 0.16
</TABLE>
The fair value of each option grant estimated on the date of grant used to
compute pro forma net income and pro forma income per share is estimated using
the Black-Scholes option pricing model. The following assumptions were used:
<TABLE>
<CAPTION>
September 30, June 30,
----------------------- ---------------
1997 1998 1999 1999 2000
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend yield.......................... 0% 0% 0% 0% 0%
Expected volatility..................... 30% 30% 30% 30% 30%
Risk-free rate of return................ 6.47% 5.59% 5.84% 5.84% 6.29%
Expected life........................... 4 years 4 years 4 years 4 years 4 years
</TABLE>
-------------------------------------------------------------------------------
F-14
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Founder's Options
On August 29, 2000, an additional 3,301,680 options were granted to certain
founders at an exercise price of $11.00 per share. These options are fully
vested and could give rise to compensation expense to the Company during the
fourth quarter of fiscal year 2000. The amount of compensation expense will be
based upon the difference between the initial public offering price and the
option exercise price.
9. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering all employees, subject
to certain participation and vesting requirements. The plan provides that the
Company will partially match employee contributions up to a certain amount.
Total contributions by the Company were $86,000, $151,000 and $299,000 for the
years ended September 30, 1997, 1998 and 1999, respectively, and $224,000 and
$655,000 for the nine months ended June 30, 1999 and 2000, respectively.
10. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
September 30, June 30,
--------------------- ---------------
1997 1998 1999 1999 2000
(in thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current:
Federal................................ $ 927 $2,007 $3,960 $2,463 $ 9,693
State.................................. 263 520 1,081 622 2,638
------ ------ ------ ------ -------
Total current........................... 1,190 2,527 5,041 3,085 12,331
------ ------ ------ ------ -------
Deferred:
Federal................................ 11 (26) (273) (144) (659)
State.................................. 4 (9) (75) (40) (182)
------ ------ ------ ------ -------
Total deferred.......................... 15 (35) (348) (184) (841)
------ ------ ------ ------ -------
Provision for income taxes.............. $1,205 $2,492 $4,693 $2,901 $11,490
====== ====== ====== ====== =======
</TABLE>
The components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
September 30,
-------------- June 30,
1998 1999 2000
(in thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for doubtful accounts....................... $ 22 $ 130 $ 639
Uniform capitalization and obsolete inventory......... 176 409 694
Accumulated depreciation.............................. (53) (56) (56)
Warranty expense...................................... 60 75 162
Other................................................. 16 11 (29)
------ ------ ------
Net deferred tax asset................................ $ 221 $ 569 $1,410
====== ====== ======
</TABLE>
-------------------------------------------------------------------------------
F-15
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
A reconciliation of the Company's provision for income taxes to the U.S.
federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended June
Year Ended September 30, 30,
---------------------------------------- ------------
1997 1998 1999 2000
Amount % Amount % Amount % Amount %
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Provision for income
taxes at
statutory rate........ $1,048 35% $2,157 35% $4,105 35% $ 9,869 35%
State taxes net of
federal benefit....... 185 6.2 337 5.5 654 5.6 1,579 5.7%
Other................... (28) (0.9) (2) (0.1) (66) (0.6) 42 0.0%
------ ---- ------ ---- ------ ---- ------- ----
$1,205 40.3% $2,492 40.4% $4,693 40.0% $11,490 40.7%
====== ==== ====== ==== ====== ==== ======= ====
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company is a subsidiary of Furukawa Electric North America which is a
wholly-owned subsidiary of Furukawa Electric Company, Ltd. The Company's
related party transactions occur between other Furukawa owned subsidiaries and
affiliates.
The Company sells fiber optic components and purchases raw materials from some
of these entities in the regular course of business. Sales of fiber optic
subsystems and modules to related parties amounted to $69,000, $911,000 and
$611,000 for the years ended September 30, 1997, 1998 and 1999, respectively
and $531,000 and $1,006,000 for the nine months ended June 30, 1999 and 2000,
respectively. Purchases of raw materials from related parties amounted to
$2,089,000, $2,706,000 and $8,416,000 for the years ended September 30, 1997,
1998 and 1999, respectively, and $3,662,000 and $12,029,000 for the nine
months ended June 30, 1999 and 2000, respectively. Accounts receivable due
from related parties were $230,000 and $52,000 at September 30, 1998 and 1999
and $121,000 at June 30, 2000. Accounts payable to related parties were
$1,866,000 and $3,184,000 at September 30, 1998 and 1999 and $5,995,000 at
June 30, 2000. The Company paid $69,000 in management fees to Furukawa for
consulting and advisory services on management issues for the year ended
September 30, 1999.
12. SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment which includes the design and
manufacture of fiber optic subsystems and modules. The following is a summary
of sales to geographic areas based on the location of the entity purchasing
the Company's product:
<TABLE>
<CAPTION>
Nine Months
Years Ended September Ended
30, June 30,
----------------------- ---------------
1997 1998 1999 1999 2000
(in thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues by geographical area:
United States......................... $ 6,955 $13,647 $24,439 $16,041 $53,957
Canada................................ 1,370 2,384 5,371 3,313 4,740
Israel................................ 858 1,720 2,951 1,893 7,424
Europe................................ 643 1,096 2,567 1,597 2,365
Other................................. 300 773 708 481 575
------- ------- ------- ------- -------
$10,126 $19,620 $36,036 $23,325 $69,061
======= ======= ======= ======= =======
</TABLE>
-------------------------------------------------------------------------------
F-16
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
13. PROFORMA DATA (UNAUDITED)
Preferred and Common Stock
The Company currently has one class of no par common stock and no par Series A
preferred stock which is convertible into common stock. On the date the
Company's initial public offering ("IPO") becomes effective, the Company will
reincorporate in Delaware and create two new classes of common stock with a
par value of $0.001 per share and the Board of Directors will have the
authority, without further action by the stockholders, to issue additional
shares of preferred stock in one or more series. All of the Company's
outstanding shares of convertible preferred stock will automatically convert
into shares of Class B common stock upon the closing of the IPO.
Holders of new Class A common stock will generally have identical rights to
holders of Class B common stock, except that holders of Class A common stock
will be entitled to one vote per share while holders of Class B common stock
will be entitled to ten votes per share on matters submitted to a vote of the
stockholders. Upon effectiveness of the IPO, Furukawa will own all of the
Company's outstanding Class B common stock.
-------------------------------------------------------------------------------
F-17
<PAGE>
[Description of Artwork]
Inside Back Cover
The center of the page contains an image of the Company's products lined up
in several rows. Above this image is the Company's logo. In the center of the
image is the statement: "OCP Mission Statement: "To be the premier supplier of
fiber optic interface products for metropolitan area and high-speed premises
networks." "
<PAGE>
[LOGO OF OPTICAL COMMUNICATION PRODUCTS, INC.]
<PAGE>
-------------------------------------------------------------------------------
Part II
Information not required in prospectus
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of Class A common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $ 38,254
NASD filing fee..................................................... $ 12,000
Printing and engraving expenses..................................... $ 250,000
Blue Sky fees and expenses.......................................... $ 5,000
Legal fees and expenses............................................. $ 350,000
Accounting fees and expenses........................................ $ 200,000
Nasdaq National Market listing fees................................. $ 95,000
Transfer agent and registrar fees and expenses...................... $ 5,000
Miscellaneous....................................................... $ 44,746
----------
Total............................................................. $1,000,000
==========
</TABLE>
ITEM 14. Indemnification of Directors and Officers
Under Section 145 of the General Corporation Law of the State of Delaware, we
can indemnify our directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). Our certificate of incorporation provides
that, pursuant to Delaware law, our directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty of care to us and our
stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of the law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by law and require us to advance litigation expenses
upon our receipt of an undertaking by the director or officer to repay such
advances if it is ultimately determined that the director or officer is not
entitled to indemnification. Our bylaws further provide that rights conferred
under such bylaws do not exclude any other right such persons may have or
acquire under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
We also have directors' and officers' liability insurance. In addition,
concurrently with this offering, we will enter into agreements to indemnify
our directors and our executive officers in addition to the indemnification
provided for in the certificate of incorporation and bylaws. These agreements
will, among other things, indemnify our directors and our executive officers
for expenses (including attorneys fees), judgments, fines and
-------------------------------------------------------------------------------
II-1
<PAGE>
-------------------------------------------------------------------------------
settlement amounts incurred by such person in any action or proceeding,
including any action by or in our right, on account of services by that person
as our director or officer or as a director or officer of any of our
subsidiaries, or as a director or officer of any company or enterprise that
the person provides services to at our request.
ITEM 15. Recent Sales of Unregistered Securities
The following is a summary of our sales of our securities during the past
three fiscal years involving sales of our securities that were not registered
under the Securities Act of 1933, as amended:
From May 1997 to July 1997, we granted options to purchase 460,000 shares of
our Class A common stock to employees at an exercise price of $0.10 per share.
From March 1998 to July 1998, we granted options to purchase 1,380,000 shares
of our Class A common stock to our employees at an exercise price of $0.19 per
share.
From August 1998 to July 1999, we granted options to purchase 760,000 shares
of our Class A common stock to our employees at an exercise price of $0.39 per
share.
From December 1999 to April 2000, we granted options to purchase 320,000
shares of our Class A common stock to our employees at an exercise price of
$2.88 per share.
In August 2000, we granted options to purchase 3,301,680 shares of our Class A
common stock to certain of our executive officers, at an exercise price of
$11.00 per share. The issuance of these options was exempt from registration
under the Securities Act in reliance on Rule 506 of the Securities Act due to
the status of the optionees as accredited investors.
As of August 29, 2000, 550,000 options to purchase common stock had been
exercised.
Unless otherwise noted, the issuances of the options described above were
exempt from registration under Rule 701 of the Securities Act as securities
issued under a written compensatory benefit plan established by us for the
participation of our employees, directors, officers or consultants and
advisors.
ITEM 16. Exhibits and Financial Statement Schedule
(a)Exhibits
See Exhibit Index.
-------------------------------------------------------------------------------
II-2
<PAGE>
-------------------------------------------------------------------------------
(b)Financial Statement Schedule.
<TABLE>
<CAPTION>
Schedule II-Valuation and Qualifying Accounts
For the Year Ended September 30, 1997, 1998 and 1999 and the Nine Months Ended June 30, 2000
Additions Balance
Balance at charged at end
beginning to Deductions- of
Description Period of period expense recoveries period
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts and Returns .... 1997 241,600 -- (76,600) 165,000
1998 165,000 (113,000) 52,000
1999 52,000 267,000 (22,000) 297,000
Nine months ended
June 30, 2000 297,000 1,131,000 -- 1,428,000
Allowance for Obsolete
Inventory................ 1997 48,000 100,000 148,000
1998 148,000 194,000 342,000
1999 342,000 510,000 852,000
Nine months ended
June 30, 2000 852,000 605,000 1,457,000
Allowance for Warranty .. 1997 170,500 (78,500) 92,000
1998 92,000 96,000 (48,000) 140,000
1999 140,000 133,000 (20,000) 253,000
Nine months ended
June 30, 2000 253,000 132,000 (14,000) 371,000
</TABLE>
ITEM 17. Undertakings
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in denominations
as required by the underwriters and registered in names as required by the
underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by a director, officer
or controlling person in connection with the securities being registered, we
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 indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of this
issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
-------------------------------------------------------------------------------
II-3
<PAGE>
-------------------------------------------------------------------------------
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of these securities at that time shall be deemed to
be the initial bona fide offering thereof.
-------------------------------------------------------------------------------
II-4
<PAGE>
--------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment No. 2 to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on October 16, 2000.
Optical Communication Products, Inc.
/s/ Susie L. Nemeti
By: ______________________________________
Susie L. Nemeti
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
Muoi Van Tran* Chief Executive Officer, October 16, 2000
____________________________________ President and Director
Muoi Van Tran (Principal Executive
Officer)
/s/ Susie L. Nemeti Chief Financial Officer October 16, 2000
____________________________________ Secretary, Vice President of
Susie L. Nemeti Finance and Administration
and Director (Principal
Financial and Accounting
Officer)
Mohammad Ghorbanali* Chief Operating Officer, October 16, 2000
____________________________________ Vice President of
Mohammad Ghorbanali Manufacturing and Research
and Development and Director
Masato Sakamoto* Chairman of the Board of October 16, 2000
____________________________________ Directors
Masato Sakamoto
Kunihiro Matsubara* Director October 16, 2000
____________________________________
Kunihiro Matsubara
</TABLE>
--------------------------------------------------------------------------------
II-5
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Yoshihisa Okada* Director October 16, 2000
____________________________________
Yoshihisa Okada
Mitsuyoshi Shibata* Director October 16, 2000
____________________________________
Mitsuyoshi Shibata
</TABLE>
/s/ Susie L. Nemeti
*By: _________________________
Susie L. Nemeti
Attorney-in-Fact
--------------------------------------------------------------------------------
II-6
<PAGE>
--------------------------------------------------------------------------------
Exhibit Index
<TABLE>
<CAPTION>
Number Description
----------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation currently in effect
3.2* Bylaws
4.1* See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws for the Registrant defining the rights of
holders of Common Stock of the Registrant
4.2* Specimen Stock Certificate
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1+ 2000 Stock Incentive Plan
10.2+ Employee Stock Purchase Plan
10.3+ Form of Indemnification Agreement
10.4 Form of Registration Rights Agreement, by and between the Registrant
and The Furukawa Electric Co., Ltd.
10.5+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Muoi Van Tran, as currently in effect
10.6+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Mehrdad Ghorbanali, as currently in effect
10.7+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Susie L. Nemeti, as currently in effect
10.8* Stock Option Agreement, dated August 29, 2000, by and between the
Registrant and Muoi Van Tran
10.9* Stock Option Agreement, dated August 29, 2000, by and between the
Registrant and Mohammad Ghorbanali
10.10* Stock Option Agreement, dated August 29, 2000, by and between the
Registrant and Susie L. Nemeti
21.1+ List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Brobeck Phleger & Harrison 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.
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