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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 000-31861
OPTICAL COMMUNICATION PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 95-4344224
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
20961 Knapp Street
Chatsworth, California 91311
(Address of principal executive offices, including zip code)
Registrant's Telephone Number, Including Area Code: (818) 701-0164
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------------- --------------------------------
Common Stock, $0.001 par value The Nasdaq National Market
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ _ ] No [ X ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of December 1, 2000 the approximate aggregate market value of voting
stock held by non-affiliates of the registrant was $128,297,000 (based upon the
closing price for shares of the Registrant's Common Stock as reported by The
National Market System of the National Association of Securities Dealers
Automated Quotation System on that date). Shares of Common Stock held by each
officer, director, and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of December 1, 2000, there were approximately 41,380,040 shares of Class
A Common Stock outstanding.
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OPTICAL COMMUNICATION PRODUCTS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I....................................................................... 1
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 26
ITEM 3. LEGAL PROCEEDINGS.......................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 27
PART II...................................................................... 28
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS................................ 28
ITEM 6. SELECTED FINANCIAL DATA.................................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 39
PART III..................................................................... 40
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 40
ITEM 11. EXECUTIVE COMPENSATION..................................... 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 54
PART IV...................................................................... 55
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................ 55
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This Annual Report on Form 10-K, including information incorporated herein by
reference, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to expectations concerning matters that are not
historical facts. Words such as "projects," "believes," "anticipates," "will,"
"estimate," "plans," "expects," "intends," and similar words and expressions are
intended to identify forward-looking statements. Although we believe that such
forward-looking statements are reasonable, we cannot assure you that such
expectations will prove to be correct. Important language regarding factors
which could cause actual results to differ materially from such expectations are
disclosed in this Report, including without limitation under the caption "Risk
Factors" beginning on page 13 of this Report, and in our Registration Statement
on Form S-1 (No. 333-44862) declared effective by the Securities and Exchange
Commission ("SEC") on November 2, 2000. All forward-looking statements
attributable to Optical Communication Products are expressly qualified in their
entirety by such language. We do not undertake any obligation to update any
forward-looking statements.
PART I.
ITEM 1. 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.
The Company was founded in October 1991 with initial funding from The
Furukawa Electric Company, Ltd. of Japan ("Furukawa"). We offer 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, CIENA, Cisco Systems, ECI
Telecom, Lucent Technologies, Marconi Communications, Next Level 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
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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.
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.
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.
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.
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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 digital subscriber line, or
DSL, integrated services digital network, or 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.
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 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.
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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.
. Providing long distance operation 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 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 fiber optic communication equipment
manufacturers offer a broad range of products.
. Producing increasingly integrated products requires cross disciplinary
expertise in optics, circuit design, packaging and microwave and radio
frequency engineering.
. Responding to demands for shorter lead times requires manufacturers to
design products and scale production 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.
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
designed for the specific requirements of the metropolitan and high-speed
premises network markets, allowing fiber optic communication equipment
manufacturers to focus on their core competencies of designing and building
overall systems.
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
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degrees Celsius to 85 degrees Celsius. Our products are engineered
using advanced packaging technologies and feature low levels of
radiated electromagnetic interference. Our products are qualified
under requirements established by Telcordia (Bellcore), an engineering
and administrative services consortium that establishes industry
standards and specifications for the telecommunications, wireless and
fiber optic industries. The Telcordia requirements relate 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. Our products are
engineered to meet the specific distance, temperature and other
performance requirements of the metropolitan area and high speed
premises 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.
. 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.
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
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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.
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 and Receivers - Transmitters convert an electronic digital
input signal into an optical output signal for transmission over a fiber optic
network. 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. We offer separate transmitter and receiver modules that
provide our customers with the greatest flexibility in product design by
allowing them to place transmitters and receivers separately according to design
specifications.
Our optical transmitter and receiver products support the SONET/SDH,
Fast Ethernet, Gigabit Ethernet and Fibre Channel transmission standards and are
offered in a wide range of data rates, transmission distances and packaging
options. In addition, we have begun to provide samples of our DWDM transmitters
and receivers to key customers for initial testing.
Transceivers - Optical transceivers are products that contain both a
transmitter and a receiver in a single device 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,
wavelengths, modes and transmission distances. Our transceivers support the
SONET/SDH, Fast Ethernet, Gigabit Ethernet and Fibre Channel transmission
standards.
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 becoming widely
used. Our transponder product line is currently being developed as a single
channel product, conforming to SONET/SDH transmission standards.
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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 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. Wavelength
division multiplexing is a technology which allows multiple signals to be sent
along the same optical fiber by using different colors of light for each signal.
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. While we are currently developing
products in all of the areas described above, we may choose to prioritize or
redirect our development efforts in response to 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.
A small number of customers have historically accounted for a
significant portion of our total revenue. For the fiscal year ended September
30, 2000, our 10 largest customers accounted for 80.2% of our total revenue,
with Cisco Systems and Alcatel (including sales to each of their contract
manufacturers) accounting for approximately 34.2% and 15.3% of our total
revenue, respectively. No other customer accounted for more than 10.0% of our
revenue during the fiscal year ended September 30, 2000. 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 financial reporting purposes, we
consider our customers to be contract manufacturers and fiber optic
communications equipment manufacturers who place purchase orders with us or
otherwise purchase our products directly. For the fiscal year ended September
30, 2000, revenue from our three largest direct sales customers, Flextronics,
Alcatel and Solectron, accounted for 23.8%, 15.3% and 12.1%, respectively, of
our total revenue. See
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"Business - 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 our
understanding of fundamental optical devices, their packaging and high speed
circuit design 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 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 also design
our receiver packages for automated assembly, and we design and
manufacture our own optical subassemblies for our receivers. This
allows us to provide design flexibility, high-performance and the
ability to manufacture in volume.
. 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. We
also have considerable expertise in designing receivers to minimize
the effects of external noise that can significantly affect the
performance of a receiver. 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. We believe our
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technical competencies in these areas enable us to produce fiber optic
subsystems and modules with low 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.
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 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. Our quality control procedures
include vendor inspection, incoming material inspection, in-process testing and
outgoing inspection. We provide specialized training to assure the competency of
our manufacturing personnel, and we maintain ISO 9002 certification.
We purchase several key components for our products from a limited
number of suppliers. The components that we purchase include integrated
circuits, lasers, light emitting diodes, vertical cavity surface-emitting
lasers, photodiode devices and other passive electronic 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.
Research and Development
In fiscal 1999 and 2000, our research and development expenses were
$1.1 million and $2.5 million, respectively. We also incurred development costs
of $84,000 paid to Furukawa in 2000 for the automation of our product testing
procedure. We believe that our experienced optics engineers and the modular
nature of our products allowed us to enjoy relatively low research and
development expenses in the past. In addition, our relationship with Furukawa
provided us with access to Furukawa's optical device and packaging technology.
Furukawa has developed a number of innovative components that we have integrated
into our products and has assisted in the automation of key portions of our
manufacturing process. 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.
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We expect to increase our total research and development expenses to
provide resources to develop new product lines and fund development contracts
with universities, research institutes and companies. As a result, we expect our
future research and development expenses to increase significantly in absolute
dollars and as a percentage of revenue. We will continue to focus our research
and development activities on enhancing our existing products, developing new
products to meet the evolving needs of our customers within our existing markets
and supporting emerging standards that are consistent with our product
strategies.
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
plan 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 short-term contracts with our manufacturers' representatives
and distributors which can be cancelled by either party upon 30 days notice. 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. Please refer to
Note 12 to our Notes to Financial Statements for further information about our
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.
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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 personnel, who work closely with our manufacturing and quality
groups, provide this support.
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 believe that we have established a favorable position in the
metropolitan area and high-speed premises network markets by identifying and
focusing on fiber optic subsystems and modules specifically for these markets.
We believe that we have a combination of comprehensive product offerings,
management and design expertise, market understanding and manufacturing
capabilities that are focused on these markets. We compete primarily with
Agilent Technologies, ExceLight Communications, Finisar, Infineon Technologies,
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. In addition, unlike many of our competitors who specialize in the
long-haul markets, we believe that we have the ability to offer products with
both superior price and performance characteristics since our products are
designed for the specific requirements of 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
digital subscriber line, or DSL, and cable modems. Most of these technologies
provide lower speed and shorter distance capabilities than optical networking
technologies, but may provide certain 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 "Business - Risk factors - Our markets are highly competitive, some
of our customers are also our competitors, and our other 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."
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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 "Business - 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 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 "Business - 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."
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.
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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. Furukawa beneficially owns all of our outstanding Class B common stock,
which as of December 1, 2000 represented 61.5% of our outstanding shares of
common stock and 94.1% of the combined voting power of all of our outstanding
common stock.
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. We believe that our prior business
dealings with Furukawa and its subsidiaries and affiliates were on terms that
were no less favorable than terms that would be available from unrelated third
parties for similar transactions.
RISK FACTORS
You should carefully consider the following risks before you decide to buy
shares of our common stock. The risks and uncertainties described below are not
the only ones facing us. Additional risks and uncertainties, including those
risks set forth in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" below, may also adversely impact and impair our
business. If any of the following risks actually occur, our business, results of
operations or financial condition would likely suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of the
money you paid to buy our stock.
This Report contains forward-looking statements based on the current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and
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uncertainties. Our actual results could differ materially from those discussed
in these forward-looking statements as a result of certain factors, as more
fully described in this section and elsewhere in this Report. We do not
undertake to update publicly any forward-looking statements for any reason, even
if new information becomes available or other events occur in the future.
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.
We define our customers as fiber optic communication equipment
manufacturers who have purchased our products directly or have 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. For
the fiscal year ended September 30, 2000, our 10 largest customers accounted for
approximately 80.2% of our total revenue, with Cisco Systems and Alcatel
(including sales to their contract manufacturers) accounting for approximately
34.2% and 15.3% of our total revenue, respectively. For financial reporting
purposes, we consider our customers to be contract manufacturers and fiber optic
communications equipment manufacturers who place purchase orders with us or
otherwise purchase our products directly. For the fiscal year ended September
30, 2000, revenue from our three largest direct sales customers, Flextronics,
Alcatel and Solectron, accounted for 23.8%, 15.3% and 12.1%, respectively. 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.
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.
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.
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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;
. and economic conditions specific to the communications and related
industries.
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
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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.
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.
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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, some of our customers are also our
competitors, and our other 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 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.
Lucent Technologies and Nortel Networks, two of our customers, are also
our competitors. In addition, existing and potential customers, especially in
Japan and other international markets, may also become 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
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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.
Our continued success in generating revenue depends on growth in construction 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 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.
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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 fiscal year ended September 30, 2000, sales of our 1x9 pin
configuration products alleged to infringe the Methode patents accounted for
38.8% 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
fiscal year ended September 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 "Legal Proceedings" for
additional details.
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
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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 the unauthorized use of our proprietary technology and
processes 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 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
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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.
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 senior management are
fully vested. Our loss of any key
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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.
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 labeling
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.
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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 2001 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.
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 "Properties."
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,
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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.
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. We believe that our past business dealings
with Furukawa and its subsidiaries and affiliates were on terms that were no
less favorable than terms that would be available from third parties for similar
transactions. We intend to continue to maintain our relationship with Furukawa
and Furukawa will continue to control us. The terms of future transactions with
Furukawa may or may not be comparable to those that would be available from
unaffiliated third parties. See "Related party transactions."
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.
Furukawa beneficially owns all of our outstanding shares of Class B
common stock, which as of December 1, 2000 represented 94.1% 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
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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. 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.
Our chairman and three other members of our board of directors are also
executives of Furukawa. These individuals have obligations to both our company
and Furukawa 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.
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ITEM 2. PROPERTIES
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.
ITEM 3. 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 fiscal
year ended September 30, 2000, sales of our 1x9 pin configuration products
alleged to infringe the '408 and '468 patents accounted for 38.8% of our total
revenue. For the fiscal year ended September 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.
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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 "Business - 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."
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 29, 2000, our sole stockholder approved a resolution by
written consent approving and adopting (i) the Optical Communication Products,
Inc. 2000 Stock Incentive Plan with 12,121,680 shares of Class A Common Stock
initially authorized for issuance under the plan and (ii) the 2000 Employee
Stock Purchase Plan with 300,000 shares of Class A Common Stock initially
authorized for issuance under the plan.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information
Our Class A common stock has traded on The Nasdaq National Market under
the symbol "OCPI" since November 3, 2000. For the period from November 3, 2000
through December 1, 2000, the range of high and low intra-day sales prices
reported on The Nasdaq National Market for our Class A common stock were $23.00
and $9.625, respectively.
Holders
As of December 1, 2000, there were 61 stockholders of record who held
shares of our Class A common stock.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock
since our inception and we 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.
Recent Sales of Unregistered Securities
During the fiscal year ended September 30, 2000, we granted options to
purchase a total of 3,621,680 shares of our common stock to our employees at a
weighted-average exercise price of $10.28 per share.
During the fiscal year ended September 30, 2000, 470,000 options to
purchase our common stock had been exercised.
The issuance and exercise of these options were exempt from
registration under the Securities Act of 1933, as amended, in reliance on (i)
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 and (ii) Rule 506 of the
Securities Act due to the status of the optionees as accredited investors.
Use of Proceeds from Sales of Registered Securities
On November 3, 2000, we completed an initial public offering of our
Class A common stock. The managing underwriters in the offering were UBS Warburg
LLC, J.P. Morgan & Co., U.S. Bancorp Piper Jaffray and Wit SoundView (the
"Underwriters"). The shares of common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (the "Registration Statement") (Reg. No. 333-44862) that was declared
effective by the SEC on November 2, 2000. The offering commenced on October 16,
2000. All 12,075,000 shares of Class A Common Stock registered under the
Registration Statement were sold at a price of $11.00 per share, which amount
includes exercise of the underwriters' over-allotment option of 1,575,000
shares. The aggregate price of the offering amount registered and sold was
$132,825,000. In connection with the offering, we paid an aggregate of
$9,297,750 in underwriting discounts and commissions to the
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Underwriters. In addition, the following table sets forth the other estimated
material expenses incurred in connection with the offering.
SEC registration fee $ 106,960
NASD filing fee 15,990
Nasdaq National Market listing fee 94,000
Printing and engraving expenses 300,000
Legal fees and expenses 540,589
Accounting fees and expenses 292,925
Consulting fees and expenses 1661
Roadshow and travel expenses 48,750
-----------------
Total $ 1,400,875
After deducting the underwriting discounts and commissions and the
offering expenses described above, we received net proceeds from the initial
public offering of approximately $122,126,375.
As of December 1, 2000, we have used the net proceeds from our initial
public offering to fund our general operations and invested the balance in
interest bearing investment grade instruments. None of the net proceeds from our
initial public offering were paid directly or indirectly to any of our
directors, officers, partners or affiliates or any of their associates, or any
persons or entities owning 10% or more of any class of our equity securities.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal years ended September 30
Income statement data 1996 1997 1998 1999 2000
(In thousands, except Per share Data)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 6,747 $10,126 $19,620 $36,036 $101,867
Cost of revenue 3,726 5,797 11,086 20,860 50,326
------- ------- ------- ------- --------
Gross profit 3,021 4,329 8,534 15,176 51,541
Operating Expenses:
Research and development 342 465 779 1,134 2,527
Sales and marketing 373 563 999 1,364 2,943
General and administrative 847 369 712 1,065 3,877
------- ------- ------- ------- --------
Total operating expenses 1,562 1,397 2,490 3,563 9,347
Income from operations 1,459 2,932 6,044 11,613 42,194
Other income (expenses), net 60 62 119 116 305
------- ------- ------- ------- --------
Income before income taxes 1,519 2,994 6,163 11,729 42,499
Income taxes (benefit) 529 1,205 2,492 4,693 17,319
------- ------- ------- ------- --------
Net income $ 990 $ 1,789 $ 3,671 $ 7,036 $ 25,180
Earnings per share:
Basic $ 0.04 $ 0.06 $ 0.13 $ 0.26 $ 0.91
Diluted $ 0.03 $ 0.02 $ 0.04 $ 0.07 $ 0.25
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Shares outstanding:
Basic 27,247 27,321 27,321 27,348 27,547
Diluted 99,788 9,842 100,494 101,132 102,500
September 30
------------------------------------------------------
1996 1997 1998 1999 2000
Balance sheet data (In Thousands)
------------------------------------------------------
Cash and cash equivalents $1,195 $1,661 $ 1,863 $ 2,447 $ 3,202
Working capital 2,582 3,971 7,214 11,970 34,078
Total assets 4,134 5,970 11,661 26,149 50,426
Long-term portion of debt -- -- -- 2,750 2,296
Stockholders' equity 2,801 4,384 8,055 15,096 40,373
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to such financial statements included elsewhere in this Report
beginning on page F-1. The following discussion contains forward-looking
statements that involve risks and uncertainties. The statements are based on
current expectations and actual results could differ materially from those
discussed herein. Factors that could cause or contribute to the differences are
discussed in "Business - Risk Factors" and elsewhere in this Report.
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.
Furukawa beneficially owns all of our outstanding Class B common stock,
representing 61.5% of our outstanding shares of common stock and 94.1% of the
combined voting power of all of our outstanding common stock. Since our
inception, we have purchased substantially all of our lasers and the majority of
our other fiber optic components from Furukawa. We have 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 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 fiscal year ended
September 30, 2000, our 10 largest customers accounted for approximately 80.2%
of our total revenue, with Cisco Systems and Alcatel accounting for
approximately 34.2% and 15.3% of our total revenue, respectively. No other
customer accounted for more than 10.0% of our total revenue for the fiscal year
ended September 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.
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 fiscal year ended September 30,
2000, sales of our 1x9 products alleged to infringe the Methode patents
accounted for 38.8% of our total revenue. Sales of our other products alleged to
infringe the Methode
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<PAGE>
patents represented an immaterial amount of our total revenue for the fiscal
year ended September 30, 2000. See "Legal Proceedings."
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.
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.
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.
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.
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
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<PAGE>
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.
Results of Operations
The following table sets forth income statement data for the periods indicated
as a percentage of revenue:
Fiscal years ended September 30
1998 1999 2000
Revenue 100.0% 100.0% 100.0%
Cost of revenue 56.5 57.9 49.4
Gross Profit 43.5 42.1 50.6
Operating Expenses:
Research and development 4.0 3.1 2.5
Sales and marketing 5.1 3.8 2.9
General and administrative 3.6 3.0 3.8
Total operating expenses 12.7 9.9 9.2
Income from operations 30.8 32.2 41.4
Other income (expenses), net 0.6 0.3 0.3
Income before income taxes 31.4 32.5 41.7
Income taxes 12.7 13.0 17.0
Net income 18.7% 19.5% 24.7%
Fiscal years ended September 30, 2000 and 1999
Revenue - Revenue increased 182.7% to $101.9 million in the fiscal year
ended September 30, 2000 from $36.0 million in the fiscal year ended September
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 transceiver products. Sales of our products
for metropolitan area networks increased to 84.3% of revenue for the fiscal year
ended September 30, 2000 from 60.5% of revenue for the fiscal year ended
September 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 141.3% to $50.3 million in
the fiscal year ended September 30, 2000 from $20.9 million in the fiscal year
ended September 30, 1999. Gross margin increased to 50.6% from 42.1% during this
period. The increase in gross margin was due to a decrease in labor costs as a
percentage of revenue due to higher productivity in our new facility, lower
component costs as a percentage of revenue due to higher volume purchases and a
decrease in overhead as a percentage of revenue. Provisions for obsolete
inventory increased 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.
33
<PAGE>
Research and Development - Research and development expenses increased
122.8% to $2.5 million in the fiscal year ended September 30, 2000 from $1.1 in
the fiscal year ended September 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 automation of our product testing procedure.
Research and development as a percentage of revenue decreased to 2.5% from 3.1%
over this period because of a significant growth in revenue. We expect research
and development expenses to increase significantly as a percentage of revenue as
we expand our research and development efforts.
Sales and Marketing - Sales and marketing expenses increased 115.7% to
$3.0 million in the fiscal year ended September 30, 2000 from $1.4 in the fiscal
year ended September 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 3.8% 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 264.0% to $3.9 million in the fiscal year ended September 30, 2000
from $1.1 in the fiscal year ended September 30, 1999. This increase was the
result of an increase in employee benefits and bonuses, an increase in legal and
other professional fees and an increase in reserves to provide for uncollectible
receivables. 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 269.0% to $17.3
million in the fiscal year ended September 30, 2000, based on an effective tax
rate of 40.8%, from $4.7 million in the fiscal year ended September 30, 1999,
based on an effective tax rate of 40.0%.
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
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<PAGE>
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.
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.
Quarterly Results
The following table sets forth some of our selected financial
information for our eight 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 Report. These operating results
are not necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
Three-Month Period Ended
-------------------------------------------------------------------------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30,
1998 1999 1999 1999 1999 2000 2000 2000
(In thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue .................... $ 6,474 $ 7,244 $ 9,607 $ 12,711 $ 14,785 $ 25,279 $ 28,997 $ 32,806
Cost of revenue ............ 3,829 4,549 5,613 6,869 7,911 12,958 13,715 15,742
--------- --------- --------- --------- --------- --------- --------- ----------
Gross profit ............... 2,645 2,695 3,994 5,842 6,874 12,321 15,282 17,064
Operating Expenses:
Research and development . 227 270 281 356 406 516 734 871
Sales and marketing ...... 312 302 357 393 510 685 785 963
General and administrative 189 220 245 411 471 919 1,392 1,095
--------- --------- --------- --------- --------- --------- --------- ----------
Total operating expenses 728 792 883 1,160 1,387 2,120 2,911 2,929
Income from operations ..... 1,917 1,903 3,111 4,682 5,487 10,201 12,371 14,135
Other income (expenses), net 36 43 43 (6) 19 35 83 168
--------- --------- --------- --------- --------- --------- --------- ----------
Income before income taxes . 1,953 1,946 3,154 4,676 5,506 10,236 12,454 14,303
Income taxes (benefit) ..... 804 799 1,298 1,792 2,244 4,171 5,075 5,829
--------- --------- --------- --------- --------- --------- --------- ----------
Net income ................. $ 1,149 $ 1,147 $ 1,856 $ 2,884 $ 3,262 $ 6,065 $ 7,379 $ 8,474
========= ========= ========= ========= ========= ========= ========= ==========
Earnings per share:
Basic .................... $ 0.04 $ 0.04 $ 0.07 $ 0.11 $ 0.12 $ 0.22 $ 0.27 $ 0.30
Diluted .................. $ 0.01 $ 0.01 $ 0.02 $ 0.03 $ 0.03 $ 0.06 $ 0.07 $ 0.09
Shares outstanding:
Basic .................... 27,321 27,321 27,348 27,401 27,401 27,401 27,515 27,871
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diluted .................. 101,107 101,107 101,207 101,107 103,022 103,022 103,864 100,092
As a percentage of revenue:
Revenue .................... 100.0% 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 48.0
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............... 40.9 37.2 41.6 46.0 46.5 48.7 52.7 52.0
Operating Expenses:
Research and development . 3.5 3.7 2.9 2.8 2.7 2.0 2.5 2.7
Sales and marketing ...... 4.8 4.2 3.7 3.1 3.4 2.7 2.7 2.9
General and administrative 2.9 3.0 2.6 3.2 3.2 3.6 4.8 3.3
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 11.2 10.9 9.2 9.1 9.3 8.3 10.0 8.9
Income from operations ..... 29.7 26.3 32.4 36.9 37.2 40.4 42.7 43.1
Other income (expenses), net 0.6 0.6 0.4 - 0.1 0.1 0.3 0.5
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes . 30.3 26.9 32.8 36.9 37.3 40.5 43.0 43.6
Income taxes (benefit) ..... 12.4 11.0 13.5 14.1 15.2 16.5 17.5 17.8
-------- ------- ------- ------- ------- ------- ------- -------
Net income ................. 17.9% 15.9% 19.3% 22.8% 22.1% 24.0% 25.5% 25.8%
</TABLE>
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 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% and 52.0% of revenue in the quarters ended June 30, 2000 and September 30,
2000, respectively. We do not expect our future gross margins to exceed the
margins that we have achieved in the quarters ended June 30, 2000 and September
30, 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% of revenue over the quarterly periods between the quarter
ended September 30, 1998 and the quarter ended September 30, 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.
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The following table sets forth revenue attributable to each of our
product groups as a percentage of revenue for the periods presented.
Fiscal years ended September 30
--------------------------------------
1998 1999 2000
--------------------------------------
Receivers 21.5% 16.4% 15.2%
Transceivers 55.4 70.0 73.4
Transmitters 15.9 11.5 9.9
Other 7.2 2.1 1.5
--------------------------------------
Revenue 100.0% 100.0% 100.0%
We believe the increase in the percentage of sales attributable to our
transceiver products during the periods reflected in the table above reflects an
overall increase in customer demand for products designed with higher levels of
integration, such as transceivers.
Liquidity and Capital Resources
As of September 30, 2000, our primary source of liquidity was our cash
and cash equivalents balance of $3.2 million and $9.3 million of marketable
securities which consist primarily of United States notes and treasury bonds.
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 lines of credit and term loans. As of September 30,
2000, our working capital was $34.1 million with a current ratio of 3.1. As of
September 30, 1999, our working capital was $12.0 million with a current ratio
of 2.5. 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 September 30, 2000, we had a $2.8 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 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 $1.3
million, primarily to purchase additional production equipment to continue our
manufacturing capacity expansion.
During the fiscal year ended September 30, 2000 and September 30, 1999,
we generated cash flow from operations of $12.9 million and $2.2 million,
respectively. The increase in cash generated by
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<PAGE>
operating activities during this period was caused by increased revenue,
partially offset by increases in accounts receivable and inventory. For the
years ended September 30, 1999 and 1998, we generated net cash flow from
operations of $2.2 million and $1.3 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.
During the fiscal year ended September 30, 2000 and September 30, 1999,
cash used in investing activities was $11.8 million and $4.9 million,
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.
On November 3, 2000, we completed an initial public offering of our
Class A Common Stock. All 12,075,000 shares of Class A Common Stock registered
under the Registration Statement were sold at a price of $11.00 per share, which
amount includes exercise of the underwriters' over-allotment option of 1,575,000
shares. After deducting the underwriting discounts and commissions and the
offering expenses we received net proceeds from the initial public offering of
approximately $122,126,375.
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 $2.8 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
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<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Optical Communication Products, Inc. financial statements, schedules
and supplementary data, as listed under Item 14, appear in a separate section of
this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
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<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers, Directors and Key Employees
Set forth below is information concerning our directors, executive
officers and other key employees. Our board of directors intends in the near
future to select at least two additional people who are not our employees and
are otherwise independent to serve as directors. We expect that the new
directors will replace Messrs. Ghorbanali and Shibata as directors.
Name Age Position(s)
---- --- -----------
Muoi Van Tran 49 Chief Executive Officer, President
and Director
Susie L. Nemeti 42 Chief Financial Officer, Secretary,
Vice President of Finance and
Administration
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 53 Director
Mitsuyoshi Shibata 47 Director
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 our company,
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
40
<PAGE>
bachelor of science degree in electrical engineering as well as his masters
degree from San Jose State University.
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 joined our company as a director and member of our
audit and compensation committees upon completion of our initial public offering
in November 2000. 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
Our board of directors is composed of seven members. Each director
currently serves until the next annual meeting of stockholders or until his
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
41
<PAGE>
four and seven, with the exact number to be determined by a majority of our
board of directors or stockholders.
Board Committees
Independent director nominating committee - Our board of directors has
established an independent director nominating committee which will nominate and
select persons deemed independent to serve as our independent directors. The
independent nominating committee is composed of Muoi Van Tran, our Chief
Executive Officer and President, and Messrs. Sakamoto and Okada. The independent
director nominating committee also has the responsibility to search for and
nominate independent director candidates to fill independent director vacancies
on our board.
Audit committee - In October 2000, our board of directors established
an audit committee which will be composed of three independent directors. Dr.
Personick is currently the only member of the audit committee. 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 - In October 2000, our board of directors
established a compensation committee composed of Messrs. Sakamoto and Okada and
Dr. Personick. The compensation committee is 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.
42
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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
receive, from time to time, grants 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 fiscal 2000. All members of our board of
directors in fiscal 2000, 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
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
serving at September 30, 2000.
<TABLE>
<CAPTION>
Long-term
compensation
------------
Annual compensation
-------------------
Securities
Other annual underlying All other
Name and principal position Year Salary Bonus compensation options/SAR compensation
<S> <C> <C> <C> <C> <C> <C>
Muoi Van Tran.................. 2000 $ 218,035 $ 1,006,568 $ 44,250(1) 1,330,200 --
Chief Executive Officer
and President 1999 189,400 306,600 17,700 -- --
Mohammad Ghorbanali............ 2000 $ 175,883 $ 823,551 $ 43,500(1) 1,088,360 --
Chief Operating Officer
and Vice President of
Manufacturing and
Research and Development 1999 153,800 250,900 17,400 -- --
Susie L. Nemeti................ 2000 $ 142,715 $ 668,247 $ 35,500(1) 883,120 --
Chief Financial Officer,
Secretary and Vice
President of Finance and
Administration 1999 125,600 203,500 14,200 -- --
</TABLE>
(1) Estimated.
43
<PAGE>
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>
<CAPTION>
Potential Realizable
Value at Assumed
Rates of Stock Price
Individual Grants Appreciation for
Option Term
----------------------------------------------------------------------------------------
Number of % of Total
Securities Options Exercise
Under- Granted to Price
lying Employees Per
Options in Fiscal Share Expiration
Name Grants (#) 2000 ($/share) Date 5%($) 10%($)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Muoi Van Tran................ 1,330,200 36.7% $ 11.00 8/28/10 $9,202,112 $23,319,958
Mohammad Ghorbanali......... 1,088,360 30.1% $ 11.00 8/28/10 $7,529,101 $19,080,221
Susie L. Nemeti.............. 883,120 24.4% $ 11.00 8/28/10 $6,109,284 $15,482,124
</TABLE>
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.
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 our initial public offering price of $11.00 per share
as the fair market value, multiplied by the number of shares underlying the
option. None of our executive officers exercised options in the fiscal year
ended September 30, 2000. All of the options held by our executive officers are
fully vested.
44
<PAGE>
<TABLE>
<CAPTION>
Number of shares of Class A
common stock underlying Value of unexercised
unexercised options at in-the-money options
September 30, 2000 at September 30, 2000
---------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable ($) 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 were authorized for issuance under
our 1992 Stock Option Plan. Options for 1,990,000 shares were issued under the
plan. Upon the execution of the underwriting agreement relating to our initial
public offering on November 2, 2000, our 1992 Stock Option Plan terminated, and
no further option grants may be made under this plan. All options outstanding
under this plan 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 were authorized
for issuance under the 2000 Stock Option/Stock Issuance Plan and 963,600 options
were issued under the plan. Of these 963,600 options, 200,000 options were
granted to David Jenkins, our Managing Director of European Operations, and
763,600 options to our other employees, all at an exercise price of $11.00 per
share.
Upon the execution of the underwriting agreement relating to our
initial public offering on November 2, 2000, our 2000 Stock Option/Stock
Issuance Plan terminated, and no option grants may be made under the plan. All
options outstanding under the plan 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 former 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 was November 2, 2000, the date of the underwriting agreement for our
initial public offering. At that time, all outstanding options under our
predecessor plans were 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.
45
<PAGE>
Share Reserve
A total of 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
. 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 administers 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 also has 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 includes the following features:
46
<PAGE>
. 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.
. 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.
47
<PAGE>
. 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 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
48
<PAGE>
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 of directors
in August 2000 and approved by our stockholders in August 2000. The plan became
effective upon our initial public offering in November 2000. 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 is
initially 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 our
initial public 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.
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.
49
<PAGE>
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% 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
up to a maximum of $500 per year. 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 plan 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 plan year ended December 31, 1999 were approximately
$276,700.
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
50
<PAGE>
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.
51
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our Class A Common Stock and Class B Common Stock as of December 1,
2000 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 common stock.
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 December 1, 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. 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
Number of shares shares beneficially
beneficially owned owned
------------------------------------------------
<S> <C> <C>
Named executive officers and directors:
Muoi Van Tran (1)............................................ 18,740,160 16.7%
Susie L. Nemeti (2)........................................... 5,649,480 5.2
Mohammad Ghorbanali (3)....................................... 12,387,160 11.2
Masato Sakamoto (4)........................................... 66,000,000 61.5
Kunihiro Matsubara (4)........................................ 66,000,000 61.5
Yoshihisa Okada (4)........................................... 66,000,000 61.5
Stewart D. Personick.......................................... -- --
Mitsuyoshi Shibata (4)........................................ 66,000,000 61.5
Other 5% Stockholders:
Furukawa Electric North America, Inc, (5)..................... 66,000,000 61.5
900 Lafayette Street, Suite 506
Santa Clara, CA 95050
All directors and executive officers as a group (8 persons)(6) 102,776,800 95.7%
</TABLE>
---------------------------
(1) Includes 8,428,760 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, 2,100,000 shares of our Class A common stock held by Muoi Van Tran, as
trustee of The Muoi Van Tran 2000 Trust dated October 1, 2000 for the benefit of
Mr. Tran's family, 2,100,000 shares of our Class A common stock held by Mr.
Tran's spouse, Tracy Tam Trang, as trustee of The Tracy Tam Trang 2000 Trust
dated October 1, 2000 for the benefit of Mr. Tran's family, 700,000 shares of
Class A common stock held by Muoi Van Tran, as trustee of The Muoi Van Tran
Trust dated October 1, 2000 for the benefit of Mr. Tran's family, 700,000 shares
of Class A common stock held by Mr. Tran's spouse, Tracy Tam Trang, as trustee
of The Tracy Tam Trang Trust dated October 1, 2000 for the benefit of Mr. Tran's
family, 40,000 shares of Class A common
52
<PAGE>
stock held by Muoi Van Tran and Tracy Tam Trang, as co-trustees of the Tiffany
Tam Tran Irrevocable Trust dated October 1, 2000 for the benefit of Mr. Tran's
child, 40,000 shares of Class A common stock held by Muoi Van Tran and Tracy Tam
Trang, as co-trustees of the Nicholas Nam Tran Irrevocable Trust dated October
1, 2000 for the benefit of Mr. Tran's child, 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 400,000 shares of our Class A common stock held by Susie Nemeti, as
trustee of the Susie Nemeti 2000 Trust dated October 1, 2000 for the benefit of
Ms. Nemeti's child, and 400,000 shares of our Class A common stock held by Ms.
Nemeti's spouse, Attila Nemeti, as trustee of the Attila Nemeti 2000 Trust dated
October 1, 2000 for the benefit of Ms. Nemeti's child, and options to purchase
883,120 shares of our Class A common stock at an exercise price of $11.00 per
share, all of which are presently exercisable.
(3) Includes 5,000,000 shares of our Class A common stock held by Mohammad
Ghorbanali, as trustee of the Mohammad Ghorbanali 2000 Trust dated October 1,
2000 for the benefit of Mr. Ghorbanali's family, 30,000 shares of our Class A
common stock held by Mohammad Ghorbanali, as trustee of the Navid Ghorbanali
Irrevocable Trust dated October 1, 2000 for the benefit of Mr. Ghorbanali's
child, 30,000 shares of our Class A common stock held by Mohammad Ghorbanali, as
trustee of the Negar Ghorbanali Irrevocable Trust dated October 1, 2000 for the
benefit of Mr. Ghorbanali's child, and 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 our Class B common stock held by Furukawa
Electric North America, Inc. Mr. Sakamoto is the President of Furukawa Electric
North America, Inc. 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. Sakamoto, Matsubara, Okada and Shibata disclaim
beneficial ownership of these shares.
(5) Consists of 66,000,000 shares of our Class B common stock.
(6) Includes options to purchase 8,766,760 shares of our Class A common stock at
a weighted average exercise price of $4.14 per share, all of which are presently
exercisable, and 66,000,000 shares of our Class B common stock.
53
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. We
believe that our business dealings with Furukawa and its subsidiaries and
affiliates were on terms that were no less favorable than terms that would be
available from unrelated third parties for similar transactions. See "Business -
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 $21,779,000,
$8,416,000 and $2,706,000 for the years ended September 30, 2000, 1999 and 1998,
respectively. Our sales to these related parties amounted to $1,126,000,
$611,000 and $911,000 for the years ended September 30, 2000, 1999 and 1998,
respectively. Accounts receivable due to us from our related parties were
$42,000 and $52,000 at September 30, 2000 and 1999, respectively. Accounts
payable to our related parties were $5,175,000 and $3,184,000 at September 30,
2000 and 1999, respectively. 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.
We have entered into a registration rights agreement with Furukawa
which includes demand registration rights, piggy-back registration rights and
other standard rights and limitations. The registration rights agreement
provides that Furukawa may not demand a registration prior to one year from the
closing of our initial public offering in November 2000 and also provides that
Furukawa will not purchase any shares of our Class A common stock for 180 days
following the closing of our initial public offering. In addition to the
limitations 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 our initial public offering without the prior written
consent of UBS Warburg LLC.
54
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements of
Optical Communication Products, Inc. are included in a separate section of this
Annual Report on Form 10-K commencing on the pages referenced below:
<TABLE>
<CAPTION>
Page
----
Optical Communication Products Financial Statements
------------------------------------------------------
<S> <C>
Independent Auditors' Report ........................................................................ F-2
Balance Sheets at September 30, 2000 and 1999 ....................................................... F-3
Statements of Income for each of the three years in the period ended September 30, 2000 ............. F-4
Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2000 F-5
Statements of Cash Flows for each of the three years in the period ended September 30, 2000 ......... F-6
Notes to Financial Statements ....................................................................... F-7
</TABLE>
2. Financial Statement Schedule. The following financial
statement schedule of Optical Communication Products, Inc. is included in a
separate section of this Annual Report on Form 10-K commencing on the pages
referenced below. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the financial
statements or notes thereto.
Schedule II- Valuation and Qualifying Accounts
For the Year Ended September 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Description Balance at Additions
beginning of charged to Deductions- Balance at end
Period period expense recoveries of period
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts 1998 165,000 (113,000) 52,000
1999 52,000 267,000 (22,000) 297,000
2000 297,000 1,480,000 - 1,777,000
Reserve for Obsolete Inventory 1998 148,000 194,000 342,000
1999 342,000 510,000 852,000
2000 852,000 928,000 1,780,000
Warranty Reserve 1998 92,000 96,000 (48,000) 140,000
1999 140,000 133,000 (20,000) 253,000
2000 253,000 173,000 (19,000) 407,000
</TABLE>
3. Exhibits. The following Exhibits are attached hereto and
incorporated herein by reference:
Number Description
--------------------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation
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
4.3 * Standstill and Registration Rights Agreement, dated as of
October 26, 2000, by and between the Registrant and The Furukawa
Electric Co., Ltd.
10.1* 2000 Stock Incentive Plan
10.2* Employee Stock Purchase Plan
10.3* Form of Indemnification Agreement
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 Mohammad Ghorbanali, as currently in effect
10.7* Employment Agreement, dated November 1, 1999, by and between
55
<PAGE>
the Registrant and Susie L. Nemeti, as currently in effect
10.8* Form of Stock Option Agreement, dated August 29, 2000, by and
between the Registrant and each of Muoi Van Tran, Mohammad
Ghorbanali and Susie L. Nemeti (including a schedule of
substantially identical terms)
10.9* Form of Stock Option Agreement, dated June 28, 1993, by and
between the Registrant and each of Muoi Van Tran, Mohammad
Ghorbanali and Susie L. Nemeti (including a schedule of
substantially identical terms)
21.1* List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
* This exhibit was previously filed as an exhibit to the Company's
Registration Statement on Form S-1 declared effective November 2, 2000
(File No. 333-44862) under the same exhibit number, and is incorporated by
reference herein.
(b) Reports on Form 8-K:
None.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Chatsworth, State of California, on the 12th day of December,
2000.
Optical Communication Products, Inc.
By: /s/ Muoi Van Tran
------------------------------
Name: Muoi Van Tran
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Muoi Van Tran his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Masato Sakamoto Chairman of the Board of December 12, 2000
Directors
/s/ Muoi Van Tran Chief Executive Officer, December 12, 2000
President and Director
(principal executive officer)
/s/ Susie L. Nemeti Chief Financial Officer December 12, 2000
(principal financial and
accounting oficer)
/s/ Mohammad Ghorbanali Director December 12, 2000
/s/ Kunihiro Matsubara Director December 12, 2000
/s/ Yoshihisa Okada Director December 12, 2000
/s/ Stewart D. Personick Director December 12, 2000
/s/ Mitsuyoshi Shibata Director December 12, 2000
57
<PAGE>
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, 1999 and 2000,
and the related statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 16. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule 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,
1999 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP,
Los Angeles, California
November 14, 2000
F-1
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 2000 (in thousands, except share and per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
-----------------
1999 2000
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,447 $ 3,202
Marketable securities 497 9,280
Accounts receivable less allowance for doubtful accounts:
$ 297 - 1999 and $1,777 - 2000 8,185 20,031
Inventories, net 8,308 16,018
Deferred income taxes 662 1,808
Prepaid expenses and other current assets 81 87
------- -------
Total current assets 20,180 50,426
PROPERTY, PLANT, AND EQUIPMENT, Net 5,940 8,190
OTHER ASSETS 29 460
------- -------
TOTAL $26,149 $59,076
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 471 $ 471
Accounts payable 2,138 4,036
Accounts payable to related parties 3,184 5,175
Accrued bonus 1,038 3,042
Other accrued expenses 1,125 2,057
Income taxes payable 254 1,567
------- -------
Total current liabilities 8,210 16,348
------- -------
LONG-TERM DEBT 2,750 2,296
------- -------
DEFERRED INCOME TAXES 93 59
------- -------
COMMITMENTS AND CONTINGENCIES
<CAPTION>
Pro Forma
Subsequent
Event
(Note 13)
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY:
Convertible preferred stock, no par value; 70,000,000
shares authorized, 66,000,000 shares issued and outstanding
at 1999 and 2000 1,650 1,650
Common stock, no par value; 150,000,000 shares authorized,
27,401,440 shares issued and outstanding at1999 and
27,871,440 issued and outstanding at 2000 172 269
Class A - common stock, $.001 par value; 200,000,000 shares
authorized, 27,871,440 shares issued and outstanding at 2000
(pro forma 28
Class B - common stock $.001 par value; 66,000,000 shares
authorized, 66,000,000 shares issued and outstanding at 2000
(pro forma) 66
Additional paid-in capital (pro forma) 1,825
Retained earnings 13,274 38,454 38,454
------- ------- -------
Total stockholders' equity 15,096 40,373 40,373
------- ------- -------
TOTAL $26,149 $59,076 $59,076
======= ======= =======
</TABLE>
See notes to financial statements.
F-2
<PAGE>
OPTICAL COMMUNICATION PRODUCTION
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1999, AND 2000 (In thousands,
except share and per share data)
--------------------------------------------------------------------------------
1998 1999 2000
REVENUE $ 19,620 $ 36,036 $ 101,867
COST OF REVENUE 11,086 20,860 50,326
----------- --------- ---------
GROSS PROFIT 8,534 15,176 51,541
----------- --------- ---------
EXPENSES:
Research and development 779 1,134 2,527
Selling and marketing 999 1,364 2,943
General and administrative 712 1,065 3,877
----------- --------- ---------
Total expenses 2,490 3,563 9,347
----------- --------- ---------
INCOME FROM OPERATIONS 6,044 11,613 42,194
----------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 121 149 410
Interest expense (2) (60) (249)
Other income (expense) 27 144
----------- --------- ---------
OTHER INCOME, Net 119 116 305
----------- --------- ---------
INCOME BEFORE INCOME TAXES 6,163 11,729 42,499
INCOME TAXES 2,492 4,693 17,319
----------- --------- ---------
NET INCOME $ 3,671 $ 7,036 $ 25,180
=========== ========= =========
BASIC EARNINGS PER SHARE $ 0.13 $ 0.26 $ 0.91
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.07 $ 0.25
BASIC SHARES OUTSTANDING 27,321 27,348 27,547
DILUTED SHARES OUTSTANDING 100,494 101,132 102,500
PRO FORMA (Note 13):
Basic earnings per share $ 0.08 $ 0.27
Diluted earnings per share $ 0.07 $ 0.25
Basic shares outstanding 93,348 93,547
Diluted shares outstanding 101,132 102,500
See notes to financial statements.
F-3
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1999, AND 2000 (In thousands, except share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid-in Retained
---------------------- -----------------------
Shares Amount Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 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 for exercise
of options 80,000 5 5
---------- --------- ---------- -------- ------- ---------- ----------
BALANCE, SEPTEMBER 30, 1999 66,000,000 1,650 27,401,440 172 13,274 15,096
Net income 25,180 25,180
Issuance of common stock for exercise
of options 470,000 97 97
---------- --------- ---------- -------- ------- ---------- ----------
BALANCE, JUNE 30, 2000 66,000,000 $ 1,650 27,871,440 $ 269 $ - $ 38,454 $ 40,373
========== ========= ========== ======== ======= ========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
OPTICAL COMMUNICATION PRODUCTS, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1999, AND 2000 (in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999 2000
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,671 $ 7,036 $ 25,180
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 163 305 722
Changes in operating assets and liabilities:
Accounts receivable, net (2,304) (4,010) (11,846)
Inventories, net (2,208) (4,924) (7,710)
Deferred income taxes (35) (348) (1,180)
Prepaid expense and other current assets (48) 1 (6)
Other assets (10) (431)
Accounts payable 193 1,645 1,898
Accounts payable to related parties 1,439 1,318 1,991
Accrued bonuses 383 508 2,004
Other accrued expenses 386 436 932
Income taxes payable (323) 279 1,313
-------- --------- --------
Net cash provided by operating activities 1,317 2,236 12,867
-------- --------- --------
INVESTING ACTIVITIES:
Purchase of marketable securities (2,810) (1,508) (12,783)
Sales of marketable securities 2,326 2,000 4,000
Purchase of property, plant and equipment (631) (5,370) (2,972)
-------- --------- --------
Net cash used in investing activities (1,115) (4,878) (11,755)
-------- --------- --------
FINANCING ACTIVITIES:
Proceeds from long term debt -- 3,300
Principal payments on long term debt -- (79) (454)
Issuance of common stock -- 5 97
-------- --------- --------
Net cash provided by (used in) financing activities -- 3,226 (357)
-------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 202 584 755
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,661 1,863 2,447
-------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,863 $ 2,447 $ 3,202
======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid during the year for:
Interest $ -- $ 48 $ 239
Income taxes 2,497 4,710 17,158
</TABLE>
See notes to financial statements.
F-5
<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, 1998, 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"). Furukawa
beneficially owns 70.3% of the Company's capital stock at September 30, 2000
(see Note 13). After our initial public offering on November 3, 2000, Furukawa's
ownership of the Company became 61.5%.
Operations
The Company operates in one industry segment, which 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 include contract manufacturers or major end user customers, amounted to
23.8%, 15.3%, and 12.1%, respectively for the year ended September 30, 2000. One
direct sale customer amounted to 21.7% and 10.8% of revenue in 1998 and 1999,
respectively.
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 have historically not been material. Maturities on
held-to-maturity marketable debt securities range from three months to two
years.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market, net of an allowance for obsolescence.
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.
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
F-6
<PAGE>
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 income tax assets to the amounts expected to be
realized.
Earnings per Share
Basic earnings per share are computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share are
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, as shipments
are FOB shipping point, 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 policies 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
At September 30, 2000, the Company had one class of no par common stock and no
par Series A preferred stock, which converted into common stock upon the
effectiveness of the Company's initial public offering ("IPO") (see Note 13).
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 four largest customers amounted to
$3,340,000, $2,915,000, $2,420,000 and $2,418,000 at September 30, 2000,
respectively. Accounts receivable from the Company's largest customer amounted
to $1,095,000 at September 30, 1999.
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
F-7
<PAGE>
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 components. 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.
3. INVENTORIES
Inventories, net consist of the following:
September 30,
-----------------
1999 2000
(in thousands)
Raw materials $ 4,427 $ 8,351
Work-in-process 4,563 9,019
Finished goods 170 428
------- -------
9,160 17,798
Less allowance for obsolete inventory 852 1,780
------- -------
Inventories, net $ 8,308 $16,018
======= =======
F-8
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, Useful
-----------------
1999 2000 Lives
(in thousands)
Land $ 1,345 $ 1,345
Buildings and improvements 3,352 3,801 39 years
Machinery and equipment 1,824 4,045 5 years
Furniture and fixtures 58 168 5 years
Computer hardware and software 175 368 3 years
-------- --------
6,754 9,727
Less accumulated depreciation 814 1,537
-------- --------
$ 5,940 $ 8,190
======== ========
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 is paid in monthly installments and
matures on July 15, 2006 and 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.
Long-term debt at September 30, 1999 and 2000 consists of the
following:
1999 2000
(in thousands)
Term loan due July, 2006 (8.42% at September 30, 2000) $3,221 $2,767
Less current portion 471 471
------ ------
Long-term debt, less current portion $2,750 $2,296
====== ======
F-9
<PAGE>
Long-term debt maturities as of September 30, 2000 consist of the
following:
Fiscal 2001 $ 471
Fiscal 2002 471
Fiscal 2003 471
Fiscal 2004 471
Fiscal 2005 471
Thereafter 412
------
$2,767
======
6. EARNINGS PER SHARE
The following is a calculation of the basic and diluted earnings per
share ("EPS"):
Weighted average common shares
outstanding 27,321 27,348 27,547
-------- -------- --------
Total $ 0.13 $ 0.26 $ 0.91
======== ======== ========
Diluted EPS:
Income attributable to common
stockholders $ 3,671 $ 7,036 $ 25,180
Preferred stock dividends - - -
-------- -------- --------
Total $ 3,671 $ 7,036 $ 25,180
======== ========= ========
Weighted average common shares
outstanding 27,321 27,348 27,547
Convertible preferred stock 66,000 66,000 66,000
Common stock options 7,173 7,784 8,953
-------- -------- --------
Diluted shares outstanding 100,494 101,132 102,500
======== ======== ========
Diluted EPS $ 0.04 $ 0.07 $ 0.25
======== ======== ========
F-10
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases certain 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, 1998, 1999 and 2000 was $92,000, $105,000 and $13,000,
respectively. The Company 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. The 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 reexamination 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 9,670,360
founders' stock options, which were separate from the Company's stock
option plan and are fully vested. All options were granted at fair
value.
On August 29, 2000, the Board of Directors approved the 2000 Stock
Incentive Plan. Upon the effectiveness of the Company's IPO, options
from the 1992 plan transferred to the 2000 plan. The 2000 plan
provides that options may have a term of up to 10 years, and become
exercisable and vest in increments. The normal vesting is 25 percent
per year over four years. However, the vesting period can vary.
F-11
<PAGE>
There were 3,597,152 options available for future grant under the
Company's 1992 stock option plan at September 30, 2000. Stock option
activity, including the options granted outside the plan, is as
follows:
<TABLE>
<CAPTION>
Weighted
Number Exercise Price Average
of Options per Option Exercise Price
<S> <C> <C> <C>
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 0.1
---------- ------------------ ------
Options outstanding - September 30, 1999 9,608,680 0.00025 to 0.39 0.07
Options granted 3,621,680 2.88 to 11.00 10.28
Options exercised (470,000) 0.10 to 0.19 0.18
Options canceled (570,000) 0.10 to 0.39 0.25
---------- ------------------ ------
Options outstanding - September 30, 2000 12,190,360 $0.00025 to $11.00 $ 3.09
========== ================== ======
</TABLE>
The following table summarizes information regarding options outstanding at
September 30, 2000.
<TABLE>
<CAPTION>
September
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------
Remaining
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 2.74 $ 0.00025 6,368,680 $ 0.00025
40,000 0.01 1.25 0.01 40,000 0.01
680,000 0.06-.0.07 5.07 0.07 680,000 0.07
380,000 0.10 6.72 0.10 312,917 0.10
540,000 0.19 7.75 0.19 303,750 0.19
560,000 0.39 8.75 0.39 175,000 0.39
320,000 2.88 9.34 2.88 - 2.88
3,301,680 11.00 9.91 11.00 3,301,680 11.00
---------- --------------- ------ ----------- ---------- ---------
12,190,360 $0.00025-$11.00 $ 5.61 $ 3.09 11,182,027 $ 3.27
========== =============== ====== =========== ========== =========
</TABLE>
All stock options are granted at the fair market value of the
Company's common stock at the grant date. The weighted averages
estimated fair value of options granted in 1998, 1999 and 2000 was
$0.19, $0.39 and $1.58.
F-12
<PAGE>
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:
Year Ended September 30,
------------------------
1999 2000
(in thousands, except
per share amounts)
Net Income:
As reported $ 7,036 $ 25,180
Pro forma $ 7,002 $ 19,714
Basic earnings per share
As reported $ 0.26 $ 0.91
Pro forma $ 0.08 $ 0.72
Diluted earnings per share
As reported $ 0.07 $ 0.25
Pro forma $ 0.07 $ 0.19
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 in completing the model:
September 30,
------------------------
1998 1999 2000
Dividend yield 0% 0% 0%
Expected volatility 30% 30% 30%
Risk-free rate of return 5.59% 5.84% 6.33%
Expected life (years) 4 4 1.27
9. PROFIT SHARING PLAN
The Company has a deferred cash and profit sharing plan covering all
employees, subject to certain participation and vesting requirements.
The plan provides that the Company will partially match employee
contributions or provide discretionary contributions up to a certain
amount. Total contributions by the Company were $151,000, $299,000 and
$957,000 for the years ended September 30, 1998, 1999 and 2000,
respectively.
F-13
<PAGE>
10. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1998 1999 2000
(in thousands)
<S> <C> <C> <C>
Current:
Federal $2,007 $ 3,960 $ 14,495
State 520 1,081 4,004
------ -------- --------
Total current $2,527 5,041 18,499
------ -------- --------
Deferred:
Federal (26) (273) (933)
State (9) (75) (247)
------ -------- --------
Total deferred (35) (348) (1,180)
------ -------- --------
Provision for income taxes $2,492 $ 4,693 $ 17,319
====== ======== ========
The components of deferred tax assets (liabilities) are as follows:
September 30,
---------------
1999 2000
(in thousands)
Allowance for doubtful accounts $ 130 $ 780
Uniform capitalization and obsolete inventory 409 747
Accumulated depreciation (56) (59)
Warranty expense 75 179
Other 11 102
------ ------
Net deferred tax asset $ 569 $1,749
====== ======
</TABLE>
A reconciliation of the Company's provision for income taxes to the
U.S. federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1998 1999 2000
----------------- ----------------- ----------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes
at statutory rate $2,157 35.0% $ 4,105 35.0% $ 14,875 35.0%
State taxes, net of federal
benefit 337 5.5 654 5.6 2,442 5.7
Other (2) (0.1) (66) (0.6) 2 0.1
------ ---- ------- ---- -------- ----
$2,492 40.4% $ 4,693 40.0% $ 17,319 40.8%
====== ==== ======= ==== ======== ====
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company is a subsidiary of Furukawa Electric North America, which
is a wholly owned subsidiary of Furukawa. The Company's related party
transactions occur between itself and other Furukawa owned
subsidiaries and affiliates.
F-14
<PAGE>
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
$911,000, $611,000 and $1,126,000 for the years ended September 30,
1998, 1999 and 2000, respectively. Purchases of raw materials from
related parties amounted to $2,706,000, $8,416,000 and $21,779,000 for
the years ended September 30, 1998, 1999 and 2000, respectively.
Accounts receivable due from related parties were $52,000 and $42,000
at September 30, 1999 and 2000, respectively. Accounts payable to
related parties were $3,184,000 and $5,175,000 at September 30, 1999
and 2000, respectively. The Company paid $34,000 and $69,000 in
management fees to Furukawa for consulting and advisory services on
management issues for the years ending September 30 1998 and 1999,
respectively. No management fees were paid in the fiscal year ended
September 30, 2000.
12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment, which includes the
design and manufacture of fiber optic subsystems and modules. The
following are summaries of sales to geographic areas based on the
location of the entity purchasing the Company's products and sales for
each of the products within the segment:
September 30,
------------------------------
1998 1999 2000
(in thousands)
Revenues by geographical area:
United States $ 13,647 $ 24,439 $ 78,866
Canada 2,384 5,371 8,418
Israel 1,720 2,951 11,003
Europe 1,096 2,567 2,770
Other 773 708 810
-------- -------- --------
$ 19,620 $ 36,036 $101,867
======== ======== ========
Sales by Product:
Receivers $ 4,222 $ 5,913 $ 15,503
Transceivers 10,872 25,226 74,737
Transmitters 3,115 4,157 10,135
Other 1,411 740 1,492
-------- -------- --------
$ 19,620 $ 36,036 $101,867
======== ======== ========
F-15
<PAGE>
13. SUBSEQUENT EVENT- INITIAL PUBLIC OFFERING AND CONVERSION OF STOCK
Initial Public Offering - On November 3, 2000, the Company completed
its initial public offering of 12,075,000 newly issued shares of Class
A common stock, which includes the exercise of the underwriters' over-
allotment option of 1,575,000 shares, at an offering price of $11.00.
Proceeds from the offering were $123,572,000 net of underwriting
discounts and commissions.
Preferred and Common Stock - Approximately upon the date the Company's
IPO became effective, the Company reincorporated in Delaware and
created two new classes of common stock with a par value of $0.001 per
share. All of the Company's outstanding shares of common stock and
convertible preferred stock automatically converted into shares of
Class A and Class B common stock, respectively. The effects of this
conversion are shown pro-forma on the face of the balance sheet.
Holders of new Class A common stock generally have identical rights to
holders of Class B common stock, except that holders of Class A common
stock are entitled to one vote per share while holders of Class B
common stock are entitled to ten votes per share on matter submitted
to a vote of the stockholders. Furukawa owns all of the Company's
outstanding Class B common stock.
F-16
