<PAGE>
As filed with the Securities and Exchange Commission on October 4, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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WAVESPLITTER TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
California 3674 94-3237126
(prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
Delaware
(after reincorporation)
(State or Other Jurisdiction of
Incorporation or Organization)
</TABLE>
46430 Fremont Blvd.
Fremont, CA 94538
(510) 580-8888
(Address, Including Zip Code, and Telephone Number Including Area Code, of
Registrant's Principal Executive Offices)
--------------
William H. Diamond, Jr.
President and Chief Executive Officer
WaveSplitter Technologies, Inc.
46430 Fremont Blvd.
Fremont, CA 94538
(510) 580-8888
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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Copies to:
<TABLE>
<S> <C>
Gregory C. Smith, Esq. Kevin P. Kennedy, Esq.
Celeste E. Greene, Esq. Simpson Thacher & Bartlett
Skadden, Arps, Slate, Meagher & Flom LLP 3373 Hillview Avenue, Suite 250
525 University Avenue, Suite 220 Palo Alto, California 94304
Palo Alto, California 94301 (650) 251-5000
(650) 470-4500
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to Be Registered Offering Price(1) Registration Fee
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<S> <C> <C>
Common stock, $0.001 par value per share....... $115,000,000 $30,360
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion. Dated October 4, 2000.
Shares
[LOGO OF WAVESPLITTER TECHNOLOGIES, INC.]
Common Stock
-----------
This is an initial public offering of shares of common stock of WaveSplitter
Technologies, Inc. All of the shares of common stock are being sold
by WaveSplitter.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $ and $ . WaveSplitter has applied to have its common stock
approved for quotation on the Nasdaq National Market under the symbol "WVSP."
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to WaveSplitter...................... $ $
</TABLE>
To the extent the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from WaveSplitter at the initial public offering price less the
underwriting discount.
-----------
The underwriters expect to deliver the shares on , 2000.
Goldman, Sachs & Co.
J.P. Morgan & Co.
Bear, Stearns & Co. Inc.
U.S. Bancorp Piper Jaffray
-----------
Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER]
[The inside front cover depicts the telecommunications market segment divided
into multiple layers using a funnel graphic to illustrate different service
levels. Underneath this diagram are the headings "Early Wavelength Division
Multiplexing Networks" and "Dense Wavelength Division Multiplexing Networks
enabled by WaveSplitter Components." The "Early Wavelength Division
Multiplexing Networks" are depicted by 8 inputs and outputs on the multiplexer
and demultiplexer optical amplifiers. The "Dense Wavelength Division
Multiplexing Networks enabled by WaveSplitter Components" are depicted by 40
inputs in each Dense Wavelength Division Multiplexing multiplexer and
demultiplexer.]
[INSIDE BACK COVER GRAPHIC]
WavePump Pump Laser Combiner
For Next-generation optical amplifiers
High power handling capability
Low insertion loss
Economical
WaveProcessor Interleaver
For high capacity dense wavelength division multiplexing systems
Very dense channel spacing
Excellent passband shape and crosstalk
Low dispersion
WaveArray High channel Array Waveguide
For high channel count dense wavelength division
multiplexing systems
Wafer processing for high volume production
High level of intergration
Easily customized
WaveEssentials Couplers and Wavelength Division Multiplexers
For optical amplifiers and dense wavelength division
multiplexing systems
Offshore, high volume production
Quick delivery
Value-added packaging for intergration
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus.
WaveSplitter Technologies
We develop, manufacture and market high performance optical components and
modules based on fused fiber and planar lightguide circuit technologies for use
in next generation optical communication networks. Our products are designed to
enable optical systems manufacturers and service providers to increase the
capacity and reliability of optical networks, extend the reach of optical
signals in core networks and build flexible, scalable and cost-effective
metropolitan area networks.
We sell our products to optical networking system and subsystem manufacturers
that produce products such as optical amplifiers and dense wavelength division
multiplexing systems for the optical networking market. We are currently
shipping products in volume to Corning and Corvis and are delivering pre-
production or evaluation products to Alcatel, Ciena, Cisco, Furukawa, Harmonic,
Lucent Technologies, Marconi, Mitsubishi, NEC, SDL, Siemens and Sumitomo.
Communications service providers are increasingly using optical networking
technology that transmits communications traffic via laser-generated pulses of
light and significantly improves signal clarity, quality and capacity compared
to traditional electronic, copper-based networks. To accommodate the
significant growth in communications traffic in recent years, service providers
initially upgraded the core, or long-distance portions, of their networks, to
fiber optic transmission equipment or systems connected by fiber optic cable.
In order to bring the increased capacity or bandwidth of core optical networks
closer to end users, optical networking technology is now being deployed within
shorter distance, metropolitan area networks which are connected to the core.
These metropolitan area networks are potentially much greater in number than
core networks and consist of greater numbers of network elements.
The development and enhancement of optical technologies have enabled
improvements in network performance and lowered the overall costs of building
and maintaining optical networks. Current generation technologies, however, are
not sufficient to meet the capacity and network flexibility needs of service
providers as they transition to an all-optical network topology. Enhanced
optical networks will require a wide array of high performance next generation
optical components and modules.
Our two current technology platforms, advanced fused fiber and planar
lightguide circuits, are well suited to meet the demanding requirements of long
haul and metropolitan area optical system providers. Our advanced fused fiber-
based components, such as our WaveProcessor interleaver, WavePump pump
combiner, WaveMetro multiplexer and our various WaveEssentials products, are
designed to be more reliable and more easily manufactured than similar products
based on other technologies. Our planar lightguide circuit platform enables the
integration of multiple complex optical functions in a single package. By
reducing the number of discrete optical components, overall system reliability
is enhanced. The planar lightguide circuit technology, used in products such as
our WaveArray multiplexer, uses semiconductor manufacturing methods to produce
lower cost products in high volumes. We intend to apply these and other
technologies, individually and in combination, to provide high performance,
integrated optical components and modules designed to meet customer-specific
requirements for optical networking products.
3
<PAGE>
We design our products to provide the following benefits:
.improved network performance;
.production scalability;
.improved reliability;
.customization and integration capabilities; and
.cost-effectiveness.
Our objective is to be a leading supplier of high performance optical
components and modules for next generation optical networks. Key elements of
our strategy are to:
.leverage multiple technology platforms to expand our product offering;
.deliver custom solutions;
.increase production capacity to capture growth opportunities;
.expand sales and marketing efforts; and
.pursue strategic relationships and acquisitions to accelerate growth.
We were incorporated in January 1996 under the name Applied Fiber Optics,
Inc. and changed our name to WaveSplitter Technologies, Inc. in February 1999.
We did not begin selling our products in commercial volumes until December
1999. We incurred net losses of $7.3 million for the six months ended June 30,
2000, and $13.0 million in 1999.
Our principal executive offices are located at 46430 Fremont Blvd., Fremont,
California 94538 and our telephone number is (510) 580-8888. Our web site is
located at http://www.wavesplitter.com. Information contained on our website
does not constitute part of this prospectus.
The WaveSplitter logo, WaveSplitter, WaveSplitter Technologies, WavePump,
WaveProcessor, WaveMetro and WaveEssentials are trademarks of WaveSplitter.
This prospectus also contains trademarks of other companies.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered....................... shares
Common stock outstanding after the offering
.......................................... shares
Use of proceeds............................ We expect to use the net proceeds of this
offering for working capital, capital
expenditures and other general corporate
purposes, including the possible
construction or acquisition of an optical
wafer fabrication facility and expansion of
our existing manufacturing facilities. In
addition, we may use a portion of the net
proceeds to acquire complementary products,
technologies or businesses. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..... "WVSP"
</TABLE>
The common stock to be outstanding after the offering is based on shares
outstanding as of September 30, 2000. The shares outstanding exclude:
. shares of common stock issuable as of September 30, 2000 upon
the exercise of outstanding stock options under our stock option plan at
a weighted average exercise price of $ per share;
. shares of common stock initially reserved for future issuance
under our stock option plans, excluding the annual increase in the
number of shares under our option plans beginning in January 2002;
. shares of common stock initially reserved for future issuance
under our employee stock purchase plan, excluding the annual increase in
the number of shares authorized under our employee stock purchase plan
beginning in January 2002, and
. shares of common stock issuable as of September 30, 2000 upon
the exercise of outstanding warrants at a weighted average exercise
price of $ per share.
Except as otherwise indicated, information in this prospectus gives effect to
our four-for-one stock split effected in June 2000 and assumes the following:
. our reincorporation into the State of Delaware before the consummation
of this offering, and a change in the par value of the common stock from
no par value to $0.001 per share;
. the amendment of our articles of incorporation to effect the conversion
of all outstanding shares of preferred stock into shares of common stock
upon completion of this offering; and
. no exercise of the underwriters' over-allotment option.
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
The following table sets forth a summary of our statement of operations data
for the periods presented. The pro forma information in the following table
gives effect to the automatic conversion of all outstanding shares of our
convertible preferred stock into shares of common stock.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
-------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... -- -- $ 103 -- $ 1,554
Cost of revenue.................. -- -- 709 -- 3,444
------- ------- -------- ------- -------
Excess of cost of revenue over
revenue......................... -- -- (606) -- (1,890)
======= ======= ======== ======= =======
Loss from operations............. $(1,402) $(5,637) (13,594) $(5,837) (9,994)
======= ======= ======== ======= =======
Net loss......................... (1,380) (5,532) (13,740) (6,054) (9,871)
======= ======= ======== ======= =======
Net loss applicable to common
stock........................... (1,580) (5,532) (13,740) (6,054) (9,871)
======= ======= ======== ======= =======
Basic and diluted net loss per
share........................... $ (0.73) $ (1.96) $ (4.24) $ (1.92) $ (1.81)
======= ======= ======== ======= =======
Weighted average shares
outstanding:
Basic and diluted.............. 2,166 2,828 3,239 3,153 5,451
======= ======= ======== ======= =======
Basic and diluted pro forma net
loss per share.................. $ (0.35) $ (0.18)
======== =======
Weighed average shares used in
computing basic and diluted pro
forma net loss per share........ 39,468 54,742
======== =======
</TABLE>
The following table sets forth a summary of our balance sheet data as of June
30, 2000:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all outstanding
shares of our convertible preferred stock into shares of common stock
upon the closing of this offering, including the sale of shares of
Series F preferred stock in September 2000 at a price of $ per share;
and
. on a pro forma as adjusted basis to reflect the conversion of all
outstanding shares of our convertible preferred stock and our receipt of
the estimated net proceeds from the sale of shares of common
stock in this offering at an initial public offering price of
$ per share after deducting the underwriting discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 2000
----------------------------
Pro
Forma As
Actual Pro Forma Adjusted
-------- --------- --------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 13,215 $64,557 $
Working capital......... 11,435 62,777
Total assets............ 20,610 71,952
Long-term obligations,
excluding current
portion................ 2,140 2,140
Convertible preferred
stock and warrants..... 42,072 --
Stockholders' equity
(deficit).............. (27,435) 65,969
</TABLE>
6
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
consider the risks described below carefully and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. If any of the following risks actually occur, our business, financial
condition and results of operations could suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our common stock.
Risks Related To Our Financial Results
We only began selling our products in commercial volumes in December 1999 and,
as a result, you may have difficulty evaluating our operating results.
WaveSplitter was founded in January 1996, and we did not begin selling our
products in commercial volumes until December 1999. An investor in our common
stock must consider the risks and difficulties we expect to encounter as an
early stage company in the rapidly evolving optical networking market. Our
limited historical financial performance makes it difficult for you to evaluate
the success of our business to date and to assess its future viability.
Moreover, our business strategy may not be successful.
We have a history of losses and expect to continue to incur net losses for the
foreseeable future, which could result in a decline in the market price of our
stock.
We incurred net losses of $9.9 million for the six months ended June 30,
2000, $13.7 million in 1999, and $5.5 million in 1998. As of June 30, 2000, we
had an accumulated deficit of $31.1 million. We may not be able to sustain the
recent growth in our revenue, and we may not realize sufficient revenue to
achieve or maintain profitability. We also expect to incur significant product
development, sales and marketing and administrative expenses, in addition to
expenses related to the possible construction or acquisition of an optical
wafer fabrication facility and expansion of our existing manufacturing
facilities. As a result, we will need to significantly increase revenue to
achieve profitability. Even if we achieve profitability, given the competition
in, and the evolving nature of, the optical components market, we may not be
able to sustain or increase profitability on a quarterly or annual basis. Any
failure to significantly increase our revenue as we implement our product and
sales and marketing strategies would force us to curtail planned expenditures
or harm our ability to achieve and maintain profitability and could negatively
impact the market price of our common stock.
Because our ability to accurately forecast our quarterly sales is limited and
our costs are relatively fixed in the short term, our quarterly operating
results and stock price may fluctuate.
We only recently began selling our optical component products, and we have
only generated revenue from the sale of these products since December 1999.
Accordingly, we may be unable to accurately forecast our revenue from sales of
these products, and we have limited meaningful historical financial data upon
which to plan future operating expenses. Our ability to forecast revenue
related to our proposed products is even more limited. Customers in our
industry tend to order large quantities of products on an irregular basis. This
means that customers who account for a significant portion of our revenue in
one quarter may not place any orders in the succeeding quarter. These ordering
patterns may result in significant quarterly fluctuations in our revenue and
operating results. None of our current customers has long-term purchase
obligations, and our customers may cancel or defer purchases on short notice
without significant penalty, or stop placing orders with us at any time,
regardless of any forecast they may have previously provided. For example, any
downturn in our customers' business could significantly decrease sales of our
products to these customers. The loss
7
<PAGE>
of any of our key customers or a significant reduction in sales to these
customers could significantly reduce our revenue, and we may be unable to
offset any revenue reduction with additional revenue from other customers.
In addition, our revenue and operating results have fluctuated significantly
from quarter to quarter, and may fluctuate significantly in the future, for
several reasons, some of which are outside of our control. These factors
include, but are not limited to:
. the amount and timing of operating costs and capital expenditures
relating to our business, operations and infrastructure;
. the announcement or introduction of new or enhanced products in the
optical components market;
. our ability to manufacture and ship our products on a timely basis;
. our ability to obtain sufficient supplies to meet our product
manufacturing needs, including the supply of wafers for use in one of
our products; and
. our ability to achieve acceptable yields in manufacturing.
We may also experience seasonality in the sales of our products. For example,
we expect that sales may decline during summer months, particularly in the
Asian and European markets into which we intend to expand. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results. It is difficult for us to evaluate the degree to which this
seasonality may affect our business because we have only been selling our
products in commercial volumes since December 1999.
As a result of these and other factors, we believe that quarter-to-quarter or
other periodic comparisons of our revenue and operating results are not
necessarily meaningful, and that these comparisons may not be accurate
indicators of future performance.
If we are unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, any significant revenue shortfall would harm our
operating results. Moreover, our operating results in one or more future
quarters may fail to meet the expectations of securities analysts or investors.
If this occurs, we would expect to experience an immediate and significant, and
possibly long-term, decline in the price of our stock.
We depend on a single customer for a substantial portion of our revenue and the
loss of this customer or a significant reduction or delay in sales to any of
our key customers could significantly reduce our revenue.
Historically, a single customer has accounted for a significant portion of
our revenue. Corvis Corporation accounted for 83% of our revenue in the six
months ended June 30, 2000. We anticipate that our operating results will
continue to depend on sales to a relatively small number of customers for the
foreseeable future.
The optical networking systems industry is dominated by a small number of
large companies. Accordingly, we are dependent on a small number of customers.
Our customers also have and will continue to have negotiating leverage to
obtain price reductions. The loss of Corvis Corporation as a customer or a
significant price reduction or delay in sales to any of our key customers could
harm our operating results.
8
<PAGE>
Risks Related To The Optical Components Industry
Our business is dependent upon the adoption of optical networks to satisfy
increased bandwidth requirements. If these networks are not adopted consistent
with our expectations, our business would be harmed and the market price of our
common stock would decline.
We expect that our future revenue will continue to come from the sales of our
optical component products. Because the market for optical components is in an
early stage of development, we cannot accurately assess the size of the market,
and we have limited insight into the trends that may emerge and affect our
business. Moreover, our business plan is premised on the assumption that
increased demand for these products will arise as service providers expand
their optical networks into the metropolitan areas and elsewhere. These service
providers may elect to delay or limit the deployment of these new optical
networks for a variety of reasons, including budget considerations, development
costs, decreased projected usage and regulatory concerns. Specifically, their
broad-based deployment, in many instances, is contingent upon technology
improvements and decreased deployment costs. If the role of optical networks
does not increase as we anticipate, we would not realize our expected revenue
growth.
The acceptance of our products may also be hindered by:
. the reluctance of our prospective customers to replace or supplement
their current networking products with our products; and
. the emergence of new technologies or industry standards which could
cause our products to be less competitive.
The occurrence of any of these events could harm our operating results.
The optical components market in which we compete is new, unpredictable, and
characterized by rapid technological changes and evolving standards, and if
this market does not develop and expand as we anticipate, demand for our
products may decline, which would harm our operating results.
The optical components market is new and characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. Because this market is new, it is difficult to
predict its potential size or future growth, if any. Widespread adoption of
optical networks is critical to our future success. Potential end-user
customers who have invested substantial resources in their existing copper
lines or other systems may be reluctant or slow to adopt a new approach, like
optical networks. Our success in generating revenue in this emerging market
will depend on:
. maintaining and enhancing our relationships with our customers;
. the education of potential end-user customers and network service
providers about the benefits of optical networks; and
. our ability to accurately predict and develop our products to meet
industry standards.
If we fail to address rapidly changing market conditions, the sales of our
products may decline, which would harm our operating results.
The markets in which we operate are highly competitive, and we may not be able
to effectively compete against other providers of optical components,
particularly those with longer operating histories and greater resources.
In the optical networking market, we face competition from companies such as
Alcatel S.A., Avanex Corporation, Bookham Technology plc, Chorum Technologies
Inc., DiCon Fiberoptics, Inc.,
9
<PAGE>
ITF Optical Technologies, JDS Uniphase Corporation, Kymata Ltd., LightWave
Microsystems, Lucent Technologies Inc., New Focus, Inc., Nortel Networks
Corporation and Oplink Communications Inc., among others. Some of these
companies have longer operating histories and significantly greater financial,
technical, marketing and other resources than we have.
These competitors may be better able to:
. respond to new technologies or technical standards;
. react to changing customer requirements and expectations;
. acquire other companies to gain new technologies or products that may
displace our product lines;
. manufacture, market and sell products;
. devote greater resources to the development, production, promotion,
support and sale of products; and
. deliver a fuller range of competitive products at lower prices.
As a result of these factors, our customers could decide to purchase products
from our competitors and reduce their purchases from us.
Further, we believe that some of our competitors could introduce optical
components that include the functionality that we currently provide in our
products at lower prices. If these vendors provide lower cost optical
components that perform comparable functions to our products coupled with the
broader applications of their existing product lines, our product sales could
decline. Even if the functionality of the standard features of our competitors'
products is equivalent to ours, we face a substantial risk that a significant
number of our target customers would elect to pay a premium for similar
functionality rather than purchase products from a less well known vendor.
As our competitors consolidate, they may offer products or pricing that we
cannot match, which could cause our revenue to decline.
Consolidation in the optical components industry could intensify the
competitive pressures that we face. For example, two of our competitors, JDS
Uniphase Corporation and E-TEK Dynamics, Inc., recently merged. The merged
company has announced its intention to offer more integrated products that
could make our products less competitive. In addition, we may be unable to
compete effectively in a consolidated environment due to the greater marketing
and distribution powers of larger competitors, as well as their greater
economies of scale.
Risks Related To Our Business
Our recent growth has placed a significant strain on our management, systems
and resources, and we may experience difficulties managing our expected growth,
if it is realized.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We are continuing to expand the scope of our operations domestically
and internationally and have increased the number of our employees
substantially in the past year. At September 30, 1999, we had a total of
89 employees and at September 30, 2000, we had a total of 192 employees. In
addition, we plan to hire a significant number of employees over the next few
quarters. Our total revenue has also grown from approximately $103,000 during
all of 1999 to approximately $1.6 million during the six months ended June 30,
2000. We currently operate facilities in Fremont, California and Atlanta,
Georgia and
10
<PAGE>
are in the process of establishing an additional office facility in Fremont,
California. The growth in employee headcount and in revenue, combined with the
challenges of managing geographically-dispersed operations, has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management, systems and resources. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems
and procedures and continue to expand, train and manage our work force
worldwide. The failure to effectively manage our growth could harm our
operating results.
We may not succeed in developing and marketing new optical component products,
and our operating results may be harmed.
Our success depends on our ability to anticipate our customers' needs and
develop products that address those needs. Our products are complex, and new
products and product enhancements may take longer to develop than originally
anticipated. These products may contain defects when first introduced or as new
versions are released.
The timely introduction of new products and product enhancements will require
that we effectively transfer production processes from research and development
to manufacturing and coordinate our efforts with those of our suppliers to
rapidly achieve volume production. If we fail to effectively and timely
transfer production processes, develop product enhancements or introduce new
products that meet the needs of our customers as scheduled, we will not be able
to replace more mature products with new products, or product enhancements,
that have higher gross margins. Customers that had been designing our new
components into their products could instead purchase components from our
competitors, resulting in lost revenue over a longer term. We could also incur
unanticipated costs in attempting to complete delayed new products or to fix
defective products.
We currently rely on sales of our WavePump product and expect to rely on sales
of our WavePump and WaveProcessor products in the future for a substantial
portion of our revenue, and a failure to meet our sales expectations for these
products could cause our revenue to fall.
We derive a substantial portion of our revenue from a limited number of
products. Specifically, we derived 97% of our revenue in the six months ended
June 30, 2000 from our WavePump product. We expect that the revenue from our
WavePump and WaveProcessor products will account for a substantial portion of
our total revenue in future periods. Continued and widespread market acceptance
of these products is critical to our future success. If sales of these products
decline, or if our current products do not achieve market acceptance at the
rate at which we expect, our operating results would be harmed.
We must substantially expand our sales organization to increase market
awareness and sales of our products, and if we fail to do so, our revenue may
not increase.
To increase market awareness and sales of our products, we will need to
substantially expand our sales operations, both domestically and
internationally. Currently, we market and sell our products through direct
sales in North America and through our agents and representatives
internationally. In the future, we expect to expand our direct sales in North
America and internationally. The sale of our products requires long and
involved efforts targeted at several key departments within our prospective
customers' organizations. Sales of our products require the prolonged efforts
of executive personnel and specialized systems and applications engineers
working together with a small number of dedicated salespersons. Currently, our
sales organization is limited. We will need to grow our sales force to increase
market awareness and sales of our products. Competition for these individuals
is intense, and we might not be able to hire the kind and number of
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<PAGE>
sales personnel and applications engineers we need. If we are unable to expand
our sales organization, our operating results would be harmed.
If we cannot increase our sales volumes, reduce our costs or introduce higher
margin products to offset anticipated reductions in the average selling price
of our products, our operating results would suffer.
The average selling price of our products may decrease in response to
competitive pricing pressures, new product introductions by us or our
competitors or other factors. If we are unable to offset the anticipated
decrease in our average selling prices by increasing our sales volumes or
changing our product mix, our revenue and gross margins will decline. In
addition, to maintain and enhance our gross margins, we must reduce the
manufacturing cost of our products, and we must develop and introduce new
products and product enhancements with higher margins. If we are unable to do
so, our financial position may be harmed and our stock price may decline.
Our products are deployed in large and complex systems and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation or decrease market acceptance of our products.
Some of our products are designed to be deployed in large and complex optical
networks. Our optical component products may contain undetected defects when
first introduced or as new versions are released, and our customers may
discover defects in our products only after they have been fully deployed and
operated under peak stress conditions. In addition, our products are combined
with products from other vendors. As a result, should problems occur, it may be
difficult to identify the source of the problem. If we are unable to fix
defects or other problems, we could experience, among other things:
. loss of customers;
. damage to our reputation;
. failure to attract new customers or achieve market acceptance;
. diversion of development and engineering resources; and
. legal actions by our customers.
Our existing product liability insurance may not be sufficient to cover us
against all possible liability. Liability claims could also require us to spend
significant time and money in litigation or to pay significant damages, which
could harm our operating results. As a result, any such claims, whether or not
successful, could damage our reputation, which could have a similar result.
The sales cycles for our products are long and unpredictable and may cause
revenue and operating results to vary from quarter to quarter, which could
cause volatility in our stock price.
The timing of our revenue is difficult to predict because of the length and
unpredictability of the sales and implementation cycles for our products. We do
not recognize revenue until a product has been shipped to a customer and
collection is considered probable. Customers often view the purchase of our
products as a significant and strategic decision. As a result, customers
typically expend significant effort in evaluating, testing and qualifying our
products and our manufacturing processes. This customer evaluation and
qualification process typically ranges from four to six months. In addition,
some of our customers require that our products be subjected to Telcordia
qualification testing, which can take from three to six months or more. While
our customers are
12
<PAGE>
evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to customers' needs. We may also expend significant
management efforts, increase manufacturing capacity and order long lead time
components or materials prior to receiving an order. Even after this evaluation
process, a potential customer may not purchase our products. Because of the
evolving nature of the optical networking market, we cannot predict the length
of these sales and development cycles. As a result, these long sales cycles may
cause our revenue and operating results to vary significantly and unexpectedly
from quarter to quarter, which could cause volatility in our stock price.
We may not be able to attract, train or retain highly qualified engineering,
manufacturing, sales and marketing personnel because these personnel are
limited in number and in high demand.
To implement our business plan, we must hire a significant number of
additional employees, particularly engineering, sales and manufacturing
personnel. Our ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining whether we will be
successful. Competition for highly skilled personnel is intense, especially in
the Silicon Valley where our headquarters are located. We may not be successful
in attracting or retaining qualified personnel to fulfill our current or future
needs, which could harm our ability to develop, manufacture and sell our
products, and provide related support and services to our customers.
We depend on our key personnel and the loss of any key personnel may harm our
operating results.
Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing personnel, many of whom
would be difficult to replace. In particular, we depend on William H. Diamond,
Jr., our President and Chief Executive Officer. If we were to lose the services
of Mr. Diamond or any of our other key managers and personnel, our operating
results could be harmed. We do not maintain key person life insurance for any
of our key employees.
We may engage in future strategic investments and acquisitions that could
dilute the percentage ownership of our stockholders, cause us to incur debt or
assume contingent liabilities.
We expect that, as part of our business strategy, we will continue to grow in
part by pursuing strategic acquisitions of and investments in companies and
technologies to complement our existing product offerings, augment our market
coverage, secure supplies of critical materials and/or enhance our technology
capabilities. We currently have no commitments or agreements to acquire any
business. In the event of any future acquisitions or investments, we could:
. issue stock that would dilute our current stockholders' percentage
ownership;
. incur debt and/or reduce our cash balances;
. assume liabilities; or
. incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These acquisitions and investments also involve numerous risks, including:
. problems combining the acquired operations, personnel, technologies,
information systems or products;
. unanticipated costs or liabilities;
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<PAGE>
. diversion of management's attention and other resources from other
business concerns;
. harm to our existing business relationships with suppliers and
customers;
. risks associated with entering geographic areas and/or markets in which
we have no or limited prior experience; and
. potential loss of key employees, particularly those of the acquired
organizations.
We may be unable to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, which could harm
our operating results.
Our expansion into international markets may not succeed and will expose us to
risks associated with international operations and result in higher personnel
costs.
We intend to expand into international markets. We have only limited
experience in marketing, selling and supporting our products internationally.
Prior to 2000, we had no revenue from sales to customers located outside of
North America. For the six months ended June 30, 2000, 6% of our revenue was
from international sales. Our international sales will be limited if we cannot
establish and maintain relationships with international distributors, establish
additional foreign operations, expand international sales channel management,
hire international personnel and develop relationships with international
service providers. Even if we are able to successfully expand international
operations, we may not be able to maintain or increase international market
demand for our products or maintain or increase operating margins due to higher
costs of these sales. Our international operations are subject to a number of
risks and uncertainties including:
. greater difficulty in staffing and managing foreign operations and in
collecting accounts receivable;
. the impact of recessions in economies outside the United States;
. multiple, conflicting and changing governmental laws and regulations,
including export licensing requirements and restrictions; and
. reduced protection of intellectual property in some countries.
We expect our international revenue and expenses to continue to be
denominated predominantly in U.S. currency. As a result, our customers' orders
could fluctuate significantly based upon changes in our customers' currency
exchange rates in relation to the U.S. dollar. A large increase in the value of
the U.S. dollar could make our products more expensive to our foreign
customers, resulting in cancelled or delayed orders and decreased revenue. Our
international sales could be delayed or could have costs which would lower
their contribution to our gross profit.
Risks Related To Manufacturing Our Products
If we are unable to expand our manufacturing capacity in a timely manner, or if
we do not accurately project demand, we will have excess capacity or
insufficient capacity, either of which could harm our operating results.
We currently manufacture a majority of our products in our facilities located
in Fremont, California. We plan to devote significant resources to expand our
manufacturing capacity at this facility. Any difficulties, disruptions or
delays in the construction of these new facilities, or in the manufacture of
our products while we transition to these new facilities, could prevent us from
achieving timely delivery of products and could result in lost revenue. We
could also face the inability
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<PAGE>
to procure and install the necessary capital equipment, a shortage of raw
materials we use in our products, a lack of availability of manufacturing
personnel to work in our facilities, difficulties in achieving adequate yields
from new manufacturing lines and an inability to predict future order volumes.
We may experience delays, disruptions, capacity constraints or quality control
problems in our manufacturing operations, and, as a result, product shipments
to our customers could be delayed, which would harm our revenue, competitive
position and reputation. Our inability to deliver products timely could enable
competitors to win business from our customers. Since customers often design a
component into their equipment, this could result in a permanent loss of a
customer for one or more of our components. 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
could harm our operating results.
Because some of our products are manufactured overseas, we are subject to risks
inherent in doing business abroad, which may harm our manufacturing capacity
and our operating results.
We manufacture some of our products in Taiwan through our manufacturing
relationship with a contract manufacturer. During the nine months ended
September 30, 2000, 3% of our products were manufactured in Taiwan. We expect
to expand our overseas production in the future through our contract
manufacturer and other overseas manufacturers. The ability of our contract
manufacturer or any overseas contract manufacturer that we may rely upon in the
future to operate its facilities may be harmed by changes in or interpretations
of the laws and regulations of the countries in which it is located, such as
those relating to taxation, import and export tariffs, environmental
regulations, land use rights, property and other matters. Our operating results
may be harmed by changes in the political or social conditions in the countries
where our contract manufacturers are located.
To successfully meet our overall production goals, we also will have to
coordinate effectively our manufacturing operations in California with our
contract manufacturer's manufacturing operations in Taiwan. The geographic
distance between our headquarters in California and our contract manufacturer's
manufacturing facility in Taiwan will make it difficult for us to manage the
relationship and oversee operations there to assure the quality and timely
delivery of our products.
Any disruption in our relationship with our contract manufacturer or any
contract manufacturer that we may rely upon in the future may cause us to fail
to meet the demands of our customers and damage our customer relationships.
We rely on our contract manufacturer to manufacture products for us according
to our specifications and to fill orders on a timely basis, and we may increase
our reliance on contract manufacturers in the future as demand for our products
grows. Our contract manufacturer provides comprehensive manufacturing services,
including assembly of our products and procurement of resources. Our contract
manufacturer also builds products for other companies and may not always have
sufficient quantities of inventory available to fill our orders, or may not
allocate its internal resources to fill these orders on a timely basis. If for
any reason our contract manufacturer or any future contract manufacturer were
to stop satisfying our manufacturing needs without providing us with sufficient
warning to procure an alternate source, or were to fail to make timely delivery
of our orders, we may lose revenue and suffer damage to our customer
relationships.
The process of qualifying a new contract manufacturer for complex products
such as ours and commencing commercial-scale production is expensive, would
consume a substantial amount of time of our technical personnel and management
and could result in a significant interruption in the supply of our products.
If we sought to change manufacturers in a short period of time, our business
could
15
<PAGE>
be disrupted. In addition, we may be unsuccessful in identifying a new
manufacturer capable of and willing to meet our needs on terms that we would
find acceptable, which could harm our overall production. The occurrence of any
of the foregoing events or circumstances could harm our operating results.
Because we order materials and components based on rolling forecasts, we may
overestimate or underestimate our component and material requirements, which
could increase our costs or prevent us from meeting customer demand.
We use rolling forecasts based on anticipated product orders to determine our
component requirements. It is very important that we accurately predict both
the demand for our products and the lead times required to obtain the necessary
components and materials. Lead times for components and materials that we order
vary significantly and depend on factors such as specific supplier
requirements, the size of the order, contract terms and current market demand
for the components. For substantial increases in production levels, some
suppliers may need six months or more lead time. If we overestimate our
component and material requirements, we may have excess inventory, which would
increase our costs. If we underestimate our component and material
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. The
occurrence of any of these events or circumstances could harm our operating
results.
Because we depend on single or limited source suppliers for some of the key
manufacturing equipment and materials in our products, we are susceptible to
price fluctuations and supply shortages that could prevent us from shipping
customer orders on time, if at all.
We typically purchase our materials and equipment through purchase orders,
and in general we have no guaranteed supply arrangements with any of these
suppliers. We currently purchase several key materials used in the manufacture
of our products from single or limited source suppliers. For example, we
purchase wafers and chips necessary for our proposed WaveArray products from a
single supplier that currently does not have contractual supply obligations to
us. Our supply needs will increase significantly in 2001 when we begin
commercial production of this product. If our relationship with this supplier
were to terminate, we may not be able to locate an alternative supplier. We
also would experience delays from evaluating and testing the products of these
potential alternative suppliers. Further, financial or other difficulties faced
by these suppliers or significant changes in demand for these components or
materials could limit their availability. Also, our competitors and our
customers may acquire our suppliers and potential suppliers, which could limit
the availability of the suppliers upon which we rely. Several of our largest
customers also manufacture and sell optical components that are competitive to
ours, and have announced that they are increasing the development of their own
internal sources of supply in competition with us. For instance, one of our
customers, Corning, Inc., announced in August 2000 its plans to invest
$80 million in a new facility in New York that will employ 440 people, and
double its production of fiber-based passive components. We expect that
competitive pressures may result in price reductions, reduced margins and loss
of market share. As a result, we may experience increased competition and lost
sales opportunities if those customers choose to manufacture and sell products
that they currently purchase from us.
We may incur added inventory costs as a means of addressing assurance of
supply. Any interruption or delay in the supply of any of these materials, or
the inability to obtain these materials from alternate sources at acceptable
prices and within a reasonable amount of time, would impair our ability to meet
scheduled product deliveries to our customers and could cause customers to
cancel orders, which could harm our operating results.
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<PAGE>
If we are unable to timely construct or acquire an optical wafer fabrication
facility for supply of wafers used in our WaveArray product, or if we encounter
unanticipated expenses related to this facility, our ability to make our
WaveArray product could be limited, and our operating results could be harmed.
In order to obtain an adequate supply of wafers used in our WaveArray
product, we may decide to construct or acquire an optical wafer fabrication
facility to meet our wafer manufacturing requirements. Construction or
acquisition of this facility could utilize a significant portion of the
proceeds of this offering and may require us to seek additional equity or debt
financing in the future. We may not be able to obtain additional financing, if
required, when needed or on satisfactory terms, if available. In addition, if
we decide to build a facility we may experience unanticipated construction
delays and cost overruns. We may be unable to construct or acquire an optical
wafer fabrication facility on satisfactory terms, if at all. We do not
currently have a long term contract to ensure the supply of wafers for this
product. Therefore, we would need to obtain such a contract or, alternatively,
build or acquire an optical wafer fabrication facility. The inability to obtain
a sufficient supply of wafers on satisfactory terms could limit our ability to
make our WaveArray product and harm our operating results.
If we do not achieve acceptable manufacturing yields or sufficient product
reliability, our ability to ship products to our customers could be
jeopardized.
The manufacture of our products involves complex and precise processes.
Changes in our manufacturing processes or those of our suppliers, or the use of
defective components or materials, could significantly reduce our manufacturing
yields and product reliability. For example, we experienced limited fiber
breakage in our WavePump product when we initially commenced volume
manufacturing. Our manufacturing costs are relatively fixed, and, thus,
manufacturing yields are critical to our results of operations. In some cases,
existing manufacturing techniques involve labor intensive manufacturing
processes. In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our manufacturing lines.
We are also automating our manufacturing processes and related equipment to
lower costs through improved yields and reduced cycle time. Delays in
implementation may reduce our ability to meet demand and could harm our
operating results.
If our customers do not qualify our manufacturing lines for volume shipments,
we may not capture volume production business and our growth could be limited.
Generally, customers do not purchase our products, other than limited numbers
of evaluation units, prior to qualification of the manufacturing line for
volume production. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through varying levels of qualification with our
customers. Customers may require that we be registered under international
quality standards, such as ISO 9001. While our Fremont manufacturing facility
is presently ISO 9001 certified, we may be unable to maintain that
certification. This qualification process determines whether our manufacturing
lines meet the customers' quality, performance and reliability standards. If
there are delays in qualification of our products, our customers may drop the
product from a long-term supply program, which would result in significant lost
revenue opportunity and could harm our operating results.
If we cannot decrease our manufacturing costs to offset anticipated reductions
in the average unit price of our products, our operating results may suffer.
The optical components industry is very competitive, and as a result, we
anticipate that the average unit price of our products may decrease in the
future. We expect the price of our existing products to decline due to various
factors, including:
. increased competition from companies with lower labor and production
costs;
17
<PAGE>
. a limited number of potential customers with significant bargaining
leverage;
. the introduction of new products by us or our competitors; and
. greater economies of scale for higher volume manufacturers.
Adding manufacturing capacity increases our fixed costs and the levels of
unit shipments we must achieve to maintain gross margins. As a result, if we
are unable to increase our revenue or continuously reduce our manufacturing
costs, we may be unable to improve our gross margins or they may decline, which
would harm our operating results.
If we fail to comply with the requirements of environmental laws, we could
incur costs, have government sanctions imposed against us, or experience
disruptions in our operations.
In connection with the possible construction or acquisition of an optical
wafer fabrication facility, we anticipate handling small amounts of hazardous
materials as part of our manufacturing activities. Although we believe that we
are complying with all applicable environmental regulations in connection with
our operations, we may be required to incur environmental remediation costs to
comply with current or future environmental laws.
Our facilities are vulnerable to natural disasters and other unexpected losses,
and we may not have adequate insurance to cover such losses.
Our facilities are susceptible to damage from earthquakes as well as from
fire, floods, loss of power or water supply, telecommunications failures and
similar events. In particular, our headquarters and principal manufacturing
facility in Fremont, California are located on or near a known earthquake fault
zone. A natural disaster could significantly disrupt our operations. Although
we carry property and business interruption insurance, our coverage may not be
adequate to compensate us for all losses that may occur. In addition, if we
experience disruptions, our customers may choose to use our competitors'
designs over ours, which could result in the loss of valued customers in the
long-term. The occurrence of any of these events or circumstances could harm
our operating results.
Risks Related To Our Intellectual Property
We may not be able to protect or enforce our intellectual property rights,
which could impair our competitive position.
We rely on a combination of copyright, trademark, trade secret and U.S.
patent laws, and on nondisclosure agreements and other means to protect our
intellectual property rights. Our U.S. patent applications may not be approved,
any of our patents that may issue may not adequately protect our intellectual
property, and the validity of any issued patents may be challenged by third
parties. Monitoring use of our products is difficult and we cannot be certain
that the steps we have taken will prevent the unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as the laws do in the United States. Despite
our efforts to protect our proprietary rights, third parties may copy or
otherwise obtain and use our products or technology without authorization,
develop similar technology independently or design around our patents. If we
are unable to adequately protect our intellectual property, our operating
results may be harmed.
We may be exposed to intellectual property infringement claims by third parties
which could be costly to defend, divert management's attention and resources,
and may result in liability.
The optical components industry is characterized by vigorous protection and
pursuit of intellectual property rights. We have entered into indemnification
obligations in favor of our customers that could be triggered upon an
allegation or finding that we infringe other parties' proprietary rights.
18
<PAGE>
We have occasionally been contacted by patent holders regarding our interest in
licensing their patents, and we may in the future receive notifications
alleging that we are infringing the intellectual property rights of others. In
the event any intellectual property claims are asserted against us, we would
likely incur significant costs and diversion of our resources defending claims
asserted by third parties, which could harm our operating results. Any
potential intellectual property litigation could invalidate our proprietary
rights and force us to do one or more of the following:
. stop selling, incorporating or using our products that use the
challenged intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign the products that use the technology.
If we are forced to take any of these actions, our ability to manufacture and
sell our products may be harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that may be imposed, which could
harm our operating results.
Necessary licenses of third-party technology may not be available to us on
commercially reasonable terms, if at all, which could harm our ability to
manufacture and sell our products.
From time to time, we may be required to license technology from third
parties to develop new products or product enhancements. Third-party licenses
may not be available to us on commercially reasonable terms, if at all. The
inability to obtain any third-party license required to develop, manufacture
and sell new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could limit our ability to manufacture and sell our
products, which in turn could harm our operating results.
Risks Related To This Offering
We may need additional capital, which may not be available, and our ability to
grow may be limited as a result.
We believe that the anticipated net proceeds of this offering, together with
our existing capital resources, credit facilities and cash flow expected to be
generated from future operations, will be sufficient to meet our capital
requirements at least through the next twelve months. However, we may be
required, or could elect, to seek additional funding prior to that time. We
intend to use a portion of the net proceeds from this offering for working
capital, capital expenditures and other general corporate purposes, including
the possible construction or acquisition of an optical wafer fabrication
facility and expansion of our existing manufacturing facilities. We may also
use a portion of the net proceeds to acquire complementary products,
technologies or businesses; however, we currently have no commitments or
agreements relating to any acquisition transactions.
If cash from available sources is insufficient, or if cash is used for
unanticipated uses, we may need additional capital sooner than anticipated. In
the event we are required, or elect, to raise additional funds, we may be
unable to do so on favorable terms, or at all. Further, if we issue new equity
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise funds on acceptable terms,
we may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements. Any inability to raise additional capital when we require it
could harm our operating results.
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<PAGE>
There has been no prior market for our common stock, and a public market for
our securities may not develop or be sustained.
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering, and the market price might fall below the initial public
offering price. The initial public offering price may bear no relationship to
the price at which the common stock will trade upon completion of this
offering. The initial public offering price will be determined based on
negotiations between us and the representatives of the underwriters, based on
factors that may not be indicative of future market performance.
Insiders will continue to have substantial control over us after this offering
and could delay or prevent a change in our corporate control that a stockholder
may believe to be desirable.
Upon completion of this offering and assuming no exercise of the
underwriters' over-allotment option, our executive officers, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately % of
our outstanding common stock based on shares outstanding as of September 30,
2000. As a result, these stockholders may be able to together exercise
significant control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could delay or prevent an outside party from acquiring or merging with
us, or cause a change of control of our company that may not be favored by the
other stockholders.
The provisions of our charter documents and change of control agreements may
inhibit potential acquisition bids that a stockholder may believe are
desirable, and the market price of our common stock may be lower as a result.
Upon completion of this offering, our board of directors will have authority
to issue up to 10 million shares of preferred stock. The board of directors can
fix the price, rights, preferences, privileges and restrictions of the
preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting
and other rights of our stockholders may be harmed. The issuance of preferred
stock may result in the loss of voting control to other stockholders. We have
no current plans to issue any shares of preferred stock.
Our charter documents contain anti-takeover devices including:
. only one of the three classes of directors is elected each year;
. a super-majority vote requirement for effecting significant amendments
to our charter documents;
. a prohibition on cumulative voting in the election of directors;
. the ability of our stockholders to remove director without cause is
limited;
. the right of stockholders to act by written consent has been eliminated;
. the right of stockholders to call a special meeting of stockholders has
been eliminated; and
. a requirement of advance notice to nominate directors or submit
proposals for consideration at stockholder meetings.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock.
In addition, we have change of control agreements with certain
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of our officers and option agreements with certain officers which have change
of control provisions, which may discourage, delay or prevent someone from
acquiring or merging with us. As a result, these provisions may prevent the
market price of our common stock from increasing substantially in response to
actual or rumored takeover attempts. These provisions may also prevent changes
in our management.
Delaware law may inhibit potential acquisition bids; this may harm the market
price of our common stock, discourage merger offers and prevent changes in our
management.
Section 203 of the Delaware General Corporation Law limits business
combination transactions with 15% stockholders that have not been approved by
the board of directors. This provision may inhibit potential acquisition bids
of our company. Upon completion of this offering, we will be subject to the
antitakeover provision of the Delaware General Corporation Law, which regulates
corporate acquisitions. Under Delaware law, a corporation may opt out of the
antitakeover provisions. We do not intend to opt out of the antitakeover
provisions of Delaware Law.
A total of or % of the shares that are currently restricted may be sold
into the market in the future, which could cause the market price of our common
stock to drop significantly, even if our business is doing well.
Our current stockholders hold a substantial number of shares, which they will
be able to sell in the public market in the future. Sales of a substantial
number of shares of our common stock could cause our stock price to fall. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock.
After this offering, we will have outstanding shares of common stock.
This includes shares that we are selling in the offering, which may be
resold immediately in the public market. The remaining shares will become
eligible for resale in the public market as shown in the table below.
<TABLE>
<CAPTION>
Number of shares/Percent Date of availability for resale into the
outstanding after the offering public market
------------------------------ ----------------------------------------------
<C> <S>
/ % 120 days after the date of this prospectus if
we do not complete a follow-on public
offering within this 120 day period. If we
complete a follow-on public offering within
this period, none of these shares will be
eligible for resale at this time.
/ % 180 days after the date of this prospectus,
if we do not complete a follow-on public
offering within 120 days after the date of
this prospectus. If we complete a follow-on
public offering within 120 days after the
date of this prospectus, all of these
additional shares, as well as the shares
noted in the preceding paragraph, will be
eligible for resale upon the later of (a) 180
days after the date of this prospectus or (b)
90 days after the date of the prospectus
relating to the follow-on public offering.
All of the shares subject to resale set forth
in this and the preceding paragraph are
restricted by virtue of a lockup agreement
with the underwriters. The underwriters may
release all or a portion of the shares
subject to these agreements at any time
without public notice.
/ % Between 180 days and 365 days after the date
of this prospectus, or between 120 and 365
days if we do not complete a follow-on public
offering within 120 days of the date of this
prospectus, these additional shares will
become eligible for resale, subject to the
resale limitations, including where
applicable, volume limitations, of Rule 144
under the Securities Act.
</TABLE>
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<PAGE>
We have broad discretion in how we use the proceeds of this offering, and we
may not use these proceeds effectively.
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
We expect to experience volatility in our share price, which could negatively
affect your investment.
This initial public offering price may vary from the market price of our
common stock after the offering. If you purchase shares of common stock, you
may not be able to resell those shares at or above the initial public offering
price. The market price of our common stock may fluctuate due to:
. changes in financial estimates by securities analysts;
. changes in market valuations of other optical components companies;
. any deviations in revenue or in losses from expectations of securities
analysts; and
. future sales of common stock or other securities.
In addition, the Nasdaq National Market has experienced extreme volatility
that has often been unrelated to the performance of particular companies.
Future market fluctuations may cause our stock price to fall regardless of our
performance. In the past, companies that have experienced volatility in the
market price of their stock have been the object of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of management's attention and
resources.
22
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things,
. implementing our business strategy;
. attracting and retaining customers;
. obtaining and expanding market acceptance of the products and services
we offer;
. forecasts of the size and growth of relevant markets;
. rapid technological changes in our industry and relevant markets; and
. competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements
and events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus, and,
except as required by law, we do not intend to update them or to explain the
reasons why actual results may differ.
23
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares of our
common stock in this offering of approximately $ million, or $
million if the underwriters exercise their over-allotment option in full, based
upon an assumed initial public offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. The principal purposes of this offering are to obtain additional
capital and to create a public market for our common stock. We expect to use
the net proceeds from this offering for working capital, capital expenditures
and other general corporate purposes, including approximately $20 to $25
million for the possible construction or acquisition of an optical wafer
fabrication facility and approximately $10 to $15 million for the expansion of
our existing manufacturing facilities. However, we may elect to meet our wafer
needs through supply contracts in lieu of building or acquiring a fabrication
facility. We may use a portion of the net proceeds to acquire complementary
products, technologies or businesses; however, we currently have no commitments
or agreements relating to any such transactions.
The amounts we actually expend may vary significantly and will depend on a
number of factors, including the amount of our future revenues and other
factors described under "Risk Factors." Accordingly, we will have significant
discretion in the use of the net proceeds of this offering. Investors will be
relying on the judgment of our management regarding the application of the
proceeds of this offering. Pending use of the net proceeds as discussed above,
we intend to invest these funds in short-term, interest-bearing, investment-
grade obligations.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock. We presently
anticipate that we will retain all of our future earnings to finance the
development and expansion of our business and provide working capital.
Therefore, we do not anticipate paying any cash dividends on our common stock
for the foreseeable future. The terms of our existing credit facilities
prohibit the payment of dividends, except in specified circumstances.
24
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 2000:
. our actual capitalization;
. our pro forma capitalization, after giving effect to the automatic
conversion of all outstanding shares of our convertible preferred stock
into shares of common stock upon the closing of this offering, including
the sale of shares of Series F preferred stock in September 2000 at
a price of $ per share; and
. our pro forma as adjusted capitalization after giving effect to the
conversion of all outstanding shares of our convertible preferred stock
and our sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share after
deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents....................... $13,215 $64,557 $
======= ======= ====
Long-term obligations, excluding current
portion........................................ $ 2,140 $ 2,140 $
Convertible preferred stock, no par value,
50,972,020 shares authorized, 49,711,840 shares
issued and outstanding, actual; no shares
issued and outstanding, pro forma and pro forma
as adjusted.................................... 42,072 --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, no shares
authorized, issued or outstanding, actual and
pro forma; 10,000,000 shares authorized, no
shares issued or outstanding, pro forma as
adjusted
Common stock, no par value, 80,000,000 shares
authorized, actual and pro forma; 11,193,697
shares issued and outstanding, actual;
66,918,301 shares issued and outstanding, pro
forma; $0.001 par value, 400,000,000 shares
authorized, shares issued and
outstanding, pro forma as adjusted............ 17,276 110,690
Additional paid-in capital..................... -- --
Stockholders' notes receivable................. (1,389) (1,389)
Deferred stock-based compensation.............. (12,235) (12,235)
Accumulated deficit............................ (31,087) (31,087)
------- ------- ----
Total stockholders' equity (deficit).......... (27,435) 65,979
------- ------- ----
Total capitalization.......................... $16,777 $68,119 $
======= ======= ====
</TABLE>
The table above excludes the following shares:
. shares of common stock issuable as of September 30, 2000 upon
the exercise of outstanding stock options under our stock option plan at
a weighted average exercise price of $ per share;
. shares of common stock initially reserved for future issuance
under our stock option plans, excluding the annual increase in the
number of shares authorized under our option plans beginning in January
2002;
. shares of common stock initially reserved for future issuance
under our employee stock purchase plan, excluding the annual increase in
the number of shares authorized under our employee stock purchase plan
beginning in January 2002; and
. shares of common stock issuable as of September 30, 2000 upon
the exercise of outstanding warrants at a weighted average exercise
price of $ per share.
25
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$ million, or $ per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by , the number of shares of common stock treated as
outstanding on a pro forma basis after giving effect to the conversion of all
outstanding shares of our preferred stock, including the sale of
shares of Series F preferred stock sold in September 2000 at a price of $
per share. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. After giving effect to the sale of the
shares of common stock offered in this offering at the assumed initial public
offering price, our pro forma net tangible book value at June 30, 2000 would
have been $ million, or $ per share. This represents an immediate
increase in net pro forma tangible book value to existing stockholders of
$ per share and an immediate dilution of $ per share to new
investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
----
Pro forma net tangible book value per share as of June 30,
2000.......................................................... $
----
Increase per share attributable to new investors...............
----
Pro forma net tangible book value per share after this offering..
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
the conversion of all currently outstanding shares of preferred stock, based on
an assumed public offering price of $ per share, the total number of
shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid by existing stockholders and by new
investors, in each case based upon the number of shares of common stock
outstanding as of June 30, 2000.
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. % $ % $
New investors..........................
--- ----- ---- -----
Total................................ 100.0% $ 100.0%
=== ===== ==== =====
</TABLE>
If the underwriters' over-allotment is exercised in full, the percentage of
shares of common stock held by existing stockholders will be reduced to ,
or % of the total number of shares of common stock to be outstanding
after this offering and the number of shares of common stock held by new
investors will increase to , or % of the total number of shares of
common stock to be outstanding immediately after this offering.
Except as indicated, the foregoing discussions and tables assume no exercise
of any stock options or warrants outstanding. As of September 30, 2000, there
were options outstanding to purchase shares of common stock at a
weighted average exercise price of $ per share and warrants outstanding to
purchase shares of common stock at a weighted average exercise price
of $ per share.
Assuming the exercise in full of all outstanding options and warrants, our
pro forma as adjusted net tangible book value as of June 30, 2000 would be $
per share, representing an immediate increase in net tangible book value of
$ per share to our existing stockholders and an immediate decrease in net
tangible book value of $ per share to new investors.
26
<PAGE>
SELECTED FINANCIAL DATA
The statements of operations data for the years ended December 31, 1997, 1998
and 1999 and the balance sheet data at December 31, 1998 and 1999, are derived
from our audited financial statements included elsewhere in this prospectus.
The statements of operations data for the period from January 2, 1996
(inception) to December 31, 1996 and the balance sheet data at December 31,
1996 and 1997, are derived from our audited financial statements that are not
included in this prospectus. The statements of operations data for the six
months ended June 30, 1999 and 2000, and the balance sheet data at June 30,
2000, are derived from our unaudited financial statements included elsewhere in
this prospectus. The following selected financial data should be read in
conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. We have prepared the unaudited
information on the same basis as the audited financial statements and have
included all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of our financial position and
operating results for these periods. Historical results are not necessarily
indicative of future results. The pro forma net loss per share information in
the following table reflects the conversion of all outstanding shares of our
convertible preferred stock into shares of common stock.
27
<PAGE>
<TABLE>
<CAPTION>
January 2,
1996
(Inception) Fiscal Year Ended Six Months Ended
to December 31, June 30,
December 31, -------------------------- -----------------
1996 1997 1998 1999 1999 2000
------------ ------- ------- -------- ------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. -- -- -- $ 103 -- $ 1,554
Cost of revenue......... -- -- -- 682 -- 3,205
Stock-based
compensation........... -- -- -- 27 -- 239
----- ------- ------- -------- ------- --------
Excess of cost of
revenue over revenue... -- -- -- (606) -- (1,890)
Operating expenses:
Research and
development.......... $ 177 $ 740 $ 3,541 7,708 $ 3,640 2,381
Sales and marketing... 34 279 1,229 2,494 977 1,786
General and
administrative....... -- 346 867 2,116 967 1,652
Stock-based
compensation......... -- 37 -- 670 253 2,285
----- ------- ------- -------- ------- --------
Total operating
expenses............ 211 1,402 5,637 12,988 5,837 8,104
----- ------- ------- -------- ------- --------
Loss from operations.... (211) (1,402) (5,637) (13,594) (5,837) (9,994)
Interest expense........ -- -- (18) (488) (255) (306)
Interest income and
other income (expense),
net.................... (1) 22 123 342 38 429
----- ------- ------- -------- ------- --------
Net loss................ $(212) $(1,380) $(5,532) $(13,740) $(6,054) $ (9,871)
Accretion of Series B
convertible preferred
stock.................. -- (200) -- -- -- --
----- ------- ------- -------- ------- --------
Net loss applicable to
common stock........... $(212) $(1,580) $(5,532) $(13,740) $(6,054) $ (9,871)
===== ======= ======= ======== ======= ========
Basic and diluted net
loss per share......... $0.15 $ (0.73) $ (1.96) $ (4.24) $ (1.92) $ (1.81)
===== ======= ======= ======== ======= ========
Weighted average shares
outstanding:
Basic and diluted..... 1,414 2,166 2,828 3,239 3,153 5,451
===== ======= ======= ======== ======= ========
Basic and diluted pro
forma net loss per
share.................. $ (0.35) $ (0.18)
======== ========
Weighed average shares
used in computing basic
and diluted pro forma
net loss per share..... 39,468 54,742
======== ========
<CAPTION>
December 31,
--------------------------------------- June 30,
1996 1997 1998 1999 2000
------------ ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 42 $ 671 $ 1,336 $ 10,994 $ 13,215
Working capital
(deficit).............. (7) 621 760 9,102 11,435
Total assets............ 191 1,224 4,623 16,135 20,610
Long-term obligations,
excluding current
installments........... -- -- -- 2,082 2,140
Convertible preferred
stock and warrants..... -- 3,049 11,004 32,141 42,072
Total stockholders'
equity (deficit)....... 142 (1,898) (7,428) (20,443) (27,435)
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the notes to those
financial statements included elsewhere in the prospectus. Our discussion
contains forward-looking statements based upon current expectations that
involve risks and uncertainties, such as our plans, objectives, expectations
and intentions. Our actual results and the timing of events could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under "Risk Factors," and
elsewhere in this prospectus.
Overview
We develop, manufacture and market high performance optical components based
on fused fiber and planar lightguide circuit technologies for use in next
generation optical communication networks. Our products are designed to enable
optical systems manufacturers and service providers to increase the capacity
and reliability of optical networks, extend the reach of optical signals in
core networks and build flexible, scalable and cost-effective metropolitan area
networks.
From inception in January 1996 through November 1999, our operating
activities consisted primarily of building a research and development
organization and engaging in product development activities. During that
period, none of our products reached commercialization. We first recognized
revenue in December 1999, when we recognized $103,000 in revenue from
commercial sales of our WavePump product.
Prior to that time, we shipped evaluation units to potential customers.
Evaluation units are prototype units sent to customers and potential customers
for evaluation. We do not recognize revenue for shipments of evaluation units
unless the product under evaluation becomes a commercial product. Once we begin
to recognize revenue on a product, we concurrently charge the costs for
production of these units to cost of revenue. If the product under evaluation
is never sold in commercial volumes, any payments received for evaluation units
of that product are treated as reductions in research and development expense
rather than being recognized as revenue. Accordingly, commencing in December
1999, when we began selling the WavePump product in commercial volumes to
fulfill customer orders, we began to recognize revenue for WavePumps, and we
also began to charge the associated costs of raw materials, production labor
and production overhead for WavePump product to cost of revenue instead of
research and development expense.
Since inception, we have incurred significant losses and as of June 30, 2000,
we had an accumulated deficit of $31.1 million. We have not achieved
profitability on a quarterly or annual basis. We expect to incur significant
research and development, technology, sales and marketing, and general and
administrative expenses in the future and, as a result, we will need to
generate significantly higher revenue to achieve and maintain profitability.
We derive our revenue from the sale of fiber optical components. We recognize
revenue when a product has been shipped to a customer and collection is
considered probable. Payment terms are generally 30 days after date of
delivery. To date we have derived substantially all of our revenue from direct
sales of our products to customers located in North America.
We have focused our selling efforts on the optical networking market.
Historically, a single customer has accounted for a significant portion of our
revenue. Corvis Corporation accounted for 83% of our revenues in the six months
ended June 30, 2000. The loss of this customer or a significant reduction or
delay in sales to any of our anticipated key customers could harm our
29
<PAGE>
operating results. The optical networking systems industry is dominated by a
small number of large companies. Our customers also have and will continue to
have negotiating leverage to obtain price reductions. We anticipate that our
operating results will continue to depend on sales to a relatively small number
of customers for the foreseeable future.
Our cost of revenue includes all materials and components used to assemble
our products, production labor and manufacturing overhead. We also include the
costs of shipping and tooling, and provisions for excess and obsolete
inventories in cost of revenue. Before we ship in volume to customers, our
products are subjected to extensive testing to confirm that they meet the
appropriate Telcordia testing criteria. We provide allowances for estimated
product returns and warranty costs at the time of revenue recognition. To date,
our product returns and warranty expenditures have been less than 1% of revenue
and our allowances have been sufficient to cover these product returns and
warranty expenditures. Our past product return and warranty experience,
however, may not be indicative of future product return rates and warranty
costs.
In September 2000, we entered into a patent cross-license agreement with
Lucent Technologies GRL Corp., an affiliate of Lucent Technologies, Inc. Under
that patent license agreement, Lucent's affiliate granted to us a non-exclusive
license to make, have made, sell or otherwise use various optical devices and
we granted to this Lucent affiliate a non-exclusive license under our patents.
As partial consideration for this license, we issued a warrant to this Lucent
affiliate to purchase 500,000 shares of our Series F preferred stock at an
exercise price of $.01 per share. This warrant is fully vested and exercisable
for a five-year period commencing with the date of grant. The estimated fair
value of the warrant of approximately $5 million was computed using the Black-
Scholes model. The fair value of the warrant will be allocated to purchased
technology, an asset that will be amortized, and to research and development
expense. We also agreed to pay royalties to this Lucent affiliate commencing
when our cumulative revenues from the sale of licensed products exceed
enumerated thresholds.
Research and development expense consists primarily of expenses incurred in
the design and development of our products and our proprietary technology.
These expenses include consultants' fees, the salaries and associated overhead
expenditures for our research and development engineers and technicians, and
materials and labor for the production of prototype units. We expense our
research and development costs as they are incurred. We believe that research
and development is critical to our product developments objectives. Therefore,
we expect research and product development expenses to increase substantially
as we continue to develop our technology and broaden our product line. In
particular, we expect to incur significant expenses related to further
development of our fused fiber and planar lightguide circuit technology.
Sales and marketing expense consists primarily of salaries, commissions,
trade show expenses, travel, advertising, public relations and associated
overhead expenses. We plan to increase our direct sales and sales support
personnel in the U.S. and internationally. We expect that sales and marketing
expenses will increase substantially as we increase our sales and marketing
personnel, advertising and other marketing programs.
General and administrative expense consists primarily of expenses for
finance, corporate management, office administration, facilities, insurance,
costs associated with expanding our information systems and legal, accounting
and other professional fees. During 2000, we signed a lease for an additional
55,000 square foot building that is scheduled to be ready for occupancy in the
first half of 2001. The base rent for this lease will be $1.2 million per year
over the 10-year life of the lease. Facilities expenses are allocated to cost
of revenue, research and development, sales and marketing, and general and
administrative expenses based on the square footage used by each department. We
expect general and administrative expenses to increase significantly as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
30
<PAGE>
From inception to June 30, 2000, we recorded total deferred stock-based
compensation of approximately $13.5 million related to options granted to
employees, representing the difference between the subsequently deemed fair
value of common stock and the exercise price of these options at the date of
grant. Options granted are typically subject to a four year vesting period. We
amortized $639,000 of deferred stock-based compensation in 1999. During the six
months ended June 30, 2000, we amortized $1.8 million of deferred stock-based
compensation. During the remainder of 2000 and in 2001, we expect to amortize
deferred stock-based compensation as follows:
<TABLE>
<CAPTION>
Expected Amortization
of Stock-Based
Fiscal Quarter Ending Compensation
--------------------- ---------------------
(in thousands)
<S> <C>
September 30, 2000..................................... $2,161
December 31, 2000...................................... 1,710
March 31, 2001......................................... 1,435
June 30, 2001.......................................... 1,151
September 30, 2001..................................... 921
December 31, 2001...................................... 776
</TABLE>
We expect aggregate stock-based compensation amortization of $2.7 million
during 2002 and $1.0 million during 2003 and $100,000 during 2004. The amount
of stock-based compensation expense to be recorded in future periods could
decrease if options for which accrued but unvested compensation has been
recorded are forfeited.
As of December 31, 1999, we had approximately $19.0 million of federal and
$19.3 million of state net operating loss carryforwards for tax reporting
purposes available to offset future taxable income. These net operating loss
carryforwards expire beginning in 2005 for state and 2020 for federal. We have
not recognized any benefit from the future use of loss carryforwards for these
periods or for any other period since inception because of uncertainty
surrounding their realization. The amount of net operating losses that we can
utilize may be limited under tax regulation in circumstances including a
cumulative stock ownership change of more than 50% over a three year period.
Such a change may have already occurred or could occur as a result of this
offering.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our sequential
quarterly revenue growth since the fourth quarter of 1999, we do not believe
that historical growth rates are necessarily sustainable or indicative of
future growth.
Results of Operations
Six Months Ended June 30, 2000 and 1999
Revenue
Revenue was $1.6 million for the six months ended June 30, 2000. We did not
recognize any revenue for the six months ended June 30, 1999.
Cost of Revenue
Cost of revenue was $3.2 million for the six months ended June 30, 2000. Cost
of revenue was high in relation to revenue during this period because
manufacturing overhead was spread over a relatively low number of units
produced. Because we had no revenue in the six months ended June 30, 1999, we
had no cost of revenue during that period.
31
<PAGE>
Research and Development
Research and development expense was $2.4 million for the six months ended
June 30, 2000 and $3.6 million for the six months ended June 30, 1999. The
decrease was due primarily to:
. the inclusion in research and development expense of $1.4 million for
the six months ended June 30, 1999, representing the cost of personnel
who were engaged in producing engineering evaluation units of the
WavePump product; and
. the higher consumption of materials and supplies in 1999 as compared to
2000.
This decrease was partially offset by the inclusion in 2000 of additional
research and development personnel and additional engineers.
Sales and Marketing
Sales and marketing expense was $1.8 million for the six months ended June
30, 2000 and $977,000 for the six months ended June 30, 1999. The increase of
$809,000 was due to an increase in sales and marketing personnel and related
costs associated with the growth in headcount in 2000.
General and Administrative
General and administrative expense was $1.7 million for the six months ended
June 30, 2000 and $967,000 for the six months ended June 30, 1999. The increase
of $685,000 was primarily due to an increase in personnel and related costs
associated with growth in headcount in 2000.
Stock-based Compensation
Stock-based compensation expense was $2.5 million, including $239,000 of
stock-based compensation expense included in cost of revenue, for the six
months ended June 30, 2000, and $253,000 for the six months ended June 30,
1999. The increase was due to the additional amortization of deferred stock-
based compensation resulting from additional stock option grants in 1999.
Years Ended December 31, 1999, 1998, and 1997
Revenue
Revenue for the year ended December 31, 1999 was $103,000. We did not
recognize any revenue until December 1999.
Cost of Revenue
Cost of revenue was $682,000 in 1999. Cost of revenue included direct
manufacturing costs such as wages and benefits for personnel in our production
workforce, who prior to December 1999 were engaged in producing engineering
prototypes. The cost of our production workforce was included in research and
development expenses prior to December 1999.
Research and Development
Research and development expense was $7.7 million in 1999, $3.5 million in
1998, and $740,000 in 1997. The increase from 1998 to 1999 was primarily due to
the significant increase in personnel and related costs associated with the
increase of personnel, and materials and supplies in 1999 as compared to 1998.
When we began producing WavePump products for customer orders in December 1999,
we began to charge the costs for personnel previously engaged in producing
engineering prototypes to cost of revenue rather than to research and
development expense. The number of personnel engaged in research and
development activities decreased from 1998 to 1999 due to this shift of
personnel from research and development activities to commercial production
32
<PAGE>
activities in December 1999. Research and development expense was $740,000 in
1997. The increase in research and development expense from 1997 to 1998 was
primarily due to an increase in research and development personnel and an
increase in the consumption of raw materials in the development process. From
January 1997 through November 1999, we shipped evaluation units to, and
received payments from, potential customers of $420,000 in 1999, $183,000 in
1998 and $24,000 in 1997. We treated these payments as reductions in research
and development expense rather than recognizing them as revenue.
Sales and Marketing
Sales and marketing expense was $2.5 million in 1999, $1.2 million in 1998,
and $279,000 in 1997. The increases during these periods were due to increases
in personnel, sales commissions, and marketing and promotional activities, such
as advertising, trade show, travel and other business development costs.
General and Administrative
General and administrative expense was $2.1 million in 1999, $867,000 in 1998
and $346,000 in 1997. The increases during these periods were due to an
increase in general and administrative personnel, and increased accounting,
legal, recruiting and facilities costs incurred in connection with growing
business activities.
Stock-based Compensation
Stock-based compensation expense was $670,000 in 1999, zero dollars in 1998
and $37,000 in 1997. The increase in 1999 was due to the additional
amortization of deferred stock-based compensation resulting from additional
stock option grants in 1999.
33
<PAGE>
Quarterly Results of Operations
The following tables set forth certain unaudited statements of operations
data for the six quarters ended June 30, 2000. This data has been derived from
the unaudited interim financial statements prepared on the same basis as the
audited financial statements contained herein and, in the opinion of
management, include all adjustments consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of such
information when read in conjunction with the financial statements and notes
thereto appearing elsewhere in this prospectus. The operating results for any
quarter should not be considered indicative of results of any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
June June
March 31, 30, September 30, December 31, March 31, 30,
1999 1999 1999 1999 2000 2000
--------- ------- ------------- ------------ --------- -------
(in thousands, except per share data )
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. -- -- -- $ 103 $ 421 $ 1,133
Cost of revenue......... -- -- -- 682 1,470 1,735
Stock-based
compensation........... -- -- -- 27 20 219
------- ------- ------- ------- ------- -------
Excess of cost of
revenue over revenue... -- -- -- (606) (1,069) (821)
------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... $ 1,508 $ 2,132 $ 2,378 1,690 1,102 1,279
Sales and marketing... 541 436 834 683 891 895
General and
administrative....... 428 539 524 625 695 957
Stock-based
compensation......... 150 103 173 244 362 1,923
------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,627 3,210 3,909 3,242 3,050 5,054
------- ------- ------- ------- ------- -------
Loss from operations.... (2,627) (3,210) (3,909) (3,848) (4,119) (5,875)
Interest expense........ (28) (250) (111) (103) (144) (162)
Interest income and
other income (expense),
net.................... 19 24 123 182 156 273
------- ------- ------- ------- ------- -------
Net loss................ $(2,636) $(3,436) $(3,897) $(3,771) $(4,107) $(5,764)
======= ======= ======= ======= ======= =======
</TABLE>
Revenue
Revenue increased in the three months ended December 31, 1999, March 31,
2000, and June 30, 2000, due to commencement of shipment in commercial volumes
of our WavePump product in December 1999 and increased shipments thereafter.
Cost of Revenue
We began charging production costs to cost of revenue when we commenced
commercial shipments of our WavePump product in December of 1999. Accordingly,
our cost of revenue increased in the three months ended March 31, 2000, and
June 30, 2000, primarily as a result of increased shipment of this product.
34
<PAGE>
Research and Development
Our research and development expense decreased in the three months ended
December 31, 1999, as costs associated with the production of our WavePump
product that previously were being treated as research and development expense
were charged to cost of revenue when commercial shipment of the product
commenced in December 1999. Because we shipped the WavePump product for the
three month period ended March 31, 2000, research and development expense
decreased during the three months ended March 31, 2000, and the cost of revenue
increased during this period compared to the prior quarter.
Sales and Marketing
Our sales and marketing expense increased during the three months ended March
31, 1999 and March 31, 2000 from the prior quarters, in part due to the cost of
trade shows that occurred in those periods. Our sales and marketing expense
increased during the three months ended September 30, 1999, in part due to a
severance payment to an employee whose employment terminated.
As a result of our limited operating history and the competitive market in
which we operate, it is difficult for us to forecast our revenue or earnings
accurately. Our results of operations in future periods may not meet or exceed
the expectations of public market analysts and investors. If this occurs, the
price of our common stock is likely to decline. Factors that are likely to
cause our results to fluctuate in the future include:
. the amount and timing of operating costs and capital expenditures
relating to our business, operations and infrastructure;
. the announcement or introduction of new or enhanced products in the
optical components market;
. our ability to manufacture and ship our products on a timely basis;
. our ability to obtain sufficient supplies to meet our product
manufacturing needs, including the supply of wafers for use in one of
our products; and
. our ability to achieve acceptable yields in manufacturing.
If we are unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, any significant revenue shortfall would likely
have an immediate negative effect on our business or operating results.
Moreover, our operating results in one or more future quarters may fail to meet
the expectations of securities analysts or investors. If this occurs, we would
expect to experience an immediate and significant, and possibly long-term,
decline in the price of our stock.
Liquidity and Capital Resources
Since our inception, we financed our operations primarily through the private
sales of common stock and six series of preferred stock offerings, which
provided aggregate net proceeds of approximately $41.5 million through June 30,
2000. In September 2000, we completed the sale of approximately 6.0 million
shares of Series F preferred stock which provided us with net proceeds of
approximately $51.3 million.
Additionally, as of June 30, 2000 we had borrowed a total of $3.4 million to
finance capital equipment acquisitions. At June 30, 2000, we had cash and cash
equivalents totaling $13.2 million, excluding $422,000 which was pledged to
support a letter of credit to one of our landlords.
35
<PAGE>
Our financing consisted of the following:
. In January 1999, we entered into a $2.5 million equipment lease
financing agreement. Equipment acquired under the lease financing
agreement is subject to repayment over a period not to exceed 48 months.
At June 30, 2000, the lease line was fully utilized.
. In October 1999, we entered into a credit agreement with a bank that
provides for borrowings up to the lesser of $2.5 million or $500,000
plus 90% of qualifying accounts receivable. Advances under the line of
credit bear interest at the bank's prime rate plus 0.5%. The agreement
was renewed in July 2000 with a maturity date of December 31, 2001. The
credit agreement includes an equipment facility of up to $1.0 million.
At June 30, 2000 no amounts were outstanding under the line of credit
and the equipment facility was fully utilized.
Net cash used in operating activities was $7.8 million for the six months
ended June 30, 2000, $11.5 million in 1999, and $4.8 million in 1998. The use
of cash in operating activities resulted from our net losses during all
reported periods as we invested heavily in research and development,
manufacturing capacity and growth in personnel to support business development
and administrative infrastructure.
Net cash used in investing activities of $1.0 million for the six months
ended June 30, 2000, included $1.4 million for purchase of property and
equipment which was offset in part by $482,000 of cash provided by the sale of
our investment in our contract manufacturer. Net cash used in investing
activities was $1.2 million in 1999 resulting entirely from purchases of
property and equipment. The $2.5 million of net cash used in investing
activities in 1998 resulted from purchases of property and equipment of $2.0
million, $450,000 of net cash used to acquire less than 10% interest in a
contract manufacturer, $422,000 of net cash restricted from use as security for
a standby letter of credit issued to our facility lessor, and $461,000 of net
cash provided by the sale of property and equipment.
Since 1998, we have made capital expenditures of $3.6 million to support our
manufacturing research and development, sales and marketing and administrative
activities. We expect to spend approximately $30 million relating to capital
expenditures for the remainder of 2000 and 2001, excluding expense for the
possible construction or acquisition of an optical wafer manufacturing
facility. We also anticipate that our capital expenditures will increase over
the next several years as we expand our facilities and acquire equipment to
support expansion of our manufacturing, sales and marketing and research and
development activities.
Net cash provided by financing activities was $10.9 million in the six months
ended June 30, 2000, $22.3 million in 1999 and $8.0 million in 1998, in each
case primarily attributable to the sale of preferred stock.
We believe that the anticipated net proceeds of this offering, together with
our existing capital resources, credit facilities and cash flow expected to be
generated from future operations, will be sufficient to meet our capital
requirements at least through the next twelve months. However, we may be
required or could elect to seek additional funding prior to that time.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issues SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," SFAS No. 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that
the corresponding gains or losses be reported either in the statement of
operations or as a component of
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<PAGE>
comprehensive income, depending on the type of hedging relationship that
exists. SFAS No. 133 will be effective for fiscal years beginning after June
15, 2000. The Company does not currently hold derivative instruments or engage
in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Adoption of SAB 101 was required in the fourth quarter of
2000, retroactive to the first quarter of 2000. The SEC will be issuing further
guidance to assist companies to interpret and implement SAB 101. We believe
that our revenue recognition policy complies with the current interpretation of
SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion 25. Interpretation No. 44 is
effective July 1, 2000. Interpretation No. 44 clarifies the application of APB
Opinion 25 for various matters, specifically:
. The definition of an employee for purposes of applying APB Opinion 25;
. The criteria for determining whether a plan qualifies as a
noncompensatory plan;
. The accounting consequence of various modification to the terms of a
previously fixed stock option or award; and
. The accounting for an exchange of stock compensation awards in a
business combination.
We do not anticipate that the adoption of Interpretation No. 44 will have a
material impact on our financial position or results of operations.
Quantitative and Qualitative Disclosure About Market Risk
We do not currently use derivative financial instruments. We generally place
our cash, cash equivalents and short-term investments in high quality corporate
bonds. We do not expect any material loss from these investments and do not
believe that normal movements in interest rates would have a material impact on
the carrying value of these investments. Based on these factors, we believe
that our potential interest rate exposure is not material.
As we expand into foreign markets, our financial results could be affected by
factors such as changes in foreign currency rates or weak economic conditions
in the foreign markets we plan to target. All of our sales are currently made
in U.S. dollars, and a strengthening of the dollar could make our services less
competitive in the foreign markets we plan to target.
37
<PAGE>
BUSINESS
Overview
We develop, manufacture and market high performance optical components and
modules based on fused fiber and planar lightguide circuit technologies for use
in next generation optical communication networks. Our products are designed to
enable optical systems manufacturers and service providers to increase the
capacity and reliability of optical networks, extend the reach of optical
signals in core networks and build flexible, scalable and cost-effective
metropolitan area networks.
Industry Background
Increase in Communications Traffic Driving the Need for Optical Networking
Due to the growth of the Internet, the volume of traffic on communications
networks has increased significantly. The rate of Internet growth is expected
to increase further. According to International Data Corporation, a leading
market research firm, the number of Internet users worldwide is estimated to
increase from 239 million at the end of 1999 to 602 million by the end of 2003.
The market research firm of Ryan, Hankin & Kent, estimates that Internet
traffic, a major contributor to overall communications traffic, will increase
from 0.4 million terabytes, or trillions of bytes, per month in 1999 to over 15
million terabytes per month by 2003.
In the past, communications networks consisted of voice and data traffic
transmitted via electrical signals over copper wire. Communications traffic
transmitted over these networks has been subject to interference, loss of
signal quality, capacity constraints and high cost. The recent deployment of
optical networking technology, which transmits communications traffic over
laser-generated pulses of light, significantly improves signal clarity,
quality, capacity and lowers costs. In order to increase network capacity and
reliability and improve signal quality of communications traffic within their
networks, many service providers are seeking to build networks that operate
entirely in the optical domain.
Growth of Optical Networking
Most existing public communications networks were originally designed to
handle lower bandwidth voice intensive traffic and consisted mainly of copper
telephone wire and electrical switching equipment. To accommodate the
significant growth in communications traffic during recent years on their
networks, service providers such as AT&T, Sprint and WorldCom initially
upgraded the core, or cross-country and long-distance portions of their
networks to fiber optic transmission equipment or systems connected by fiber
optic cable. In order to bring the increased capacity or bandwidth of core
optical networks closer to end users, optical networking technology is now
being deployed within shorter distance, metropolitan area networks which are
connected to the core. These metropolitan area networks are potentially much
greater in number than core networks and consist of greater numbers of network
elements.
Along with an increase in the number of systems and network elements in which
optical technologies are deployed, there also have been significant technology
developments enabling the capacity to be increased. The capacity of early
optical networks was limited because communications network traffic could only
be transported over a single optical signal, or wavelength within each fiber.
In addition, the development costs of early optical networks was very high due
to the need to regenerate optical signals at relatively short intervals within
the network. Since an optical signal loses power as it travels down an optical
fiber, referred to as attenuation, the optical signal must either be
regenerated or amplified in order to retain its integrity. In early optical
networks, optical signal regeneration required expensive equipment to convert
the optical signal to an electrical signal, raise
38
<PAGE>
its power level, and then make it an optical signal again, a very costly
process. In recent years, two important optical component technologies have
emerged that have helped service providers address these capacity and cost
issues: optical amplification and dense wavelength division multiplexing.
Optical Amplification. Optical amplifiers are used to amplify optical signals
without converting them to electrical signals. Optical amplifiers such as
Erbium-doped fiber amplifiers, or EDFAs, and Raman amplifiers represent a major
cost efficiency, as service providers can reduce the number of optical to
electrical to optical conversions, which are costly. Prior to the development
of optical amplifiers, optical signal degradation limited to less than 60
kilometers the distance over which an optical signal could be transmitted
without regeneration. With the advent of optical amplifiers, optical signals
are able to travel several thousand kilometers without requiring an optical to
electrical to optical conversion for regeneration.
Dense Wavelength Division Multiplexing. Dense wavelength division
multiplexing, or DWDM, enables the simultaneous transmission of multiple
optical signals, or wavelengths, within the same optical fiber. This capability
greatly increases the transmission capacity of each optical fiber. Instead of
one wavelength, hundreds of wavelengths, also referred to as channels, can be
carried by the same fiber simultaneously. As a result, dense wavelength
division multiplexing significantly reduces the cost of building and operating
a high capacity optical network when compared to the alternative of installing
and maintaining additional optical fiber and associated equipment.
Challenges Facing Optical System Manufacturers
The development and enhancement of optical amplifier and dense wavelength
division multiplexing technologies have enabled improvements in optical network
performance and lowered the overall costs of building and maintaining optical
networks. Current generation optical amplifier and dense wavelength division
multiplexing technologies are not, however, sufficient to meet the needs of
service providers transitioning to an all-optical network topology, which will
require a wide array of new, high performance optical systems. These new, high
performance optical systems will need to address a number of important
requirements of service providers' next generation optical networks, including:
Higher Channel Counts. Service providers seek to fit more and more
wavelengths, or channels, into a single optical fiber in order to economically
increase their network capacity. Dense wavelength division multiplexing
technology currently in widespread deployment is limited to roughly 40 channels
within a single fiber. To further expand the capacity of their networks in
response to the rapid growth in communications traffic, service providers want
next generation optical systems that will be capable of accommodating
significantly higher numbers of channels, or channel counts, within the same
operating wavelength range. As a consequence, narrower channel spacings are
required to remain within that range. Service providers are currently in trials
with dense wavelength division multiplexing systems with channel counts of 160
and more.
Increased Data Rates. In addition to seeking to put more channels or
wavelengths on each fiber, service providers want to increase the speed or data
rate of each channel. This will allow them to increase the overall system
capacity. Service providers are currently deploying optical systems referred to
as OC-192 systems, where each channel can carry 10 billion bits of data per
second, or 10 Gbps. Service providers are in the early stages of testing 40
Gbps systems, known as OC-768 systems, where each channel can carry 40 billion
bits of data per second.
Extended Signal Reach. In order to reduce system deployment costs, service
providers are seeking optical networking systems that are capable of extending
the distance an optical signal can travel before it requires regeneration.
Service providers are beginning to deploy ultra-long haul optical networking
systems, which are capable of producing signal reaches two to three times
longer than
39
<PAGE>
optical systems currently available. As service providers seek to transition to
an all-optical network, very long reach optical systems, which do not require
any optical to electrical to optical signal regeneration, will be required.
Greater Flexibility. In the core or backbone networks, service providers are
attempting to fulfill capacity demand by using technologies such as dense
wavelength division multiplexing. As the number of metropolitan area networks
increases and high bandwidth services are brought closer to end users, service
providers' optical system requirements begin to include network flexibility in
addition to raw capacity. Network flexibility allows service providers to
configure their networks to address fluctuating capacity demand over time and
in various locations. This feature is especially important in managing
metropolitan area networks, which typically experience large fluctuations in
capacity demand. Service providers need flexible network architectures in the
metropolitan area in order to dynamically configure their networks to address
fluctuating demand in both time and location. Optical systems must be
adjustable and reconfigurable in order to satisfy this fluctuating capacity
demand. These systems therefore need components to enable this flexibility.
Demand for Next Generation Optical Components
The need for new, high performance optical components that enable the
development of next generation optical systems is critical. The deployment of
next-generation networks will require optical components that address the
following challenges:
Improved Network Performance. As systems vendors develop and deliver next
generation optical systems that combine higher channel counts, higher data
rates, extended signal reach and greater flexibility, they require more
precise, high performance component technologies and products. With current
dense wavelength division multiplexing component technologies, such as thin
film filter and fiber Bragg gratings, the potential for channel count and
bandwidth expansion is limited because the technology requires that data be
transmitted within a defined range of wavelengths with a comparatively large
space between each channel. In addition, optical signal loss and dispersion are
more severe at higher data rates and higher channel counts. Since increases in
signal loss and dispersion necessitate increases in costly amplification and
regeneration to return optical signals to their original forms, service
providers and optical system vendors increasingly require optical components
with extremely low signal loss and dispersion characteristics. Many existing
component technologies increase signal loss and add dispersion, thereby
deteriorating the optical signal.
Production Scalability. As systems vendors introduce next generation optical
systems and service providers build out their networks into metropolitan areas,
there is an increasing need for component suppliers that are capable of scaling
their production capacity as component demand grows. In addition, system
manufacturers are increasingly outsourcing their component supply. The ability
of an optical component supplier to produce high quality components in high
volumes is extremely important to optical systems vendors. Many of the optical
component technologies that are used in existing optical systems are dependent
on materials that are currently in short supply and for which only a few
sources exist.
Improved Reliability. As optical systems incorporate higher channel counts
and higher data rates on each channel, the volume of traffic handled by any one
system is increasing dramatically. As a result, the impact of any system
downtime is more costly and affects more end users. Consequently, system
vendors are continually seeking more reliable optical components for their next
generation systems to decrease the likelihood of optical system downtime. Many
existing technologies such as thin film filters require the precise packaging
of a large number of component parts and, accordingly, are potentially less
reliable.
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<PAGE>
Customization and Integration Capabilities. Since there are few industry
standards for optical components, optical systems manufacturers tend to have a
unique combination of performance, packaging, interconnection and reliability
requirements for the optical components they incorporate into their systems. As
system manufacturers develop their next generation, higher channel count and
higher data rate systems, they are increasingly seeking component manufacturers
that have the ability to integrate components into custom modules in house so
they can reduce the amount of integration and interconnection they must do
internally.
Cost-Effectiveness. Overall optical system cost is a particularly important
factor, especially for manufacturers of metropolitan area network systems.
Existing component technologies may not cost effectively address metropolitan
area network performance, scalability and reliability requirements. To help
reduce their overall cost, system vendors are seeking high performance optical
components that can address their requirements in a cost-effective manner.
The WaveSplitter Solution
We develop, manufacture and sell high performance optical components and
modules used in next generation optical networks. Our products enable optical
systems vendors and service providers to increase the capacity of optical
networks, extend the reach of optical signals in the core networks and build
flexible, scalable and cost-effective metropolitan area networks. Our products,
based on our innovative fused fiber and planar lightguide circuit technology
platforms, are designed to enable improved network performance and reliability.
Our products and technology platforms provide the following benefits:
Improved Network Performance. Our products enable optical signals to be
transmitted with higher channel counts at narrower channel spacing, higher data
rates and over longer distances, thereby increasing the overall amount of
communications traffic that can be carried over an optical network. Our fused
fiber WavePump product combines the optical signals from several pump lasers to
enable higher power optical amplifiers for higher channel count, longer reach
optical systems. Our optical interleaver product, WaveProcessor, which is
currently in customer trials, is an optical component that enables dense
wavelength division multiplexing optical signals to be combined, or
interleaved, together to produce extremely high channel counts. We recently
demonstrated our next generation interleaver product, which is not yet in
customer trials, that combines optical systems to produce a 160 channel count
system with narrow channel spacing that enables four times more capacity than
the 40 channel count systems commercially available today. Our initial planar
lightguide circuit product, WaveArray, which is currently under development, is
a glass on silicon based optical component permitting reductions in the size
and cost of optical components while adding new functionality. The low signal
loss and low dispersion in all of our products enables optical signals to
travel further distances before optical signal regeneration is required.
Scalability. Our fused fiber and planar lightguide circuit platforms are
designed to be used in both long haul and metropolitan systems and to
facilitate easy upgrading of an optical network to higher channel counts. In
addition, our products are designed for high volume manufacturing, with several
products utilizing similar packaging. Our engineering team possesses
significant optical component manufacturing expertise, which allows us to
design all products for efficient, high volume and automated manufacturing. By
incorporating simplified component designs, which lend themselves to automated
manufacturing, and by contracting multiple manufacturers for our products, we
are able to scale production quickly to meet our customers' needs. As a result,
the manufacturing capacity of our technology can be expanded more quickly than
many competing component technologies, which are handcrafted and depend on the
addition of highly skilled operators to increase capacity.
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<PAGE>
Superior Reliability. WaveSplitter products are designed and manufactured to
meet or exceed the stringent quality and reliability requirements of our
customers. Our products are tested to Telcordia qualification standards and our
existing manufacturing facilities are all ISO-9001 certified. Our advanced
fused fiber and planar lightguide circuit technology platforms allow us to
develop products with fewer mechanical and optical parts than optical component
technologies, which reduces the potential for device failure and signal loss.
As a result, we believe these products are inherently more reliable than
devices based on thin-film filters or rare crystalline materials.
Customized, Flexible Integration Capabilities. Our technology platforms are
well-suited to the development and manufacture of standard products with
customer-specific performance requirements and to the design and manufacture of
wholly customized product solutions. Optical system manufacturers continually
establish more stringent system performance requirements and differentiate
their products based on optical component solutions. Our technology platforms
and manufacturing processes lend themselves to fast design cycles on custom
components and rapid ramp to volume manufacture, thus shortening critical time-
to-market challenges at the system level.
Cost-effectiveness. Our technologies enable more integrated component
solutions, reducing size and complexity and thereby lowering costs. In
addition, we have selected and developed optical component technologies that
depend primarily upon abundant, low cost materials available from many sources.
Our fused fiber products use optical fiber as the primary raw material, which
is abundantly available, low in cost and benefits from many years of industry
research and development. Our planar lightguide circuit products, which are
currently under development, utilize semiconductor processing technology in
order to benefit from cost advantages similar to those experienced with high
volume silicon integrated circuit manufacturing. Together these two
technologies enable us to design, manufacture and deliver cost effective
solutions to our customers.
The WaveSplitter Strategy
Our objective is to be a leading supplier of high performance optical
components and modules for next generation optical networks. Key elements of
our strategy include:
Leverage Multiple Technology Platforms to Expand Product Offering. We intend
to use our two complementary technology platforms to broaden our family of
optical component products. Our initial products are based on fused fiber
technology, which we selected as a technology platform because it enables a
combination of very high channel counts at narrow channel spacing, very low
signal loss and the ability to handle high levels of optical power. To
complement our fused fiber products, we are developing components based on our
planar lightguide circuit technology which enable the integration of multiple
optical components into one device. We intend to apply these technologies
individually and in combination to provide a family of high performance,
integrated optical components designed to meet customer-specific requirements.
Planar lightguide circuit technology lends itself to the development of
component products that route and switch optical signals, including modules
that can dynamically add and drop optical signals of a specific wavelength, and
other products such as dynamic gain equalizers, intelligent optical monitors
and waveguide amplifiers. We also intend to evaluate other technology platforms
that are complementary to our existing technology platforms in terms of low
cost, scalability and suitability for automation of the production process.
Deliver Custom Solutions. We provide optical component and modular solutions
for each customer's specific needs through the application of our technology
platforms. We intend to provide the best combination of performance and value
for our customers rather than attempting to apply a single technology platform
for all customers and all purposes. We expect this to result in a portfolio of
standard optical component products as well as a continuous flow of products
customized to fit
42
<PAGE>
specific customer needs. We plan to continue developing design capabilities,
products and technical expertise in multiple optical component technology
platforms in order to complement our customers' research and development
efforts. We intend to continue to offer flexible component solutions to improve
the performance and cost effectiveness of systems manufacturers' offerings to
their service provider customers.
Increase Production Capacity to Capture Growth Opportunities. We intend to
aggressively expand our manufacturing and production capabilities. In order to
secure volume order commitments from our customers, we intend to continue
demonstrating that our production levels can be scaled to meet and exceed our
customers' volume requirements. To facilitate our ability to scale production,
improve production yields and lower production costs, we are investing in the
development of specialized production equipment to automate the manufacture of
our fused fiber products. We are building process know-how into the production
equipment software to reduce operator training requirements and facilitate
transfer of the process offshore. We are migrating some of our manufacturing
production offshore to accelerate production expansion and to obtain labor cost
efficiencies. Currently, we are working with a contract manufacturer with
facilities in both Taiwan and the People's Republic of China, and we are
actively seeking other manufacturing relationships to further enhance our
manufacturing flexibility and capacity.
Expand Sales and Marketing Efforts. In order to continue to improve our
ability to address market and customer requirements, we intend to expand our
sales and marketing efforts. We plan to target the leading established and
emerging customers in the long-haul terrestrial, long-haul undersea, and
metropolitan market segments. To plan capacity and provide assurance of supply
to key accounts, we pursue long-term contractual supply agreements and support
major customers through multi-tiered relationships with technical, commercial
and executive staff. We believe that we have a strong reputation as a supplier
of high performance optical components.
Pursue Strategic Relationships and Acquisitions to Accelerate Growth. We
intend to solidify our position as a supplier of high performance optical
components by pursuing strategic relationships and acquisitions that can
provide us with key intellectual property, complementary technologies and
highly-qualified engineering personnel to rapidly increase our technological
expertise and expand our product portfolio.
Products
We develop optical components and modules based on scalable technology
platforms for next generation optical networks. Our products are targeted to
address critical market needs such as greater flexibility, increased data
rates, higher channel counts at narrow channel spacing and extended signal
reach. Our technology platforms currently include advanced fused fiber and
planar lightguide circuits. These platforms offer rapid scalability, high
volume production capability, rapid new product introduction, product
customization, and automation of manufacturing processes for cost reduction.
Our current products based on these technologies include pump combiners,
interleavers, high channel count array waveguide gratings, couplers and
wavelength division multiplexers.
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The following table summarizes our products, their functions and their
current status:
<TABLE>
<CAPTION>
Product Description Function Features Application Status
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WavePump Wavelength pump Allows higher High power Optical Shipping in
(Wavelength) combiner power optical handling, very amplifiers volume
amplifiers by low insertion
combining loss, Telcordia
wavelengths of reliability,
multiple pump economical
lasers
-------------------------------------------------------------------------------------------------
WavePump Polarization Allows higher Enables high Optical In development
(Polarization) pump combiner power optical power optical amplifiers
amplifiers by amplifiers
combining two
pump lasers
through optical
polarization
-------------------------------------------------------------------------------------------------
WaveProcessor Interleaver Doubles network Very dense High channel Customer trials
capacity by channel count optical
interleaving spacing, wide networks
complementary channel
sets of passband, low
channels dispersion
-------------------------------------------------------------------------------------------------
WaveArray Array waveguide A high channel High channel High channel In development
dense count dense counts, dense count optical
wavelength wavelength channel networks
division division spacing, good
multiplexer multiplexing loss
filter based on uniformity,
planar economical
waveguide
technology
-------------------------------------------------------------------------------------------------
WaveMetro Coarse Allows low-loss Low insertion Moderate Customer trials
wavelength filtering of a loss, flexible channel count
division small number of channel optical
multiplexer widely-spaced plan, Telcordia networks
channels reliability
-------------------------------------------------------------------------------------------------
WaveEssentials Optical Allows power Low insertion High channel Shipping in
couplers splitting or loss, wide count optical volume
and splitters combining with bandwidth, networks
a range of Telcordia
split reliability,
ratios high-volume
production
</TABLE>
WavePump(TM) Pump Laser Combiner. Pump combiners are used to increase the
power of optical amplifiers by combining the output of multiple pump lasers
into one common fiber for higher powered optical signal amplification. This
combination can be accomplished through multiple wavelengths or polarization.
As more channels are transmitted through a single fiber, higher power optical
amplifiers are required to provide the required amplification across all
channels. New advanced optical systems for the ultra-long-haul market require
additional amplification methods, such as Raman amplification, to transmit
signals over longer distances without the need for electrical regeneration.
Raman amplification, which results in a significant cost savings in a network,
requires higher pump power than traditional optical amplifiers. The WavePump
pump combiners are capable of handling the increased power required for next
generation optical amplifiers, increase amplifier efficiency and are economical
compared to competing technologies.
WaveProcessor(TM) Interleaver. An interleaver is an optical component that
separates one multichannel optical signal into two signals, each with half the
number of channels, yet with twice the spacing between channels. Interleavers
can also be used to combine two wide-spaced multichannel signals into one
closely-spaced multichannel signal. This allows technology and products
developed
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for wider-channel-spacing dense wavelength division multiplexing systems to be
extended to next-generation systems addressing narrower channel and higher
bandwidth demands, and effectively doubles the available capacity of optical
networks. As the front-end component in the dense wavelength division
multiplexing system, the interleaver determines the filtering performance of
the system, and must meet stringent performance criteria. Compared to competing
technologies, our WaveProcessor interleaver has low insertion loss to increase
system efficiency, a wide channel passband to avoid signal variation across the
system, and low dispersion to accommodate high bit-rate channel needs. We have
also demonstrated an interleaver with 2.5 GHz channel spacing, a factor of 20
better than needed for current generation dense wavelength division
multiplexing systems, showing the future possibilities with this platform.
WaveArray(TM) High Channel Count Array Waveguide Gratings. Array waveguide
gratings, or AWGs, are multiplexers and demultiplexers based on a glass-on-
silicon platform. These devices use processes similar to semiconductor
lithography to define a large number of optical waveguides that allow filtering
of a large number of closely-spaced dense wavelength division multiplexing
channels. The semiconductor processing technology used in our WaveArray product
permits mass customization, allowing components to be made in high volume while
addressing customer's unique needs. Also, the silicon platform in our WaveArray
product allows active components such as transmitters and receivers to be
integrated with the optical waveguides, permitting reductions in size and cost
of optical components while adding new functionality.
WaveMetro(TM) Coarse Wavelength Division Multiplexer. The WaveMetroTM is
designed to satisfy the anticipated explosive growth in the metropolitan
network and need for economical solutions. The WaveMetro is a wavelength
division multiplexer that offers a low-loss method to filter a small number of
widely spaced channels, which is characteristic of signals used in metropolitan
networks. Because the WaveMetro is designed to have a lower cost of initial
installation, we believe this product will be an attractive alternative for
metropolitan networks.
WaveEssentials(TM) Couplers and Wavelength Division Multiplexers. Couplers
split an optical signal into two fibers with a split ratio determined during
the manufacturing process. Tap couplers are a variety of couplers used in dense
wavelength division multiplexing systems to siphon a small amount of the
optical signal for monitoring and feedback purposes. The WaveEssentials
wavelength division multiplexers are used to combine widely separated
wavelength signals, most commonly to combine the pump power into the signal
fiber in optical amplifiers. The WaveEssential products offer both low
insertion loss and high volume availability at an economical price to meet our
customer's needs.
Technology
We have selected technology platforms that are well suited to meet the
requirements of long haul and metropolitan optical networking system providers
for optical performance, reliability, cost and the ability to rapidly scale up
production capacity. We expect our advanced fused fiber and planar lightguide
circuit technology platforms to be the genesis for complementary families of
optical component products that offer a combination of superior optical
performance and reliability. We also believe that these platforms offer
advantages that facilitate mass production, rapid scale up of production
capacity and cost reduction. We expect to expand our portfolio of optical
component technology platforms to respond to the evolving needs of optical
networking systems providers.
Fused fiber technology platform. Our fused fiber technology platform allows
us to produce components that enable higher channel counts at narrower channel
spacing, higher data rates and longer reach. This platform allows us to process
an optical signal by bringing the core of two fibers together to create an
interference effect in the guided light. This interference effect allows us to
split
45
<PAGE>
or combine optical signals based upon wavelength or polarization. Fused fiber,
which uses raw materials that are abundantly available, eliminates the need for
external discrete optical elements such as optical lenses, thin film filters
and rare crystals which require precision mechanical parts to maintain the
optical alignment. As a result, fused fiber products tend to be more reliable
and manufacturable. We are also able to take advantage of the many years of
research and development on fused fiber in our industry to improve the optical
efficiency of our fused fiber products. Our fused fiber products include
WavePump, WaveProcessor, WaveEssential and WaveMetro and are designed to be
much more reliable and manufacturable.
Planar lightguide circuit platform. Our planar lightguide circuit platform
enables integration of complex optical functions, allowing us to reduce the
number of optical components within a small package, or form factor. Our planar
lightguide circuit technology leverages semiconductor manufacturing methods to
produce lower cost products in high volume. Similar to semiconductor
technology, the core technologies of planar lightguide circuit can be divided
into design, wafer foundry, packaging and testing. A common wafer foundry can
be used to build different customized optical circuits. This platform allows us
to integrate more and more optical functions while keeping the form factor
small, reliability high and cost low. WaveArray is our first product built on
the planar lightguide circuit platform.
We will apply these and other technologies, individually and in combination,
to provide high performance, integrated optical components designed to meet
customer-specific requirements. Utilizing our multiple technology platforms, we
intend to focus our development efforts on building a broader and deeper array
of high performance components and modules to enable high capacity next
generation optical networks. Future products enabled by these technologies
include reconfigurable add/drop modules, dynamic gain equalizers, intelligent
optical monitors and waveguide amplifiers.
Customers
We sell our products worldwide to optical networking system and subsystem
manufacturers. Our target customers are optical amplifier and dense wavelength
division multiplexing systems integrators. Our customers focus on various
segments of the optical networking market. We are shipping products in volume
to Corning and Corvis and are delivering pre-production or evaluation products
to Alcatel, Ciena, Cisco, Furukawa, Harmonic, Lucent Technologies, Marconi,
Mitsubishi, NEC, Nokia, SDL, Siemens and Sumitomo.
Marketing, Sales and Customer Support
We market and sell our products through direct sales in North America and
through our agents and representatives internationally. Our direct sales
organization currently consists of regional sales directors operating in the
Western, Central, Northeast and Southeast regions of the United States. We have
established relationships with representatives in the United Kingdom, Germany,
France, Belgium, the Netherlands, Luxembourg, Israel, Japan and Korea. We are
aggressively increasing our sales and technical support organization to support
our customer base through field application engineers and customer support
staff. As of September 30, 2000, our sales and marketing organization consisted
of 19 professionals in product marketing, applications engineering, sales and
customer service positions. We believe strong technical support is required to
establish long-term relationships with our customers. A number of individuals
in our sales and marketing organization have a Ph.D. in physics or applied
physics. This technical collaboration with our customers helps to define the
features that are required for our products to be successful in specific
applications.
Our marketing team promotes our products within the communications industry
and gathers and analyzes market research. Our marketing professionals help us
to identify and define next-generation
46
<PAGE>
products by working closely with our customers and our research and development
engineers. They also coordinate our participation in trade shows and design and
implement our advertising effort.
Research and Development
We believe that to be successful we must continue to enhance our existing
products and develop new products that maintain technological competitiveness.
We have assembled a team of approximately 60 highly skilled optical engineers,
manufacturing and test engineers and system and network architects, of which
approximately one-third have Ph.D.s. We will continue to make substantial
investments in research and development.
Our product development process is driven by market demand and a close
collaboration between our product marketing, sales and product development
organizations. We incorporate feedback from our customers in the product
development process. We also participate in industry seminars and trade shows
where appropriate and incorporate information from these contacts throughout
the product development process. In addition to our efforts to enhance our
product development process, we believe we must continually improve our
manufacturing processes to meet cost and volume targets.
Competition
The markets we are targeting are new and rapidly evolving, and are highly
competitive. We face 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 optical transmission
problems by competitors, particularly systems companies who also manufacture
components, could significantly limit our growth.
Some companies in the optical systems and component industry that compete
with us include Alcatel S.A., Avanex Corporation, Bookham Technology plc,
Chorum Technologies Inc., DiCon Fiberoptics, Inc., ITF Optical Technologies,
JDS Uniphase Corporation, Kymata Ltd., LightWave Microsystems, Lucent
Technologies Inc., New Focus, Inc., Nortel Networks Corporation, and Oplink
Communications Inc., among others. Many of these companies are large public
companies that have longer operating histories and significantly greater
financial, technical, marketing and other resources than we have. As a result,
these competitors are able to devote greater resources to the development,
promotion, sale and support of their products. In addition, our competitors
that have large market capitalizations or cash reserves are much better
positioned than we are to acquire other companies in order to gain new
technologies or products that may displace our product lines. Any of these
acquisitions could give our competitors a strategic advantage. Many of our
potential competitors have significantly more established sales and customer
support organizations than we do. In addition, many of our competitors have
much greater name recognition and have more extensive customer bases, better
developed distribution channels and broader product offerings than our company.
These companies can leverage their customer bases and broader product offerings
and adopt aggressive pricing policies to gain market share. We expect to
encounter potential customers that, due to existing relationships with our
competitors, are committed to the products offered by these competitors. As a
result, these potential customers may not consider purchasing our products.
Existing and potential customers are also our existing and potential
competitors. These customers may develop or acquire additional competitive
products or technologies in the future, which may cause them to reduce or cease
their purchases from us. In addition, customers who are also competitors may
unfairly disparage our products in order to gain a competitive advantage.
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<PAGE>
Intellectual Property
Our success and ability to compete depend substantially upon our internally
developed technology. We have six issued patents. Our engineering teams have
significant expertise in photonic, micro-optic and systems-level design. While
we rely on patent, copyright, trade secret and trademark law to protect our
technology, we also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements, speed of product introduction to market and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. Others may develop technologies that are similar or
superior to our technology.
We generally enter into confidentiality or license agreements with our
employees, consultants, customers and vendors, and generally control access to
and distribution of our proprietary information. Despite these efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and we may be unable to prevent misappropriation
of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as do the laws of the United States.
Substantial litigation regarding intellectual property rights exists in the
optical networking industry, and we expect that optical communications products
may be increasingly subject to third-party infringement claims as the number of
competitors in our industry grows and the functionality of products in
different industry segments overlaps. In addition, we believe that many of our
competitors have filed or intend to file patent applications covering aspects
of their technology on which they may claim our technology infringes. Other
third parties may claim infringement by us with respect to our products and our
associated technology. Any such claims, with or without merit, could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all. A
successful claim of product infringement against us and failure or inability by
us to license the infringed or similar technology could harm our business.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed.
In September 2000, we entered into a patent cross-license agreement with
Lucent Technologies GRL Corp, an affiliate of Lucent Technologies. Under that
patent license agreement, Lucent's affiliate granted to us a nonexclusive
license to make, have made, sell and otherwise use various optical devices and
we granted to this Lucent affiliate a non-exclusive license under our patents.
The licenses continue for the unexpired terms of the underlying patents.
Employees
As of September 30, 2000, we had 192 full-time employees, 91 of whom were
engaged in manufacturing, 47 in research and development, 21 in sales and
marketing, 28 in general and administrative and 5 in quality. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and we consider our relations with our employees to be good.
Our future performance depends in significant part upon the continued service
of our key technical, sales and senior management personnel, none of whom is
bound by an employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key employees could have a
material adverse effect on our business, financial condition and results of
operations. Our future success also depends on our continuing ability to
attract, train and
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<PAGE>
retain highly qualified technical, sales and managerial personnel. Competition
for these personnel is intense, particularly in the Silicon Valley where our
headquarters are located, and we may be unable to retain our key personnel in
the future.
Facilities
Our headquarters are currently located in a leased facility in Fremont,
California, consisting of approximately 55,000 square feet under a lease that
expires in 2006 with options to extend the term for up to another ten years, in
two five-year intervals. We are also in the process of constructing an adjacent
office facility of approximately 55,000 square feet in Fremont, California,
under a lease that expires in 2010 with an option to extend the term for
another five years, and a research and development and manufacturing facility
of approximately 7,750 square feet in Atlanta, Georgia, under a lease that
expires in 2003 with an option to extend the term for another four years, in
two two-year intervals.
Legal Proceedings
Although we are not currently a party to any litigation, we may from time to
time become involved in litigation arising in the ordinary course of our
business.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the executive officers,
directors, and key employees of WaveSplitter as of September 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
William H. Diamond, Jr.... 44 President, Chief Executive Officer and Director
Vice President, Chief Financial Officer,
Bruce C. Pollock.......... 57 Secretary and Treasurer
Jerry R. Bautista, Ph.D... 43 Vice President and Chief Technical Officer
Sze Lo (Steve) Tsui....... 48 Vice President of Sales and Marketing
Kevin G. Sullivan, Ph.D... 32 Vice President of Engineering
Isaac Ohel................ 56 Vice President of Operations
Vice President, Corporate Controller and
Barbara M. Hubbard........ 48 Assistant Treasurer
Jill Springer............. 50 Vice President of Human Resources
Matthew J. Lucero......... 37 General Counsel and Assistant Secretary
Sheau Sheng Chen, Ph.D.... 45 Chairman of the Board and Founder
David Ladd(1)(2).......... 53 Director
Charles Lau(1)............ 51 Director
Henry R. Nothhaft(1)(2)... 56 Director
</TABLE>
--------
(1) Member of Audit Committee
(2) Member of Compensation Committee
William H. Diamond, Jr., has served as our President and Chief Executive
Officer and a member of our board of directors since June 2000. Prior to
joining us, Mr. Diamond served as Vice President of Marketing of E-TEK
Dynamics, Inc. from October 1998 to June 2000. From July 1997 to October 1998,
Mr. Diamond served as Director of Marketing for Lucent Technologies
Optoelectronics. From April 1996 to July 1997, Mr. Diamond was Managing
Director, Europe, Middle East, Africa, for Best Power Technology, Inc., a unit
of General Signal, a manufacturer of various industrial and electronic goods.
Prior to joining Best Power, Mr. Diamond served as UK General Manager and
European Sales Manager for AT&T Microelectronics Europe, from January 1996 to
April 1996. While at AT&T Microelectronics Europe, Mr. Diamond also served as
European Marketing Director for Optoelectronics, from April 1992 to January
1996 and UK General Manager from June 1994 to July 1996. Mr. Diamond holds a
B.A. from Holy Cross College and an M.B.A. from Georgetown University.
Bruce C. Pollock has served as our Vice President, Chief Financial Officer,
Secretary and Treasurer since December 1998. Prior to joining us, Mr. Pollock
served as the Senior Vice President and Chief Financial Officer of Walker
Interactive Systems, Inc., from 1994 to June 1998. Mr. Pollock holds a B.S.
from the University of Washington, and an M.B.A. and J.D. from the University
of California, Berkeley. He is a member of the State Bar of California.
Jerry R. Bautista, Ph.D. has served as our Vice President and Chief Technical
Officer since December 1998. Prior to joining us, Dr. Bautista was with Lucent
Technologies for fourteen years, as Director of Planar Technology, where he
headed Lucent's planar waveguide business for dense wavelength division
multiplexing applications, and served as a member of Bell Labs Basic Research
with a focus on fiber and optical components technology. Dr. Bautista holds a
B.S. from Stanford University and a Ph.D. from Princeton University, both in
Chemical Engineering.
Sze Lo (Steve)Tsui has served as our Vice President of Sales and Marketing
since February 2000. Prior to joining us, Mr. Tsui held senior executive
positions at Intellicorp, Walker Interactive, Acer and IBM. Most recently, he
served as President of Intellicorp, Inc. from November 1998 to
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February 2000. From July 1997 to November 1998, Mr. Tsui served as the Senior
Vice President and General Manager of Walker Interactive Systems, Inc.'s North
America operations, and as Vice President of Sales of Acer's North America
operations, from November 1995 to July 1997. Mr. Tsui holds a B.S. from the
School of Industrial Engineering and Operations Research at the University of
California, Berkeley and an M.B.A. from the Graduate School of Business at
Stanford University.
Kevin G. Sullivan, Ph.D. has served as our Vice President of Engineering
since April 2000 and previously served as our Director of Operations, from
August 1999 to April 2000. From May 1996 until joining us, Dr. Sullivan held
various positions at Lucent Technologies, including Team Leader of the Network
Products Group in 1999 and Member of the Technical Staff of Bell Laboratories
from 1996 to 1998. Dr. Sullivan was a Postdoctoral Research Associate from 1994
to 1996 at the University of Rochester, The Institute of Optics, where he also
obtained his B.S., M.S. and Ph.D. in Optics.
Isaac Ohel has served as our Vice President of Operations since April 2000.
Prior to joining us, Mr. Ohel was Manufacturing Manager at Agilent/Hewlett
Packard from January 1991 to April 2000. While at Agilent/Hewlett Packard, Mr.
Ohel formulated the Integrated Circuits manufacturing strategy and led a 400-
person team across four manufacturing sites including Southeast Asia. Prior to
that position, Mr. Ohel held various positions with the Optical Communications
Division of Hewlett Packard, from 1979 to December 1990, including Manager of
Fiber Optics Research and Development. Mr. Ohel holds a B.S. in Electrical
Engineering from Israel Institute of Technology and a M.S. in Electrical
Engineering from Stanford University.
Barbara M. Hubbard has served as our Vice President, Corporate Controller and
Assistant Treasurer since April 2000. Prior to joining us, Ms. Hubbard served
as a consultant from May 1999 to March 2000. From April 1996 to April 1999, Ms.
Hubbard held various management positions at Walker Interactive Systems, Inc.,
including Vice President of Finance from November 1998 to May 1999, Chief
Accounting Officer, Assistant Treasurer and Assistant Secretary since May 1996,
and Vice President and Corporate Controller from April 1996 to November 1998.
Prior to April 1996, Ms. Hubbard served as the Controller for Intuit, Inc. Ms.
Hubbard is a Certified Public Accountant in California and Illinois, and holds
a B.S. in Accounting from Illinois State University.
Jill Springer has served as our Vice President of Human resources since June
2000. Prior to joining us, Ms. Springer served as the Senior Director of Human
Resources of TSMC NA, a regional business unit of Taiwan Semiconductor
Manufacturing Company, Ltd. in June 1999. From July 1997 to June 1999, Ms.
Springer operated a human resources consulting practice specializing in start-
up enterprises and small companies. Ms. Springer was the Vice President of
Human Resources of KLA-Tencor from March 1995 to June 1997. Ms. Springer holds
a B.S. in political science from Illinois State University.
Matthew J. Lucero has served as our General Counsel and Assistant Secretary
since August 2000. Prior to joining us, Mr. Lucero served as Corporate Counsel
for E-TEK Dynamics, Inc., from February 1994 to August 2000. Mr. Lucero
received a B.A. from Marshall University and a J.D. from Santa Clara University
School of Law. He is a member of the State Bar of California.
Sheau Sheng Chen, Ph.D. is our Founder and has served as Chairman of our
Board of Directors since June 2000. From January 1996 to June 2000, Dr. Chen
served as our President and Chief Executive Officer, and he continues to
provide services to WaveSplitter. Dr. Chen served as Chairman of XMR
Corporation, from December 1991 to December 1999. Dr. Chen holds a Ph.D. in
physical chemistry from Texas A&M University.
David Ladd has served as a director since June 1998. Mr. Ladd has been a
General Partner of the venture capital firm Mayfield Fund since July 1999 and a
Venture Partner of Mayfield Fund from October 1997 to June 1999. Previously, he
was Vice President of Lucent Technology, from October 1997 to April 1999 and
Chief Technology Officer for Octel Communications from April 1994 to September
1997.
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<PAGE>
Charles Lau has served as a director since August 1999. Mr. Lau has been a
Managing Director of China Development Industrial Bank U.S. Venture Capital
Operations since October 1997. From November 1993 to June 1996, he was Business
Development Manager of Carpenter Technology Corp. Mr. Lau holds a B.A. from
Queens College in New York.
Henry R. Nothhaft has served as a director since April 2000. Mr. Nothhaft is
Vice Chairman of XO Communications, Inc., formerly NextLink Communications,
Inc., which recently merged with Concentric Network Corporation. Mr. Nothhaft
joined Concentric as President and Chief Executive Officer in 1995, and became
Chairman of the Board in 1998. After the merger with NextLink in 2000, he
became Vice Chairman of the Board of NextLink. Mr. Nothhaft also serves on the
board of directors for Vertical Networks, Asia Online, XO Communications, Inc.
and the Telecommunications Advisory Board of Compaq Computer Corporation. Mr.
Nothhaft holds a B.S. from the U.S. Naval Academy and an M.B.A. from George
Washington University.
Classified Board of Directors
Our certificate of incorporation provides for a classified board of directors
consisting of three classes of directors, each serving staggered three-year
terms. As a result, a portion of our board of directors will be elected each
year. To implement the classified structure, before the consummation of the
offering, three of the nominees to the board will be elected to one-year terms,
two will be elected to two-year terms and two will be elected to three-year
terms. Thereafter, directors will be elected for three-year terms. Messrs. Chen
and Lau have been designated Class I directors whose term expires at the 2001
annual meeting of stockholders. Mr. Diamond has been designated the Class II
director whose term expires at the 2002 annual meeting of stockholders. Messrs.
Ladd and Nothhaft have been designated Class III directors whose term expires
at the 2003 annual meeting of stockholders.
Executive officers are appointed by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationships among any of our directors, officers or key
employees.
Board Committees
We have established an Audit Committee and a Compensation Committee. The
Audit Committee reviews our internal accounting procedures and considers and
reports to the board of directors with respect to other auditing and accounting
matters, including the selection of our independent auditors, the scope of
annual audits, fees to be paid to our independent auditors and the performance
of our independent auditors. The Audit Committee currently consists of Messrs.
Ladd, Lau and Nothhaft. The Compensation Committee reviews and recommends to
the board of directors the salaries, benefits and stock option grants for all
employees, consultants, directors and other individuals compensated by us. The
Compensation Committee also administers our stock option and other employee
benefit plans. The Compensation Committee currently consists of Messrs Ladd and
Nothhaft.
Director Compensation
We reimburse our non-employee directors for all out-of-pocket expenses
incurred in the performance of their duties as directors of WaveSplitter. We
currently do not pay fees to our directors for attendance at meetings or for
their services as members of the board of directors. Under our 1997 stock plan,
directors are eligible to receive stock option grants.
On April 6, 2000, the board of directors granted an option to purchase
160,000 shares of common stock to Mr. Nothhaft at an exercise price per share
of $1.00.
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<PAGE>
Under our 2000 Stock Incentive Plan, each non-employee director elected to
the board of directors for the first time following this offering will receive
upon his election an initial grant of options to purchase 40,000 shares of
common stock at fair market value on the date of grant as well as a subsequent
annual grant of options to purchase 10,000 shares for each year during the
director's term. Options granted upon initial election to the Board will become
vested and exercisable as to one-third of the options each anniversary of the
date of the grant, and shall be fully vested and exercisable on the third such
anniversary. Annual option grants shall become fully vested and exercisable on
the first anniversary of the date of grant.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee of WaveSplitter serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
Compensation Committee. See "Certain Relationships and Related Transactions"
for a description of transactions between WaveSplitter and entities affiliated
with members of the Compensation Committee.
Executive Compensation
Summary Compensation Table
The following table indicates information concerning compensation of our
Chief Executive Officer and our most highly compensated executive officers
other than the Chief Executive Officer whose salary and bonus exceeded $100,000
for the year ended December 31, 1999. These executives are referred to as the
Named Executive Officers elsewhere in this prospectus. The table does not
include compensation information for William H. Diamond, Jr. who became our
President and Chief Executive Officer in June 2000. Mr. Diamond would have been
reported in the table had he been employed by us in 1999. Mr. Diamond's annual
base salary for 2000 is $250,000, with a target bonus of 40% or $100,000. For
2000, this bonus will be at least $25,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
--------------------------- ---- -------- ----- ------------ ------------ ---
<S> <C> <C> <C> <C> <C> <C>
Sheau Sheng Chen,
Ph.D.(1).................. 1999 $209,231 -- -- --
Founder, Chairman and
Former
President and Chief
Executive
Officer
Bruce C. Pollock........... 1999 175,653 -- 946,780 --
Vice President, Chief
Financial
Officer, Secretary and
Treasurer
Jerry R. Bautista, Ph.D.... 1999 181,538 -- 1,146,780 --
Vice President and Chief
Technical Officer
</TABLE>
--------
(1) Dr. Chen became our Chairman in June 2000. Prior to that, he served as our
President and Chief Executive Officer from January 1996 to June 2000.
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<PAGE>
Option Grants In Last Fiscal Year
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1999
to the Named Executive Officers.
In the fiscal year ended December 31, 1999, we granted options to purchase up
to an aggregate of shares to employees, directors and consultants. All
options were granted under our 1997 stock plan at exercise prices equal to the
fair market value of our common stock on the date of grant, as determined in
good faith by the board of directors. All options have a term of ten years.
Generally, option shares vest over four years, with 25% of the option shares
vesting one year after the option grant date, and the remaining option shares
vesting ratably each month for the next 36 months.
The following table sets forth information with respect to stock options
granted to each of the Named Executive Officers in the fiscal year ended
December 31, 1999. The exercise price per share of each option was equal to the
fair market value of the common stock as determined by the board of directors
on the date of grant. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent our estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Number of Stock Price
Securities Percent of Total Appreciation for
Underlying Options Granted Exercise of Option Term
Options to Employees in Base Price Expiration -----------------
Name Granted Fiscal Year ($/Share) Date 5% 10%
---- ---------- ---------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sheau Sheng Chen, Ph.D. ... -- -- -- -- -- --
Bruce C. Pollock........... 600,000 13.8% $0.07 1/07/2009 $ $
346,780 8.0 0.20 8/05/2009
Jerry R. Bautista, Ph.D. .. 600,000 13.8 0.07 1/07/2009
546,780 12.6 0.20 8/05/2009
</TABLE>
Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
The following table describes for the Named Executive Officers the
exercisable and unexercisable options held by them as of December 31, 1999. The
"Value of Unexercised In-the-Money Options at Fiscal Year End" is based on the
deemed value of our common stock as of December 31, 1999, less the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our 1997 Stock Plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at Fiscal Year- In-The-Money Options at
Acquired End Fiscal Year-End
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sheau Sheng Chen, Ph.D. ... -- -- 800,000 -- $140,000 --
Bruce C. Pollock........... 600,000 346,780 -- -- --
Jerry R. Bautista, Ph.D. .. 600,000 546,780 -- -- --
</TABLE>
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<PAGE>
On May 24, 1999, Bruce Pollock exercised an option to purchase 600,000 shares
of our common stock. At the time of exercise, 62,500 of these purchased shares
were vested and the remaining 537,500 were unvested and subject to repurchase
at cost by us. As of December 31, 1999, 150,000 of these purchased shares were
vested and 450,000 were unvested. The options become vested over a four-year
period while Mr. Pollock remains employed by us.
On June 22, 1999, Jerry Bautista exercised an option to purchase 600,000
shares of our common stock. At the time of exercise, 62,500 of these purchased
shares were vested and the remaining 537,500 were unvested and subject to
repurchase at cost by us. As of December 31, 1999, 137,500 of these purchased
shares were vested and 462,500 were unvested. The options become vested over a
four-year period while Mr. Bautista remains employed by us.
Incentive Plans
1997 Stock Plan
The 1997 Stock Plan was adopted by our board of directors on March 15, 1997
and approved by our stockholders on the same date for the benefit of our
officers, directors and consultants. This plan has been amended, most recently
on April 6, 2000, to approve an additional 7,000,000 shares of common stock for
issuance under this plan, which amendment was approved by our stockholders.
This plan provides for the grant of incentive stock options and nonstatutory
stock options. An aggregate of 16,570,128 shares of common stock are reserved
for issuance under this plan. As of September 30, 2000, we had granted options
to purchase an aggregate of shares of common stock under this plan.
We will not be granting options under this plan following the offering.
2000 Stock Incentive Plan
On September 28, 2000, subject to the approval of our stockholders, our board
of directors adopted the 2000 Stock Incentive Plan, or 2000 Plan, for the
benefit of our officers, employee and non-employee directors, key employees,
advisors and consultants and reserved for issuance thereunder 16 million shares
of common stock initially, which amount shall be subject to an annual increase
at the beginning of each fiscal year during the term of the 2000 Plan equal to
the lesser of (i) 4 million shares or (ii) 4% of the number of outstanding
shares of common stock on the last trading day of the immediately preceding
fiscal year. In addition, all shares remaining available for granting of awards
under our 1997 Stock Plan will be transferred to the 2000 Plan. The 2000 Plan
is scheduled to take effect upon the consummation of the initial public
offering. The 2000 Plan provides for the issuance of stock-based incentive
awards, including stock options, restricted stock, restricted stock units,
dividend equivalents and other stock-based awards. An award may consist of one
type of award or two or more of them in tandem. Under the 2000 Plan, awards
covering no more than 50% of the shares reserved for issuance under the plan
may be granted to any participant in any one year.
The 2000 Plan will be administered by our Compensation Committee. The
committee is intended to satisfy the provisions of Rule 16b-3 promulgated under
Section 16 of the Securities Exchange Act of 1934 and Section 162(m) of the
Internal Revenue Code of 1986, as amended. The committee has the discretionary
authority to interpret the 2000 Plan and may prescribe, amend and rescind rules
and make all other determinations necessary or desirable for the administration
of the 2000 Plan. The 2000 Plan permits the committee to select the officers,
directors, key employees, advisors and consultants of WaveSplitter, including
directors who are also employees, who will receive awards and generally to
determine the terms and conditions of those awards.
Under the 2000 Plan, upon initial election to the Board, each non-employee
director will receive a grant of options to purchase 40,000 shares of common
stock at an exercise price per share equal
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to the fair market value of a share of common stock on the date of grant. In
addition, each non-employee director will automatically receive an annual grant
of options to purchase 10,000 shares of common stock at a per share exercise
price equal to the fair market value of a share of common stock on the date of
grant immediately following our annual meeting of stockholders during the
director's term. Options granted upon initial election to the Board will become
vested and exercisable as to one-third of the options each anniversary of the
date of grant, and shall be fully vested and exercisable on the third
anniversary. Annual option grants shall become fully vested and exercisable on
the first anniversary of the date of grant. Each option granted to non-employee
directors shall have a three-year term.
WaveSplitter may issue two types of stock options under the 2000 Plan:
incentive stock options, which are intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified stock options. The
committee will determine the exercise price, vesting period and performance
goals, if any, with respect to grants of stock options. The exercise price of
each incentive stock option granted under this plan must be at least equal to
the fair market value of a share of common stock on the date the incentive
stock option is granted.
In addition, awards of restricted stock and restricted stock units may be
granted under the 2000 Plan. The committee will determine the purchase price,
performance period and performance goals, if any, with respect to grants of
restricted stock or restricted stock units. If the performance goals and other
restrictions are not attained, the participant will forfeit his or her shares
of restricted stock or restricted stock units. Participants with restricted
stock generally have all of the rights of a stockholder.
Dividend equivalents may also be issued under the 2000 Plan. Dividend
equivalents provide for the payment of stock, cash or other property equal in
value to dividends paid with respect to a specified number of shares.
The committee, in its discretion, may also grant other equity-based awards.
In the event of a change of control, as defined in the 2000 Plan, if
outstanding awards granted under the 2000 Plan are not assumed or substituted
for, all restrictions on such awards lapse and the awards become fully vested.
In addition, the committee may, in an award agreement or at any time
thereafter, provide for accelerated vesting or lapse of restrictions upon a
change of control.
2000 Employee Stock Purchase Plan
The 2000 Employee Stock Purchase Plan, or Employee Plan, is designed to allow
eligible employees to purchase our common stock at a discount from fair market
value and is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code. On September 28, 2000,
subject to the approval of the stockholders, the Board adopted the Employee
Plan and reserved for issuance thereunder 4 million shares of common stock
initially, with an annual increase in shares of common stock equal to the
lesser of (i) 2 million shares or (ii) 2% of the number of outstanding shares
of common stock on the last trading day of the immediately preceding fiscal
year. The Employee Plan is scheduled to take effect upon the consummation of
the initial public offering.
The Employee Plan will be implemented consecutive, overlapping offering
periods that commence on the first trading day on or after April 1 and October
1 of each year and end on the last trading day before the commencement of the
next offering period; provided, however, that the first offering period under
the plan will commence upon the consummation of the initial public offering and
end on the last trading day on or before September 30, 2002. Subsequent
offering periods shall be 24 months in length beginning each April 1 and
October 1 of each year. Stock purchases are made at the end of
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<PAGE>
each purchase period. Purchase periods are six months in length beginning each
April 1 and October 1 of each year; provided, however, that the first purchase
period under the plan will commence upon the consummation of the initial public
offering and end on the last trading day on or before March 31, 2001.
Employees are eligible to participate if they customarily work at least 20
hours per week. However, an employee may not be granted the right to purchase
stock under the Employee Plan if the employee (i) immediately after the grant
would own stock possessing 5% or more of the total combined voting power or
value of all classes of the Company's capital stock, or (ii) holds rights to
purchase stock under any of our employee stock purchase plans that together
accrue at a rate which exceeds $25,000 worth of stock for each calendar year.
The Employee Plan permits each employee to purchase common stock through
payroll deductions of up to 15% of the employee's "compensation." Compensation
is defined as the employee's base salary, wages, commissions, overtime pay and
bonuses paid to an employee. The maximum number of shares an employee may
purchase during a single purchase period is 1,000 shares.
Amounts deducted and accumulated by the employee are used to purchase shares
of common stock at the end of each purchase period. The price of the common
stock offered under this plan is an amount equal to 85% of the lower of fair
market value of the common stock at (i) the beginning of the offering period or
(ii) the end of the purchase period. If on any purchase date the price of the
common stock is lower than the stock price on the date an employee enrolled in
the Employee Plan, he or she is automatically withdrawn from and re-enrolled in
the Employee Plan at the lower stock price. Employees may end their
participation in the Employee Plan at any time during an offering period, in
which event, any amounts withheld through payroll deductions and not otherwise
used to purchase shares will be returned to them. Participation ends
automatically upon termination of employment with us.
Rights granted under the Employee Plan are not transferable by any employee
other than by will or the laws of descent and distribution. The Employee Plan
provides that, in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend or other change in corporate structure
affecting the number of issued shares of our stock, the Employee Plan
administrator will conclusively determine the appropriate equitable
adjustments. The Employee Plan will terminate ten years after it becomes
effective. Our Board has authority to amend or terminate the Employee Plan,
except that no amendment or termination may harm any outstanding rights under
the Employee Plan.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
We have not entered into any employment agreements with any of our employees.
However, we have issued offer letters of employment to our key employees.
Employment for all employees is at-will and may be terminated by us or by the
employee at any time.
Mr. Diamond's offer letter provides that in the event he is terminated
without cause or is constructively terminated, he is entitled to receive (i) a
lump sum amount equal to his annual base salary, (ii) his annual bonus prorated
through the date of termination, (iii) continuing dental, medical, vision and
life insurance for a period of one year following termination and (iv) stock
options that would have vested during the twelve months following his date of
termination become immediately vested and exercisable.
In addition, if Mr. Diamond is terminated involuntarily without cause or is
constructively terminated, in contemplation of or at any time after a change of
control, all of his unvested stock options shall become fully vested; provided
that if this termination occurs within one year of commencement of employment,
50% of his unvested stock options shall become fully vested.
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<PAGE>
From January 1996 to June 2000, Dr. Chen served as our President and Chief
Executive Officer. Dr. Chen's current annual base salary is $240,000 with a
target bonus of 40%, or $96,000, for continuing services to WaveSplitter. In
addition, if this offering is consummated prior to March 31, 2001, Dr. Chen's
options to purchase 600,000 shares of our common stock will become fully
vested.
In the event any of Messrs. Pollock, Tsui or Bautista is terminated
involuntarily without cause or is constructively terminated, in contemplation
of or at any time after a change of control, all of the unvested stock options
of such person shall become fully vested. In addition, in the event that the
employment of any of these officers is terminated other than for cause, the
vesting of options equal to one month of additional vesting for each month of
service performed by such officer accelerates.
In the event any of Messrs. Lucero, Sullivan or Ohel or Ms. Hubbard or Ms.
Springer is terminated involuntarily without cause or is constructively
terminated, in contemplation of or at any time after a change of control, all
of the unvested stock options of such person shall become fully vested;
provided that if this termination occurs within one year of commencement of
employment, only 50% of such person's unvested stock options shall become fully
vested.
Additionally, if Mr. Ohel is terminated by us without cause within his first
year of employment, he is entitled to receive severance pay equal to six months
of base salary.
Limitation of Liability and Indemnification
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derives an improper personal
benefit.
Our certificate of incorporation and bylaws further provide for the
indemnification of our directors and officers to the fullest extent permitted
by Section 145 of the Delaware General Corporation Law, including circumstances
in which indemnification is otherwise discretionary. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted our
directors, officers and controlling persons under the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
We intend to enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
the person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers. We also maintain
directors' and officers' liability insurance.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an
immediate family member of any of the foregoing, had or will have a direct or
indirect interest other than:
. compensation arrangements, which are described where required under
"Management," and
. the transactions described below.
Stock Issuances to our Directors, Officers and Principal Stockholders
Series F Preferred Stock Financing Round. In September 2000, we sold shares
of Series F preferred stock, at a purchase price of $8.54 per share, to the
following investors, among others:
. shares of Series F preferred stock to William H. Diamond, Jr., our
President, Chief Executive Officer and Director;
. shares of Series F preferred stock to Henry R. Nothhaft, one of our
directors;
. shares of Series F preferred stock to Mayfield IX, Mayfield
Associates Fund IV and WaveTrust;
. shares of Series F preferred stock to Luhsi Chen; and
. shares of Series F preferred stock to North America Venture Fund,
L.P.
Series D Preferred Stock Financing Round. In July and September 1999, we sold
shares of Series D preferred stock, at a purchase price of $1.00 per share, to
the following investors, among others:
. shares of Series D preferred stock to North America Venture Fund,
L.P;
. shares of Series D preferred stock to Mayfield IX and Mayfield
Associates Fund IV; and
. shares of Series D preferred stock to Lucent Venture Partners Inc.
In connection with the Series D preferred stock financing round, we issued to
Mayfield IX, Mayfield Associates Fund IV and Lucent Venture Partners Inc. five-
year warrants at an exercise price of $1.00 per share to purchase shares,
shares and shares, respectively, of Series D preferred stock shares
as consideration for bridge loans that were converted.
Series C Preferred Stock Financing Round. In June 1998, we sold shares of
Series C preferred stock, at a purchase price of $0.68 per share, to the
following investors, among others:
. shares of Series C preferred stock to Mayfield IX and Mayfield
Associates Fund IV; and
. shares of Series C preferred stock to Lucent Venture Partners Inc.
Series B Preferred Stock Financing Round. In April and October 1997, we sold
shares of Series B preferred stock to Luhsi Chen at a purchase price of
$0.15 per share.
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Series A Preferred Stock Financing Round. In March 1997, we sold shares of
Series A preferred stock, at a purchase price of $0.06 per share to Sheau Chen,
our Chairman of the Board of Directors.
Each of Mayfield Funds (Mayfield IX, Mayfield Associates Fund IV and
WaveTrust), Lucent Venture Partners Inc., and North America Venture Fund L.P.,
or their affiliated entities, is a 5% or greater stockholder of us.
David Ladd, one of our directors, is an affiliate of Mayfield IX, Mayfield
Associates Fund IV and WaveTrust. Mr. Ladd disclaims beneficial ownership of
any of the shares held by these funds. Luhsi Chen is the wife of Sheau Chen,
our Chairman of the board of directors. Charles Lau, one of our directors, is
an affiliate of North America Venture Fund, L.P. Mr. Lau disclaims beneficial
ownership of any of the shares held by North America Venture Fund, L.P.
Investors' Rights Agreement. WaveSplitter has entered into an investors'
rights agreement with certain purchasers of preferred stock. The agreement
provides for information rights, board observation rights, preemptive rights
and registration rights in favor of these purchasers.
Indemnity Agreements. WaveSplitter intends to enter into indemnity agreements
with each of its officers and directors.
Lucent License Agreement. In September 2000, we entered into a patent cross-
license agreement with Lucent Technologies GRL Corp., an affiliate of Lucent
Technologies, Inc. Under that patent license agreement, Lucent's affiliate
granted to us a non-exclusive license to make, have made, sell or otherwise use
various optical devices, and we granted to this Lucent affiliate a non-
exclusive license under our patents. As partial consideration for this license,
we issued a warrant to this Lucent affiliate to purchase 500,000 shares of our
Series F preferred stock at an exercise price of $0.01 per share. This warrant
is fully vested and exercisable for a five year period commencing with the date
of grant. The estimated fair value of the warrant of approximately $5 million
was computed using the Black-Scholes model. The fair value of the warrant will
be allocated to purchased technology (an asset that will be amortized) and to
research and development expense. We also agreed to pay royalties to this
Lucent affiliate commencing when our cumulative revenue from the sale of
licensed products exceeds enumerated thresholds.
Bridge loan. In April 1999, we received bridge loans, aggregating $2,000,000,
from existing investors. The loans bore interest at a rate of 8% per annum. The
loans and the interest totaling $2,034,000 automatically converted into
2,034,000 shares our Series D preferred stock upon the closing of our sale of
Series D preferred stock in July 1999. In connection with the loans, we granted
warrants to the lenders to purchase 300,000 shares of our Series D preferred
stock.
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Loans to Directors and Executive Officers
The following is a table of loans made by us to certain of our directors and
officers, in connection with the purchase of shares of our stock. Each of these
loans was made pursuant to a full recourse promissory note secured by a stock
pledge. Each of these loans was issued in connection with the exercise of stock
options which had previously been granted by the board of directors pursuant to
our stock option plans at the fair market value of our common stock on the date
of grant, as determined in good faith by our board of directors, based upon
market conditions, results of operations and recent sales of preferred stock to
third party investors. The notes bear interest at the applicable federal rate
for mid-term loans, which is currently approximately 6.0% per annum. All
unvested shares purchased by the officers are subject to repurchase by us at
the original exercise price if the officer's employment is terminated. As of
September 30, 2000, the entire principal amount on each of the following notes
was outstanding, except that Mr. Pollock has reduced the principal balance of
his May 1999 note to $37,935.
<TABLE>
<CAPTION>
Director or Officer Loan Date Loan Amount Shares Purchased
------------------- ------------- ----------- ----------------
<S> <C> <C> <C>
William H. Diamond, Jr............ August 2000 $5,000,000 2,000,000
Bruce C. Pollock.................. May 1999 40,500 600,000
February 2000 69,356 346,780
Jerry R. Bautista, Ph.D........... June 1999 40,500 600,000
March 2000 109,356 546,780
August 2000 20,000 80,000
Sze Lo (Steve) Tsui............... March 2000 226,000 904,000
Isaac Ohel........................ May 2000 260,000 260,000
August 2000 100,000 40,000
Barbara M. Hubbard................ May 2000 200,000 200,000
Sheau Sheng Chen, Ph.D............ March 2000 170,000 1,400,000
Henry R. Nothhaft................. May 2000 160,000 160,000
</TABLE>
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PRINCIPAL STOCKHOLDERS
The following table indicates information as of September 30, 2000 known to
us regarding the beneficial ownership of WaveSplitter common stock by:
. each person known to the board of directors to own beneficially 5% or
more of our common stock;
. each of our directors;
. the named executive officers; and
. all of our directors and executive officers as a group.
Information with respect to beneficial ownership has been furnished by each
director, officer or 5% or more stockholder, as the case may be. Except as
otherwise noted below, the address for each person listed on the table is c/o
WaveSplitter Technologies, Inc., 46430 Fremont Boulevard, Fremont, California
94538.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities. In computing the number of
shares beneficially owned by a person and the percent of ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after September 30, 2000 are deemed outstanding, while the shares are not
deemed outstanding for purposes of computing percent ownership of any other
person. Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to applicable community property laws.
Percentage ownership prior to this offering is based on shares of
common stock outstanding as of September 30, 2000 which number includes shares
of common stock that will be outstanding upon the conversion of outstanding
shares of preferred stock upon the closing of the offering. To the extent that
any shares are issued upon exercise of options, warrants or other rights to
acquire our capital stock that are presently outstanding or granted in the
future or reserved for future issuance under our stock plans, there will be
further dilution to new public investors.
<TABLE>
<CAPTION>
Percent of Shares
Number of Beneficially Owned
Shares --------------------
Beneficially Before the After the
Name Owned Offering Offering
---- ------------ ---------- ---------
<S> <C> <C> <C>
5% Stockholders:
Entities affiliated with the Mayfield
Fund(1)...................................
2800 Sand Hill Road, Suite 250
Menlo Park, California 94025
Entities affiliated with Lucent Venture
Partners Inc..............................
3180 Porter Drive, Suite D
Palo Alto, California 94304
North America Venture Fund, L.P.(2)........
3945 Freedom Circle, Suite 270
Santa Clara, CA 95054
Directors and Named Executive Officers:
Jerry R. Bautista, Ph.D.(6)................
Sheau Sheng Chen, Ph.D.(3)(6)..............
William H. Diamond, Jr.(6).................
Bruce C. Pollock(4)(6).....................
David Ladd(1)..............................
Charles Lau(5).............................
Henry R. Nothhaft(6).......................
Executive officers and directors as a group
(13 persons)..............................
</TABLE>
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--------
* Less than 1% of the outstanding shares of common stock.
(1) Represents shares held by Mayfield IX, shares held by Mayfield
Associates Fund IV and shares held by WaveTrust. Mayfield IX
Management LLC is the general partner of Mayfield IX and Mayfield
Associates Fund IV. The managing directors of Mayfield IX Management LLC
are F. Gibson Myers, Jr., A Grant Herdrick, III, Michael J. Levinthal,
William D. Unger, Wendell G. Van Auken, III, Kevin A. Fong, Yogen K.
Dalal, Russell C. Hirsch and Wende S. Hutton. David J. Ladd, one of our
directors, is a non-managing director of Mayfield IX Management LLC. Each
of the directors of Mayfield IX Management LLC disclaims beneficial
ownership of the shares held by Mayfield IX and Mayfield Associates Fund
IV, except to the extent of his pecuniary interest in these shares.
Includes warrants to purchase shares held by Mayfield IX and
Mayfield Associates Fund IV.
(2) North America Venture Fund, L.P., is an affiliate of China Development
Industrial Bank U.S. Venture Capital Operations. Mr. Lau, one of our
directors, is the Managing Director of China Development Industrial Bank
U.S. Venture Capital Operations. However, Mr. Lau disclaims beneficial
ownership of the shares held by North America Venture Fund, L.P., except
to the extent of his pecuniary interest in these shares.
(3) Includes shares held by certain members and family trusts of Dr.
Chen's family. Dr. Chen disclaims beneficial ownership of these shares.
(4) Includes shares held by the "Pollock family revocable trust" of
which Mr. Pollock is a trustee and has voting and dispositive power over,
and held by certain members of Mr. Pollock's family, beneficial
ownership of which is disclaimed by Mr. Pollock.
(5) Includes shares held by North America Venture Fund, L.P., an
affiliate of China Development Industrial Bank U.S. Venture Capital
Operations. Mr. Lau is the Managing Director of China Development
Industrial Bank U.S. Venture Capital Operations. However, Mr. Lau
disclaims beneficial ownership of the shares held by North America Venture
Fund, L.P., except to the extent of this pecuniary interest in these
shares.
(6) The following table indicates those people whose total number of
beneficially owned shares include shares subject to a right of repurchase
in favor of WaveSplitter as of November 30, 2000 which right of repurchase
lapses ratably over time:
<TABLE>
<CAPTION>
Shares
Subject to
Repurchase
----------
<S> <C>
Jerry R. Bautista, Ph.D...........................................
Sheau Sheng Chen, Ph.D............................................
William H. Diamond, Jr............................................
Bruce C. Pollock..................................................
Henry R. Nothhaft.................................................
Executive officers and directors as a group.......................
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this offering, we will be authorized to issue 400
million shares of common stock, $0.001 par value per share, and 10 million
shares of preferred stock, $0.001 par value per share. The following
description summarizes information regarding our capital stock. This
information does not purport to be complete and is subject in all respects to
the applicable provisions of the Delaware General Corporation Law, our
certificate of incorporation and our bylaws.
Common Stock
As of September 30, 2000, we had shares of common stock outstanding held
of record by approximately stockholders. Each share of common stock
entitles the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors. Holders of common stock are
entitled to receive ratably the dividends, if any, declared from time to time
by the board of directors out of legally available funds. Holders of common
stock have no conversion, redemption or preemptive rights to subscribe to any
of our securities. In the event of any liquidation, dissolution or winding-up
of our affairs, holders of common stock will be entitled to share ratably in
our assets remaining after provision for payment of liabilities to creditors.
The rights, preferences and privileges of holders of common stock are subject
to the rights of the holders of any shares of preferred stock which we may
issue in the future.
Preferred Stock
The board of directors has the authority, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, which may be greater
than the rights of the common stock. We cannot predict the effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of the preferred stock. However, the effects could include one or more
of the following:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of us without further action
by the stockholders.
Upon the consummation of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
Registration Rights
Upon completion of the offering, the holders of an aggregate of approximately
shares of common stock, including shares issuable upon exercise of
outstanding warrants, will be entitled to rights with respect to the
registration of these shares under the Securities Act of 1933, as amended, or
the Securities Act. Under the terms of the registration rights agreements, if
we propose to register any of its securities under the Securities Act, either
our own account or for the account of other securityholders exercising
registration rights, these holders are entitled to notice of this registration
and are entitled to include shares of common stock in the registration. The
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering subject to the registration to limit the number of
shares included in the registration. These registration rights have been waived
with respect to this offering. Holders of these rights may also require us to
file a registration statement under the Securities Act of 1933 at our expense
with respect to their shares of
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common stock, and we are required to use our best efforts to effect this
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require us to file additional registration
statements on Form S-3, subject to conditions and limitations.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Generally, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless (i) before the date of the business combination, the
transaction is approved by the board of directors of the corporation, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding stock, or (iii) on or after the date the business combination is
approved by the board and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by our board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. will serve as Transfer Agent and
Registrar for our common stock.
Listing
WaveSplitter has applied to have its common stock quoted on the Nasdaq
National Market under the trading symbol "WVSP."
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SHARES ELIGIBLE FOR FUTURE SALE
Our current stockholders hold a substantial number of shares, which they will
be able to sell in the public market in the future. Sales of a substantial
number of shares of our common stock could cause our stock price to fall. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock.
After this offering, we will have outstanding shares of common stock.
This includes shares that we are selling in the offering, which may be
resold immediately in the public market. The remaining shares will become
eligible for resale in the public market as shown in the table below.
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Sale
---------------- -----------------------------
<C> <S>
-- As of the date of the prospectus
120 days after the date of this prospectus if we do not
complete a follow-on public offering within this 120 day
period. If we complete a follow-on public offering within
this period, none of these shares will be eligible for resale
at this time.
180 days after this prospectus, if we do not complete a
follow-on public offering within 120 days after the date of
this prospectus. If we complete a follow-on public offering
within 120 days after the date of this prospectus, all of
these additional shares, as well as the shares noted in the
preceding paragraph, will be eligible for resale upon the
later of (a) 180 days after the date of this prospectus or
(b) 90 days after the date of the prospectus relating to the
follow-on public offering. All of the shares subject to
resale set forth in this and the preceding paragraph are
restricted by virtue of a lock-up agreement with the
underwriters. The underwriters may release all or a portion
of the shares subject to these agreements at any time without
public notice.
Between 180 days and 365 days after the date of this
prospectus, or between 120 and 365 days if we do not complete
a follow-on public offering within 120 days of the date of
this prospectus, these additional shares will become eligible
for resale, subject to the resale limitations, including
where applicable, volume limitations, of Rule 144 under the
Securities Act.
</TABLE>
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
66
<PAGE>
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell their shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
their shares. However, substantially all Rule 701 shares are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements described in the preceding table.
We intend to file a Registration Statement on Form S-8 registering shares of
common stock subject to outstanding options or reserved for future issuance
under our stock plans.
67
<PAGE>
UNDERWRITING
WaveSplitter and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Bear, Stearns & Co. Inc. and U.S. Bancorp Piper Jaffray
Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
J.P. Morgan Securities Inc. ................................
Bear, Stearns & Co. Inc. ...................................
U.S. Bancorp Piper Jaffray Inc. ............................
------
Total...................................................
======
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from WaveSplitter to cover such sales. They may exercise that option for
30 days. If any shares are purchased under this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by WaveSplitter. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by WaveSplitter
--------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
of such securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $
per share from the initial public offering price. If all the shares are not
sold at the initial public offering price, the representatives may change the
offering price and the other selling terms.
WaveSplitter has agreed with the underwriters not to dispose of or hedge any
of its common stock or securities convertible into or exchangeable for shares
of common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This agreement does not apply to
any existing employee benefit plans.
WaveSplitter's directors, officers and substantially all of its stockholders
have agreed with the underwriters not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This restriction shall terminate
as to 15% of the locked-up shares 120 days after the date of this prospectus if
WaveSplitter does not complete a follow-on offering within 120 days after the
date of this prospectus. If Wavesplitter does complete a follow-on offering
within 120 days after the date of this prospectus, then the restriction will
expire the later of 180 days after the date of the prospectus or 90 days after
the date of the prospectus relating to the follow-on offering, resulting in a
maximum 210 day lock-up period. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
68
<PAGE>
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among WaveSplitter and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be WaveSplitter's historical performance, estimates of the
business potential and earnings prospects of WaveSplitter, an assessment of
WaveSplitter's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
WaveSplitter has applied to have its common stock quoted on the Nasdaq
National Market under the symbol "WVSP".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the overallotment option. "Naked" short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely effect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
common stock made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have the
effect of preventing or retarding a decline in the market price of our stock,
and together with the imposition of the penalty bid, may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
At the request of WaveSplitter, the underwriters are reserving up to
shares of common stock for sale at the initial public offering price to
directors, officers, employees and friends through a directed share program.
The number of shares of common stock available for sale to the general public
in the public offering will be reduced to the extent these persons purchase
these reserved shares sold. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same basis as the
other shares offered hereby.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
WaveSplitter estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $ .
WaveSplitter has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
69
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed upon
for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California.
Attorneys of Skadden, Arps, Slate, Meagher & Flom LLP, and an investment
partnership comprised of partners of that firm beneficially own an aggregate of
111,712 shares of common stock. Select legal matters in connection with this
offering will be passed upon for the underwriters by Simpson Thacher &
Bartlett, Palo Alto, California.
EXPERTS
The financial statements of WaveSplitter Technologies, Inc. as of December
31, 1998 and 1999 and for each of the three years in the period ended December
31, 1999 included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given the
authority of said firm as experts in auditing and accounting.
CHANGE IN INDEPENDENT AUDITORS
In August 2000, we engaged PricewaterhouseCoopers LLP to replace Deloitte &
Touche LLP as our independent auditors. Our board of directors approved the
decision to change independent auditors. We had no disagreements with Deloitte
& Touche LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures which, if not resolved to
the satisfaction of Deloitte & Touche LLP, would have caused them to make
reference to the matter in their report.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration statement
on Form S-1 under the Securities Act with respect to the shares of common stock
being offered. This prospectus does not contain all of the information
described in the registration statement and the related exhibits and schedules.
For further information with respect to WaveSplitter and the common stock being
offered, reference is made to the registration statement and the related
exhibits and schedule. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the reference. A
copy of the registration statement and the related exhibits and schedule may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048, and copies of all or any
part of the registration statement may be obtained from these offices upon the
payment of the fees prescribed by the Commission. Information on the operation
of the Public Reference Room may be obtained by calling the Commission at 1-
800-SEC-0330. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
70
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... 2
Balance Sheets as of December 31, 1998 and 1999 and for the six months
ended June 30, 2000 (unaudited).......................................... 3
Statement of Operations for the years ended December 31, 1997, 1998 and
1999 and for the six months ended June 30, 1999 (unaudited) and 2000
(unaudited).............................................................. 4
Statement of Stockholders' Deficit for the years ended December 31, 1997,
1998 and 1999 and for the six months ended June 30, 2000 (unaudited)..... 5
Statement of Cash Flows for the years ended December 31, 1997, 1998 and
1999 and for the six months ended June 30, 1999 (unaudited) and 2000
(unaudited).............................................................. 6
Notes to Financial Statements............................................. 7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
WaveSplitter Technologies, Inc.
The reincorporation described in Note 11 to the financial statements has not
been consummated at October 4, 2000. When consummated, we will be in a position
to furnish the following report:
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of WaveSplitter Technologies, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 15, 2000
F-2
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- June 30, June 30,
1998 1999 2000 2000
------- -------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 1,336 $ 10,994 $ 13,215
Accounts receivable............... 93 152 1,263
Inventories....................... -- 184 526
Prepaid expenses and other current
assets........................... 378 127 264
------- -------- --------
Total current assets............ 1,807 11,457 15,268
Property and equipment, net......... 1,793 3,513 4,319
Investment in Browave............... 450 450 --
Other assets........................ 573 715 1,023
------- -------- --------
Total assets.................... $ 4,623 $ 16,135 $ 20,610
======= ======== ========
LIABILITIES, CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................. $ 481 $ 584 $ 716
Accrued liabilities............... 566 1,087 1,857
Capital leases, current portion... -- 403 780
Note payable, current portion..... -- 281 480
------- -------- --------
Total current liabilities......... 1,047 2,355 3,833
Note payable, long-term portion... -- -- 482
Capital lease, long-term portion.. -- 2,082 1,658
------- -------- --------
Total liabilities............... 1,047 4,437 5,973
------- -------- --------
Commitments (Note 5)
Series A, B, C, D and E Convertible
Preferred Stock and warrants....... 11,004 32,141 42,072
------- -------- --------
Stockholders' deficit:
Preferred Stock, $.001 par value,
10,000,000 shares authorized; no
shares issued or outstanding.....
Common Stock, $.001 par value;
400,000,000 shares authorized;
2,839,960, 4,659,280 and
11,193,697 (unaudited) shares
issued and outstanding at
December 31, 1998, 1999 and June
30, 2000 (unaudited),
respectively..................... 4 5 12 61
Additional paid in capital........ 44 1863 17,264 59,287
Stockholders' notes receivable.... -- (81) (1,389) (1,389)
Deferred stock compensation....... -- (1,014) (12,235) (12,235)
Accumulated deficit............... (7,476) (21,216) (31,087) (31,087)
------- -------- -------- --------
Total stockholders' deficit..... (7,428) (20,443) (27,435) $ 14,637
------- -------- -------- --------
Total liabilities, convertible
preferred stock and
stockholders' deficit.......... $ 4,623 $ 16,135 $ 20,610
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
-------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue......................... $ -- $ -- $ 103 $ -- $ 1,554
Cost of revenue (exclusive of
non-cash stock-based
compensation of $0, $0, $27 in
1997, 1998, 1999, $0, $239 for
the six months ended June 30,
1999 and 2000)................. -- -- 682 -- 3,205
Stock-based compensation........ -- -- 27 -- 239
------- ------- -------- ------- -------
Excess of cost of revenue over
revenue........................ -- -- (606) -- (1,890)
------- ------- -------- ------- -------
Operating expenses:
Research and development
(exclusive of non-cash stock-
based compensation of $23, $0
and $294 in 1997, 1998 and
1999, $80 and $360 for the
six months ended June 30,
1999 and 2000)............... 740 3,541 7,708 3,640 2,381
Sales and marketing (exclusive
of non-cash stock-based
compensation of $5, $0 and
$161 in 1997, 1998 and 1999,
$98 and $412 for the six
months ended June 30, 1999
and 2000).................... 279 1,229 2,494 977 1,786
General and administrative
(exclusive of non-cash stock-
based compensation of $9, $0
and $215 in 1997, 1998 and
1999, $75 and $1,513 for the
six months ended June 30,
1999 and 2000)............... 346 867 2,116 967 1,652
Stock-based compensation...... 37 -- 670 253 2,285
------- ------- -------- ------- -------
Total operating expenses..... 1,402 5,637 12,988 5,837 8,104
------- ------- -------- ------- -------
Loss from operations............ (1,402) (5,637) (13,594) (5,837) (9,994)
Interest income................. 22 118 343 40 429
Interest expense................ -- (18) (488) (255) (306)
Other income (expense).......... -- 5 (1) (2) --
------- ------- -------- ------- -------
Net loss........................ (1,380) (5,532) (13,740) (6,054) (9,871)
Accretion of Series B
convertible preferred stock.... (200) -- -- -- --
------- ------- -------- ------- -------
Net loss applicable to common
stock.......................... $(1,580) $(5,532) $(13,740) $(6,054) $(9,871)
======= ======= ======== ======= =======
Basic and diluted net loss per
common stock................... $ (0.73) $ (1.96) $ (4.24) $ (1.92) $ (1.81)
======= ======= ======== ======= =======
Basic and diluted weighted
average shares outstanding..... 2,166 2,828 3,239 3,153 5,451
======= ======= ======== ======= =======
Basic and diluted proforma net
loss per common stock
(unaudited):................... $ (0.35) $ (0.18)
======== =======
Basic and diluted weighted
average shares used in
computing pro forma net loss
per common stock (unaudited)... 39,468 54,742
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock Additional Stockholders' Total
-------------- Paid in Notes Deferred Accumulated Stockholders'
Shares Amount Capital Receivable Compensation Deficit Deficit
------ ------ ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 5,656 $ 6 $ 347 $ -- $ -- $ (212) $ 141
Conversion of common
stock into series A
preferred stock........ (5,656) (6) (347) -- -- -- (353)
Issuance of common stock
to founders for cash
and services........... 3,000 3 6 -- -- -- 8
Repurchase of common
stock issued to
founders............... (344) (1) (1) -- -- -- (1)
Exercise of common stock
options................ 100 1 1 -- -- -- 2
Deferred stock
compensation........... -- 37 -- (37) -- --
Amortization of deferred
compensation........... -- -- -- -- 37 -- 37
Repurchase of series A
preferred stock in
excess of the original
issuance price......... -- -- -- -- -- (152) (152)
Accretion of series B
preferred stock issued
at $0.15............... -- -- -- -- -- (200) (200)
Net loss................ -- -- -- -- -- (1,380) (1,380)
------ --- ------- ------- -------- -------- --------
Balance at December 31,
1997................... 2,756 3 43 -- -- (1,944) (1,898)
Exercise of common stock
options................ 84 1 1 -- -- -- 2
Net loss................ -- -- -- -- (5,532) (5,532)
------ --- ------- ------- -------- -------- --------
Balance at December 31,
1998................... 2,840 4 44 -- -- (7,476) (7,428)
Exercise of common stock
options................ 1,819 1 108 (81) -- -- 28
Deferred stock
compensation........... -- 1,553 -- (1,553) -- --
Issuance of common stock
options to
consultants............ -- -- 158 -- (158) -- --
Amortization of deferred
compensation........... -- -- -- -- 697 -- 697
Net loss................ -- -- -- -- -- (13,740) (13,740)
------ --- ------- ------- -------- -------- --------
Balance at December 31,
1999................... 4,659 5 1,863 (81) (1,014) (21,216) (20,443)
Conversion of series A
preferred stock into
common stock
(unaudited)............ 569 1 35 -- -- -- 36
Exercise of common stock
options (unaudited).... 5,966 6 1,621 (1,308) -- -- 319
Issuance of options to
consultants
(unaudited)............ -- -- 1,801 -- (1,801) -- --
Issuance of options to
employees (unaudited).. -- -- 11,944 -- (11,944) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 2,524 -- 2,524
Net loss (unaudited).... -- -- -- -- -- (9,871) (9,871)
------ --- ------- ------- -------- -------- --------
Balance at June 30, 2000
(unaudited)............ 11,194 $12 $17,264 $(1,389) $(12,235) $(31,087) $(27,435)
====== === ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(1,380) $(5,532) $(13,740) $ (6,054) $ (9,871)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................. 68 275 685 258 566
Accretion of capital lease.... -- -- 24 12 12
Loss on sale of property and
equipment.................... -- 48 -- -- --
Gain on sale of investment.... -- -- -- -- (32)
Amortization of stock-based
compensation................. 37 -- 697 253 2,524
Amortization of debt discount
on line of credit............ 7 -- 20 -- 60
Amortization of debt discount
on bridge loan............... -- -- 151 131 --
Non-cash interest expense..... -- -- 34 34 --
Change in assets and
liabilities:
Accounts receivable........... (9) (84) (59) 43 (1,111)
Inventories................... -- -- (184) -- (342)
Prepaid expenses and other
assets....................... (13) (364) 311 316 (137)
Other assets.................. (18) (131) (63) (54) (380)
Accounts payable.............. (12) 457 103 381 132
Accrued liabilities........... 35 499 521 383 770
------- ------- -------- -------- --------
Net cash used in operating
activities.................. (1,285) (4,832) (11,500) (4,297) (7,809)
------- ------- -------- -------- --------
Cash flows from investing
activities:
Investment in Browave......... -- (450) -- -- 482
Purchase of property and
equipment.................... (431) (2,049) (1,331) (419) (1,372)
Sale of property and
equipment.................... -- 461 -- -- --
Restricted cash............... -- (422) -- -- --
------- ------- -------- -------- --------
Net cash used in investing
activities.................. (431) (2,460) (1,331) (419) (890)
------- ------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
common stock to founders..... 8 -- -- -- --
Proceeds from issuance of
common stock upon exercise of
options...................... 2 2 28 9 319
Repurchase of common stock.... (1) -- -- -- --
Proceeds from issuance of
convertible preferred stock,
net.......................... 2,576 7,955 18,769 -- 9,967
Repurchase of preferred
stock........................ (240) -- -- -- --
Proceeds from loan from
shareholders................. -- -- 2,000 2,000 --
Borrowings under line of
credit....................... -- -- 281 -- 681
Payments under capital lease
obligations.................. -- -- (12) -- (47)
Proceeds received in
connection with leaseback.... -- -- 1,423 1,423 --
------- ------- -------- -------- --------
Net cash provided by
financing activities........ 2,345 7,957 22,489 3,432 10,920
------- ------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents.......... 629 665 9,658 (1,284) 2,221
Cash and cash equivalents at
beginning of period........... 42 671 1,336 1,336 10,994
------- ------- -------- -------- --------
Cash and cash equivalents at
end of period................. $ 671 $ 1,336 $ 10,994 $ 52 $ 13,215
======= ======= ======== ======== ========
Supplemental disclosure of non-
cash investing and financing
activities:
Equipment acquired under
capital lease................ $ -- $ -- $ 2,497 $ 1,699 $ --
------- ------- -------- -------- --------
Note payable and accrued
interest converted to
convertible preferred stock.. $ -- $ -- $ 2,034 $ -- $ --
------- ------- -------- -------- --------
Conversion of common stock
into series A convertible
preferred stock.............. $ 354 $ -- $ -- $ -- $ --
------- ------- -------- -------- --------
Conversion of series A
preferred stock into common
stock........................ $ -- $ -- $ -- $ -- $ 36
------- ------- -------- -------- --------
Issuance of common stock
options...................... $ -- $ -- $ 1,711 $ 560 $ 13,745
------- ------- -------- -------- --------
Issuance of warrants in
connection with capital
lease, bridge loan and line
of credit ................... $ -- $ -- $ 334 $ 254 $ --
------- ------- -------- -------- --------
Exercise of stock options for
stockholders' notes
receivable................... $ -- $ -- $ 81 $ 81 $ 1,308
------- ------- -------- -------- --------
Supplemental disclosure of cash
flow information:
Cash paid during the period
for interest................. $ -- $ -- $ 291 $ 66 $ 205
------- ------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--The Company and Significant Accounting Policies:
The Company
WaveSplitter Technologies, Inc. (the "Company"), was incorporated as Applied
Fiber Optics Inc. in California on January 2, 1996. The Company develops,
manufactures and markets high performance optical components and modules based
on fused fiber and planar lightguide circuit technologies for use in next
generation optical communication networks that enable optical systems
manufacturers and service providers to increase the capacity of optical
networks, extend the reach of optical signals in core networks and build
flexible, scalable and cost-effective metropolitan area networks. In February
1999, Applied Fiber Optics Inc. amended its articles of incorporation, changing
its name to WaveSplitter Technologies, Inc.
During the period from inception until November 30, 1999, the Company was in
the development stage and received payments of $24,000, $183,000, and $420,000
for the years ended December 31, 1997, 1998 and 1999, respectively, for the
shipment of evaluation units. Since the Company was in the development stage
and the evaluation units were of a prototype nature, such payments have been
recorded as a reduction in research and development expenses. Other development
stage activities principally involved product design and development,
development of a supplier base and establishing markets for products. Because
the Company was in the development stage through the fourth quarter of 1999,
the statements of operations and cash flows for periods through December 31,
1999 should not be viewed as representative of normal operations.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash equivalents
All short-term investments with a remaining contractual maturity, at date of
purchase, of three months or less are considered to be cash equivalents.
Restricted cash
The Company maintains a restricted cash balance of $422,000 as security for a
standby letter of credit issued to its facility lessor. The balance is included
in other assets at December 31, 1998 and 1999 and at June 30, 2000.
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, receivables, accounts payable and accrued
liabilities approximate fair value due to their short maturities. The reported
amounts of line of credit and capital lease obligations approximate fair value
due to the market interest rates which these debts bear.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out ("FIFO") method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.
F-7
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is provided using the straight-line
method over the estimated useful life of the assets, which range from three to
five years. Leasehold improvements are amortized over the shorter of their
estimated useful life, or the term of the lease.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets based upon the expected undiscounted cash flows and recognizes
impairments from the carrying value of long-lived assets, if any, based on the
fair value of such assets.
Investment
The Company accounts for its investment in Browave Corporation, a privately-
held Taiwanese company, at cost, subject to periodic assessments for other-
than-temporary impairment. In March 2000, the Company sold its investment in
Browave for $482,000.
Revenue recognition
The Company recognizes revenue from product sales upon shipment. The Company
also accrues estimated returns and warranty costs upon shipment.
Concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. The Company limits its exposure to credit
loss by placing its cash and cash equivalents with high credit quality
financial institutions. Concentrations of credit risk with respect to trade
accounts receivable are considered to be limited due to the credit quality of
the customers comprising the customer base. The Company performs ongoing credit
evaluations of its customers financial condition to determine the need for an
allowance for doubtful accounts. The Company has not experienced significant
credit losses to date. At June 30, 2000 (unaudited), one customer accounted for
86% of total accounts receivable and 83% of total revenue.
Advertising costs
Advertising costs are recorded as an expense when incurred. Advertising costs
for the years ended December 31, 1997, 1998, 1999 and the six month period
ended June 30, 2000 (unaudited) were $111,000, $325,000, $196,000 and $166,000,
respectively.
Debt
The Company accounts for debt issued with detachable warrants in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 14,
"Accounting for Convertible Debt and Debt Issued With Stock Purchase Warrants."
APB Opinion No. 14 requires debt discount to be recorded, based on the relative
fair values of each class of security, determined separately, at the time of
issuance and amortized over the term of the debt security.
F-8
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and Financial Accounting Standards Board Interpretation ("FIN")
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans," and complies with the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." Under APB Opinion No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to
acquire the stock. SFAS No. 123 defines a "fair value" based method of
accounting for an employee stock option or similar equity investment. The pro
forma disclosures of the difference between compensation expense included in
net loss and the related cost measured by the fair value method are presented
in Note 8. The Company accounts for equity instruments issued to non-employees
in accordance with the provisions of SFAS No. 123 and EITF No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services."
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax laws; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net loss per share
The Company computes net loss per share available to common stockholders in
accordance with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting
Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98,
basic and diluted net loss per share available to common stockholders is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. The calculation of diluted net loss per share available to common
stockholders excludes potential Common Stock if the effect is anti-dilutive.
Potential common stock are comprised of unvested restricted Common Stock,
incremental common shares issuable upon the exercise of stock options and
warrants and upon conversion of Series A, Series B, Series C and Series D
Convertible Preferred Stock.
F-9
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth potential shares of Common Stock that are not
included in the diluted net loss per share calculation because to do so would
be antidilutive for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Total potential Common
Stock:
Restricted Common
Stock subject to
repurchase........... -- -- 1,006,670 1,156,670 5,170,235
Options outstanding... 1,793,200 2,889,200 4,141,665 3,077,233 4,227,587
Shares resulting from
the conversion
of the:
Series A convertible
preferred stock..... 4,248,000 4,248,000 4,248,000 4,248,000 3,679,000
Series B convertible
preferred stock..... 10,400,000 10,400,000 10,400,000 10,400,000 10,400,000
Series C convertible
preferred stock..... -- 11,743,120 11,743,120 11,743,120 11,743,120
Series D convertible
preferred stock..... -- -- 20,877,000 20,877,000 20,877,000
Series E convertible
preferred stock..... -- -- -- -- 3,012,720
Convertible Preferred
Stock warrants...... 80,000 80,000 760,180 600,180 760,180
---------- ---------- ---------- ---------- ----------
Total potential common
stock excluded from
the computation of
earnings per share as
their effect
was antidilutive..... 16,521,200 29,360,320 53,176,635 52,102,203 59,869,842
========== ========== ========== ========== ==========
</TABLE>
Pro Forma Stockholders' equity (unaudited)
Upon consummation of the offering, the conversion rate for all outstanding
shares of Series A, Series B, Series C, Series D and Series E Preferred Stock
will be a ratio of one share of Common Stock for each share of Preferred Stock.
Concurrent with the effectiveness of the offering, the shares of Preferred
Stock will convert into shares of Common Stock at such one-for-one conversion
rate. The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma Stockholders' Equity at June 30, 2000.
Pro Forma net loss per share (unaudited)
The pro forma net loss per share is calculated assuming that all outstanding
shares of Convertible Preferred Stock are converted into Common Stock at the
beginning of the periods presented, or on the date of issuance of the Preferred
Stock, whichever is later.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information." The
Company identifies its operating segment based on business activities and
management responsibility. For all periods presented, the Company operated in a
single business segment, optical components.
F-10
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that
the corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type of
hedging relationship that exists. SFAS No. 133 will be effective for fiscal
years beginning after June 15, 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company's
revenue recognition policies comply with SAB 101.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an
interpretation of APB Opinion No. 25" ("FIN 44"). This Interpretation clarifies
the definition of employee for the purposes of applying Accounting Practice
Board Opinion No. 25, "Accounting for Stock Issued to Employees," the criteria
for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. This Interpretation is effective
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
Company believes that FIN 44 will not have a material effect on the financial
position or results of operations of the Company.
F-11
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31
---------------------- June 30,
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable.................. $ 103,000 $ 162,000 $ 1,298,000
Allowance for doubtful accounts...... (10,000) (10,000) (35,000)
---------- ---------- -----------
$ 93,000 $ 152,000 $ 1,263,000
========== ========== ===========
Property and Equipment:
Computers and equipment.............. $2,043,000 $3,557,000 $ 4,834,000
Furniture and fixtures............... 49,000 305,000 367,000
Leasehold improvements............... 4,000 639,000 672,000
---------- ---------- -----------
2,096,000 4,501,000 5,873,000
Accumulated depreciation and
amortization........................ (303,000) (988,000) (1,554,000)
---------- ---------- -----------
$1,793,000 $3,513,000 $ 4,319,000
========== ========== ===========
Depreciation expense for the year ended December 31, 1997, 1998, 1999 and the
six month period ended June 30, 2000 (unaudited) was $68,000, $275,000,
$685,000 and $566,000, respectively.
At December 31, 1999 and June 30, 2000 (unaudited), property and equipment
included $2,497,000 of assets under capital lease. There were no assets under
capital lease at December 31, 1998. Accumulated amortization related to
equipment under capital leases at December 31, 1999 and June 30, 2000
(unaudited) totaled approximately $502,000 and $771,000 (unaudited),
respectively.
Accrued liabilities:
Payroll and related expenses......... $ 245,000 $ 500,000 $ 733,000
Other................................ 321,000 587,000 1,124,000
---------- ---------- -----------
$ 566,000 $1,087,000 $ 1,857,000
========== ========== ===========
</TABLE>
Note 3--Borrowings:
Line of credit
In October 1997, the Company entered into a line of credit agreement with a
financial institution for borrowings of up to $400,000. The Company had no
outstanding balances at December 31, 1997 and 1998. In October 1999, the
Agreement was amended to include an equipment line and a revolving line of
credit with borrowing limits of $1,000,000 and $2,500,000, respectively.
Borrowings under the equipment line and the revolving line of credit bear
interest at the prime rate and the prime rate plus 0.5%, respectively. The
revolving line expires on December 31, 2001. All outstanding balances under the
equipment line at May 31, 2000 were converted to a 24-month term loan with a
maturity date of May 31, 2002.
Borrowings outstanding under the equipment line of credit at December 31,
1999 and June 30, 2000 (unaudited) were $281,000 and $962,000, respectively.
The Company had no outstanding balances at December 31, 1999 and June 30, 2000
(unaudited) under the revolving line of credit.
F-12
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Bridge loan
In April 1999, the Company received bridge loans, aggregating $2,000,000,
from existing investors. The loans bore interest at a rate of 8% per annum. The
loans and the interest totaling $2,034,000 automatically converted into
2,034,000 shares of the Company's Series D Convertible Preferred Stock upon the
closing of the Company's sale of Series D Convertible Preferred Stock in July
1999. In connection with the loans, the Company granted warrants to the lenders
to purchase 300,000 shares of the Company's Series D Convertible Preferred
Stock. The fair value of the warrants, estimated using the Black-Scholes model,
totaled $151,000 which was recorded as a debt discount on the loans, to be
amortized over the life of the loans as additional interest. In July 1999, the
balance of the debt discount, was recorded to interest expense upon the
conversion of the bridge loans to Series D Convertible Preferred Stock.
Note 4--Income Taxes:
No provision or benefit for federal or state income taxes has been recorded
for the years ended December 31, 1997, 1998 and 1999, as a result of the
Company's net operating losses.
At December 31, 1998 and 1999 and June 30, 2000 (unaudited), the Company has
the following approximate net operating loss carryforwards and tax credit
carryforwards available to reduce future taxable income, if any (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 June 30, 2000
--------------- ---------------
Federal State Federal State
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net operating loss carryforwards............ $18,958 $19,036 $25,579 $25,680
Tax credit carryforwards.................... 192 275 250 354
</TABLE>
These losses are available to reduce future taxable income and expire in
varying amounts beginning 2005 and 2020 for state and federal tax purposes,
respectively. The income tax benefit from the utilization of net operating loss
carryforwards may be limited in certain circumstances including, but not
limited to, cumulative stock ownership changes of more than 50% over a three
year period.
The primary components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Net operating loss carryforwards............... $ 2,813 $ 7,556 $ 10,195
Tax credits.................................... 167 374 484
Reserves and accrued expenses.................. 5 318 411
Deferred compensation.......................... -- 51 696
Property and equipment......................... (35) 50 370
------- ------- --------
2,950 8,349 12,156
Valuation allowance............................ (2,950) (8,349) (12,156)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
Based on a number of factors, including the lack of history of profits and
the fact that the Company competes in a developing market that is characterized
by rapidly changing technology,
F-13
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance has
been provided.
Note 5--Commitments:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2006. Rent expense for
the years ended December 31, 1997, 1998, 1999 and the six month period ended
June 30, 2000 (unaudited) totaled $89,000, $211,000, $1,183,000 and $923,000,
respectively.
In June 2000, the Company entered into an operating lease for a facility
effective 120 days after delivery of shell for buildout, which is expected to
be December 1, 2000. The lease has a term of ten years with minimum lease
payments of $1,214,000 for the first two years, escalating at 4% annually
thereafter. Under the terms of the lease the Company is required to pay a
$1,200,000 security deposit of which up to $1,000,000 can be in the form of a
letter of credit. The amount of the security deposit is subject to reduction
following the completion of an Initial Public Offering with gross proceeds of
greater than $50 million.
Future minimum lease payments under this lease are excluded from the
commitments mentioned in the table below.
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ---------- ----------
<S> <C> <C>
2000................................................. $ 844,000 $1,158,000
2001................................................. 1,107,000 995,000
2002................................................. 851,000 1,020,000
2003................................................. 486,000 1,053,000
2004................................................. -- 1,085,000
Thereafter........................................... -- 1,399,000
---------- ----------
Total minimum lease payments....................... 3,288,000 $6,710,000
==========
Less: Amount representing interest................... 803,000
----------
Present value of net minimum lease payments.......... 2,485,000
Less: Current portion................................ (403,000)
----------
$2,082,000
==========
</TABLE>
F-14
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6--Convertible Preferred Stock:
Convertible Preferred Stock consists of the following:
<TABLE>
<CAPTION>
Shares Proceeds
----------------------- Per Share Net of
Authorized Outstanding Amount Issuance Costs
---------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Series A.................... 4,248,000 4,248,000 $0.06 $ 266,000
Series B.................... 10,480,000 2,000,000 0.15 295,000
5,200,000 0.25 1,288,000
3,200,000 0.31 993,000
---------- -----------
10,400,000 2,576,000
Series C.................... 11,963,300 11,743,120 0.68 7,955,000
---------- ---------- -----------
Balance at December 31,
1998....................... 26,691,300 26,391,120 10,797,000
---------- ---------- -----------
Series D.................... 21,337,000 20,877,000 1.00 20,803,000
---------- ---------- -----------
Balance at December 31,
1999....................... 48,028,300 47,268,120 31,600,000
---------- ---------- -----------
Conversion of Series A
Preferred Stock into Common
Stock...................... (569,000) (569,000) 0.06 (36,000)
Series E.................... 3,512,720 3,012,720 3.32 9,967,000
---------- ---------- -----------
Balance at June 30, 2000
(unaudited)................ 50,972,020 49,711,840 $41,531,000
========== ========== ===========
</TABLE>
The holders of the Convertible Preferred Stock have certain rights and
preferences as follows:
Dividends
Holders of Series A, Series B, Series C and Series D Convertible Preferred
Stock are entitled to receive non-cumulative annual dividends of $0.004,
$0.015, $0.041 and $0.06 per share (appropriately adjusted for stock splits,
dividends, and recapitalizations), respectively, when and if declared by the
Company's Board of Directors. Such dividends are payable in preference to any
dividends for Common Stock declared by the Board of Directors. No dividends
have been declared to date.
Conversion
Each share of Series A, Series B, Series C and Series D Convertible Preferred
Stock is convertible at the option of the holder, at any time, into shares of
Common Stock on a one-for-one exchange ratio. This formula is subject to
adjustment, as defined, which provides anti-dilution protection for holders of
the Convertible Preferred Stock in the event of Common Stock issuance, splits
and recapitalizations. Conversion is automatic upon the effective date of a
public offering of Common Stock with a price per share of at least $1.88 and
for which the aggregate proceeds equal or exceed $20,000,000, net of
underwriting discounts and commissions. A total of 48,028,300 shares of Common
Stock have been reserved for issuance upon the conversion of Preferred Stock.
Liquidation
In the event of any liquidation, dissolution, winding up or the sale of all
or substantially all of the assets, where less than 50% of the voting power is
maintained by the Company, the holders of Series A, Series B, Series C and
Series D Convertible Preferred Stock shall be entitled to receive an
F-15
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
amount per share, prior and in preference to any distribution to the holders of
Common Stock, and in the following sequence. The holders of Series C and D
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of Series A and B Preferred Stock, an amount per
share of $0.68 and $1.00, respectively, plus any declared but unpaid dividends.
If the assets of the Company are insufficient to permit the full liquidation
preference for Series C and D Preferred Stock holders, then the entire assets
of the Company shall be distributed pro rata among the holders in proportion to
the number of shares multiplied by their liquidation preference for such
shares.
After payment has been made to the holders of the Series C and D Preferred
Stock, the holders of Series A and B Preferred Stock shall be entitled to
receive, prior and in preference to any distribution to the holders of Common
Stock, the amount per share of $0.06 and $0.25, respectively, plus any declared
but unpaid dividends. Any amounts remaining, after such distribution, shall be
distributed ratably among the holders of Preferred Stock and Common Stock. A
merger, acquisition, sale of voting control or sale of substantially all of the
assets of the Company, in which the shareholders of the Company do not own a
majority (50% or more) of the outstanding shares of the surviving corporation
is deemed to be a liquidation.
Redemption
Outside certain preferences granted upon liquidation, the holders of the
Series A, B, C and D Convertible Preferred Stock have no redemption rights.
Voting
Each share of the Series A, Series B, Series C and Series D Convertible
Preferred Stock has voting rights equal to that of Common Stock on an as-
converted basis. The holders of the Series A and Series B Convertible Preferred
Stock, voting together as a single class, shall be entitled to elect one member
of the Company's Board of Directors. The holders of the Series C and Series D
Convertible Preferred Stock, voting as a separate class, shall be entitled to
elect one member of the Company's Board of Directors. The holders of Series A,
B, C and D Convertible Preferred Stock together with the holders of Common
Stock voting as a single class, on an as-converted basis, shall be entitled to
elect one member of the Board of Directors.
Sale of Series E Convertible Preferred Stock (unaudited)
On March 23, 2000, the Company completed the sale of 3,012,720 shares of
Series E Convertible Preferred Stock resulting in net proceeds to the Company
of $9,967,000. The holder of these shares of Series E Convertible Preferred
Stock has the same rights as those holders of Series A through D Convertible
Preferred Stock at December 31, 1999, except that the holder is entitled to
receive non-cumulative dividends of $0.19915 per share per annum, if and when
declared by the Board of Directors. The holder of Series E Convertible
Preferred Stock is also entitled to receive, in the event of any liquidation,
sale, dissolution or winding up of the Company, an amount of $3.32 per share,
plus any declared but unpaid dividends, prior and in preference to any
distribution to the holders of Series A and B Convertible Preferred Stock, with
the similar priority as holders of Series C and D Convertible Preferred Stock.
Conversion of Series A, B, C, D and E is automatic upon the effective date of a
public offering of common stock with a price per share of at least $3.75 and
for which the aggregate proceeds equal or exceed $20 million, net of
underwriting discounts and commissions.
F-16
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accretion of Series B Convertible Preferred Stock
On April 16, 1997 and April 18, 1997, the Company completed the sale of
2,000,000 and 5,200,000 shares of Series B Convertible Preferred Stock at $0.15
per share and $0.25 per share, respectively. As the Company estimated the fair
value of the Series B Convertible Preferred Stock to be $0.25 per share at the
date of issuance, the Company recorded a beneficial conversion feature of
$200,000 as a result of the shares having been sold at a discount. Such amount
was accrued at time of issuance and treated as a preferred stock dividend for
earnings per share purposes.
Warrants
In conjunction with a bank line of credit entered into in October 1997, the
Company issued warrants to purchase 80,000 shares of Series B Convertible
Preferred Stock at an exercise price of $0.31 per share. These warrants were
exercisable upon issuance and expire in December 2002. The estimated fair value
of these warrants measured on the date of grant, using the Black-Scholes option
pricing model, was $7,000 and was recorded as a debt discount and was fully
amortized in 1997.
In connection with a lease agreement entered into in January 1999, the
Company issued to the lessor fully vested warrants to purchase 220,180 shares
of Series C Convertible Preferred Stock at an exercise price of $0.68 per
share. These warrants may be exercised at any time prior to January 28, 2009 or
no later than five years from the effective date of an initial public offering
of the Company. The estimated fair value of these warrants measured on the date
of grant, using the Black-Scholes option pricing model, was $103,000 and was
recorded as a discount to the capital lease obligations and is being amortized
to interest expense over the term of the capital lease agreement.
In connection with the bank line of credit entered into in October 1999 (see
Note 3), the Company issued warrants to purchase 160,000 shares of Series D
Convertible Preferred Stock at an exercise price of $1.00 per share. The
warrants were exercisable upon issuance and expire on October 27, 2004. The
estimated fair value of these warrants measured on the date of grant, using the
Black-Scholes option pricing model, was $80,000 and was recorded as a debt
discount, with a corresponding amount ascribed to the value of Convertible
Preferred Stock warrants, and is being amortized to interest expense over the
term of the debt.
In conjunction with the bridge loan issued on April 6, 1999, the Company
issued warrants to purchase 300,000 shares of Series D Convertible Preferred
Stock at $1.00 per share. These warrants were exercisable upon issuance and
expire on April 6, 2004. The value of the warrants was determined to be
$151,000 using the Black-Scholes option pricing model, and was recorded as a
debt discount. The debt discount was fully amortized upon the conversion of the
loans into Series D Preferred Stock in July 1999 (see Note 3).
Note 7--Common Stock:
In June 2000, the Company's Board of Directors effected a four-for-one stock
split of its common stock. All common stock amounts in the accompanying
financial statements have been restated to give effect to the stock split. In
addition, the convertible preferred stock conversion rates have been similarly
restated.
In 1999, the Company issued 1,200,000 shares of Common Stock upon the
exercise of stock options to two employees for $81,000 in notes receivable. The
full recourse notes, with total principal balances of $81,000, bear interest at
6% per annum and mature in May 2004 and June 2004.
F-17
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the six months ended June 30, 2000, (unaudited) the Company issued
5,965,417 shares of Common Stock upon exercise of stock options to employees
and non-employees for $319,000 in cash and $1,308,000 in notes receivable. The
full recourse notes bear interest from 6% to 6.4% per annum and mature from
February to June 2005.
Under the terms of stock restriction agreements, the Company has the right to
repurchase up to 100% of unvested shares of Common Stock at the original issue
price upon employee termination. The repurchase rights expire ratably over a 48
month period with 1,006,670 and 5,170,235 (unaudited) shares of Common Stock
subject to repurchase at December 31, 1999 and at June 30, 2000 (unaudited). No
shares of Common Stock were subject to repurchase at December 31, 1998.
At December 31, 1999 and June 30, 2000 (unaudited), the Company has reserved
the following shares of Common Stock for future issuance:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Conversion of Series A Preferred Stock.............. 4,248,000 3,679,000
Conversion of Series B Preferred Stock.............. 10,400,000 10,400,000
Conversion of Series C Preferred Stock.............. 11,743,120 11,743,120
Conversion of Series D Preferred Stock.............. 20,877,000 20,877,000
Conversion of Series E Preferred Stock.............. -- 3,012,720
Exercise of Preferred Stock warrants................ 760,180 760,180
Exercise of options under stock option plan......... 9,570,128 16,570,128
---------- ----------
Total............................................. 57,598,428 67,042,148
========== ==========
</TABLE>
Note 8--Employee Stock Option Plan:
The Company's 1997 Stock Option Plan (the "Plan") authorizes the Board of
Directors to grant incentive and nonstatutory stock options to employees and
consultants of the Company for up to 5,000,000 shares of Common Stock. In April
2000, the Company amended the Plan to provide for issuance of up to 16,570,128
shares of Common Stock. The terms and conditions of the Plan are as follows:
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO shall not be less than 100% of the estimated fair
value of the shares on the date of grant and (ii) the exercise price of an ISO
granted to a 10% shareholder shall not be less than 110% of the estimated fair
value of the shares on the date of grant and are for periods not to exceed five
years. Options become exercisable at such times and under such conditions as
determined by the Board of Directors. Options generally vest over four years.
F-18
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock option plan for the years
ended December 31, 1997, 1998, 1999 and the six month period ended June 30,
2000 is presented below:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise
Outstanding Price
----------- ---------
<S> <C> <C>
Options outstanding at December 31, 1996................. -- $ --
Options granted........................................ 1,893,200 0.03
Options exercised...................................... (100,000) 0.03
Options forfeited...................................... -- --
----------
Options outstanding at December 31, 1997................. 1,793,200 0.03
Options granted........................................ 1,234,000 0.06
Options exercised...................................... (83,960) 0.03
Options forfeited...................................... (54,040) 0.03
----------
Options outstanding at December 31, 1998................. 2,889,200 0.04
Options granted........................................ 4,351,660 0.13
Options exercised...................................... (1,819,320) 0.06
Options forfeited...................................... (1,279,875) 0.06
----------
Options outstanding at December 31, 1999................. 4,141,665 0.11
Options granted (unaudited)............................ 6,210,800 1.42
Options exercised (unaudited).......................... (5,965,417) 0.27
Options forfeited (unaudited).......................... (159,461) 0.14
----------
Options outstanding at June 30, 2000 (unaudited)......... 4,227,587 1.81
==========
</TABLE>
The weighted-average minimum value of options granted during 1997, 1998, 1999
and the six month period ended June 30, 2000 were $0.01, $0.02, $0.47 and $2.70
(unaudited), respectively.
At December 31, 1999 and June 30, 2000 (unaudited), the Company had 1,123,537
and 217,923 (unaudited) options vested and exercisable, respectively. The
following table summarizes information about the stock option plan outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Vested and
Options Outstanding Exercisable
---------------------------------- ---------------------
Number Weighted-
Outstanding Average Weighted- Number Weighted-
as of Remaining Average Vested and Average
December 31, Contractual Exercise Exercisable Exercise
Exercise Prices 1999 Life Price at Year End Price
--------------- ------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.025............ 800,000 7.20 $0.025 550,000 $0.025
$0.031............ 72,725 7.92 0.031 45,266 0.031
$0.038............ 140,000 8.16 0.038 96,666 0.038
$0.068............ 1,163,880 7.69 0.068 306,561 0.068
$0.150............ 122,000 9.47 0.150 5,000 0.150
$0.200............ 1,843,060 9.71 0.200 120,044 0.200
--------- ---------
4,141,665 8.57 0.119 1,123,537 0.058
========= =========
</TABLE>
F-19
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the stock option plan
outstanding at June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
Options Vested and
Options Outstanding Exercisable
----------------------------------- ---------------------
Number Weighted- Number
Outstanding Average Weighted- Vested and Weighted-
as of Remaining Average Exercisable Average
June 30, Contractual Exercise at June 30, Exercise
Exercise Prices 2000 Life in Years Price 2000 Price
--------------- ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.031........... 11,247 7.42 $0.031 3,350 $0.031
$0.068........... 336,536 6.50 0.068 159,449 0.067
$0.150........... 60,000 8.98 0.150 21,666 0.150
$0.200........... 272,304 9.28 0.200 15,527 0.200
$0.250........... 296,000 9.60 0.250 7,715 0.250
$1.000........... 413,700 9.77 1.000 6,216 1.000
$2.500........... 2,837,800 9.98 2.500 4,000 2.500
--------- -------
4,227,587 9.59 1.811 217,923 0.164
========= =======
</TABLE>
Minimum value disclosures
Had compensation cost for the Company's option plan been determined based on
the minimum value method at the grant dates, as described in SFAS No. 123, the
Company's net loss would have been as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended
---------------------------- June 30,
1997 1998 1999 2000
------- -------- --------- -----------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C>
Net loss:
As reported.................... $(1,580) $ (5,532) $ (13,740) $ (9,871)
======= ======== ========= ========
Pro forma...................... $(1,588) $ (5,543) $ (13,825) $(10,375)
======= ======== ========= ========
Net loss per share (basic and
diluted):
As reported.................... $ (0.73) $ (1.96) $ (4.24) $ (1.81)
======= ======== ========= ========
Pro forma...................... $ (0.73) $ (1.96) $ (4.27) $ (1.90)
======= ======== ========= ========
Under SFAS No. 123, the minimum value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
<CAPTION>
Year Ended December 31, Six Months
---------------------------- Ended June
1997 1998 1999 30, 2000
------- -------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Expected lives, in years......... 10 10 10 10
Risk free interest rates......... 6.4% 5.2% 5.7% 6.1%
Dividend yield................... 0.0% 0.0% 0.0% 0.0%
</TABLE>
F-20
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred compensation
In connection with certain stock option grants to employees during the years
ended December 31, 1997, 1998, 1999 and the six month periods ended June 30,
1999 (unaudited) and 2000 (unaudited), the Company recognized deferred stock
compensation totaling $37,000, $0, $1,553,000, $523,000 and $11,944,000,
respectively, which is being amortized over the vesting period of the related
options, which is generally four years, in accordance with FIN 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans".
Amortization of deferred compensation for the years ended December 31, 1997,
1998, 1999 and the six month periods ended June 30, 1999 (unaudited) and 2000
(unaudited) totaled $37,000 $0, $639,000, $244,000 and $1,849,000,
respectively.
In connection with certain stock option grants to consultants during the year
ended December 31, 1999 and the six month periods ended June 30, 1999
(unaudited) and 2000 (unaudited), the Company recognized deferred compensation
totaling $158,000, $38,000 and $1,801,000, respectively. Amortization of
deferred compensation for the year ended December 31, 1999 and the six month
periods ended June 30, 1999 (unaudited) and 2000 (unaudited) totaled $58,000,
$9,000 and $675,000, respectively. The fair value of the options granted to
non-employees was determined using the Black-Scholes option pricing model, with
the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
----------------- ----------------
(unaudited)
<S> <C> <C>
Expected lives, in years.................. 10 years 10 years
Risk-free interest rates.................. 5.7% 6.1%
Dividend yield............................ 0% 0%
Volatility................................ 65% 65%
</TABLE>
Note 9--Qualified Retirement Plan:
Effective January 1999, the Company adopted the 401(k) Qualified Retirement
Plan (the "401(k) Plan") that qualifies as a deferred salary arrangement under
Section 401 of the Internal Revenue Service Code. Under the 401(k) Plan,
participating employees may defer a portion of their pre-tax earnings not to
exceed 15% of their total compensation. The Company, at its discretion, may
make contributions for the benefit of eligible employees. The Company has not
made matching contributions.
Note 10--Subsequent Events:
Sale of Series F Convertible Preferred Stock (unaudited)
In September 2000, the Company completed the sale of 6,012,764 shares of
Series F Convertible Preferred Stock resulting in proceeds to the Company of
$51,342,000. The holders of these shares of Series F Convertible Preferred
Stock have the same rights as those holders of Series A through E Convertible
Preferred Stock, except that they are entitled to receive non-cumulative
dividends of $0.5124 per share per annum, if and when declared by the Board of
Directors. The holders of Series F Convertible Preferred Stock are also
entitled to receive, in the event of any liquidation, sale, dissolution or
winding up of the Company, an amount of $8.54 per share, plus any declared but
unpaid dividends, prior and in preference to any distribution to the holders of
Series A and B Convertible Preferred Stock, with the similar priority as
holders of Series C, D and E Convertible Preferred Stock. In accordance with
the terms of the Series F convertible preferred stock, conversion of Series A,
B, C, D, E and F is automatic upon the effective
F-21
<PAGE>
WAVESPLITTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
date of a public offering of the Company's common stock with a price per share
of at least $13.00 and for which the aggregate proceeds equal or exceed $30
million, net of underwriting discounts and commissions. In connection with its
public offering, the Company will obtain the consent of the preferred
stockholders to convert their shares prior to the consummation of the offering.
The Company is evaluating the need to record a beneficial conversion feature in
connection with the issuance of Series F.
License of Intellectual Property (unaudited)
In September 2000, the Company entered into a patent cross-license agreement
with Lucent Technologies GRL Corp., an affiliate of Lucent Technologies, Inc.
Under the patent license agreement, Lucent's affiliate granted to us a non-
exclusive license to make, have made, sell or otherwise use various optical
devices, and we granted to this Lucent affiliate a non-exclusive license under
our patents. As partial consideration for this license, the Company issued a
warrant to this Lucent affiliate to purchase 500,000 shares of Series F
preferred stock at an exercise price of $0.01 per share. This warrant is fully
vested and exercisable for a five year period commencing with the date of
grant. The estimated fair value of the warrant of approximately $5 million was
computed using the Black-Scholes model. The fair value of the warrant will be
allocated to purchased technology (an asset that will be amortized) and to
research and development expense. The Company also agreed to pay royalties to
this Lucent affiliate commencing when cumulative revenue from the sale of
licensed products exceeds enumerated thresholds.
2000 Stock Incentive Plan (unaudited)
On September 28, 2000, the Board of Directors adopted the 2000 Stock
Incentive Plan, ("2000 Plan"), for the benefit of employees and consultants for
issuance of 16 million shares of common stock initially, which amount shall be
subject to an annual increase at the beginning of each fiscal year during the
term of the 2000 Plan equal to the lesser of (i) 4 million shares or (ii) 4% of
the number of outstanding shares of common stock on the last trading day of the
immediately preceding fiscal year. In addition, all shares remaining available
for granting of awards under the 1997 Stock Plan will be transferred to the
2000 Plan. The 2000 Plan is scheduled to take effect upon the consummation of
the initial public offering. The 2000 Plan provides for the issuance of
incentive stock options and non-qualified stock options. The exercise price of
each incentive stock option granted under this plan must be at least equal to
the fair market value of a share of Common Stock on the date the incentive
stock option is granted.
2000 Employee Stock Purchase Plan (unaudited)
As of September 28, 2000, the Board of Directors adopted the 2000 Employee
Stock Purchase Plan, ("Employee Plan"). The Employee Plan is designed to allow
eligible employees to purchase the Company's common stock at a discount from
fair market value and provided for issuance of 4 million shares of common stock
initially, with an annual increase in shares of common stock equal to the
lesser of (i) 2 million shares or (ii) 2% of the number of outstanding shares
of Common Stock on the last trading day of the immediately preceding fiscal
year. The Employee Plan is scheduled to take effect upon the consummation of
the initial public offering.
Note 11--Reincorporation in Delaware
Prior to the consummation of the initial public offering of its common stock,
the Company will reincorporate in the State of Delaware. As a result of the
reincorporation, the Company will be authorized to issue 10 million shares of
preferred stock, $0.001 par value per share, and 400 million shares of common
stock, $0.001 par value per share. The financial statements have been prepared
as if this reincorporation has occurred.
F-22
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this Prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Cautionary Note Regarding Forward-Looking Statements..................... 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 38
Management............................................................... 50
Certain Relationships and Related Transactions........................... 59
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 66
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Change In Independent Auditors........................................... 70
Additional Information................................................... 70
Index to Financial Statements............................................ F-1
</TABLE>
---------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Shares
WaveSplitter
Technologies, Inc.
Common Stock
---------------
[LOGO OF WAVESPLITTER TECHNOLOGIES, INC.]
---------------
Goldman, Sachs & Co.
J.P. Morgan & Co.
Bear, Stearns & Co. Inc.
U.S. Bancorp Piper Jaffray
Representatives of the Underwriters
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection with
the offering described in this Registration Statement, all of which will be
paid by WaveSplitter. All amounts are estimates, other than the registration
fee, the NASD fee, and the New York Stock Exchange listing fee.
<TABLE>
<S> <C>
SEC Registration fee................................................ $30,360
NASD Filing fee..................................................... 12,000
Nasdaq National Market listing fee.................................. *
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Director and officer insurance expenses............................. *
Printing and engraving expenses..................................... *
Transfer agent fees and expenses.................................... *
Blue sky fees and expenses.......................................... *
Miscellaneous fees and expenses..................................... *
Total............................................................. $ *
</TABLE>
--------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Section 102 of the Delaware General Corporation Law, or the DGCL, as amended,
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of WaveSplitter) by reason of the fact that the
person is or was a director, officer, agent or employee of WaveSplitter or is
or was serving at our request as a director, officer, agent, or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgment, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
the action, suit or proceeding. The power to indemnify applies (a) if the
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if the person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of WaveSplitter, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
power to indemnify applies to actions brought by or in the right of
WaveSplitter as well, but only to the extent of defense expenses (including
attorneys' fees but excluding amounts paid in settlement) actually and
reasonably incurred and not to any satisfaction of judgment or settlement of
the claim itself, and with the further limitation that in these actions no
indemnification shall be made in the event of any adjudication of negligence or
misconduct in the performance of his duties to WaveSplitter, unless the court
believes that in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or
II-1
<PAGE>
redemption, may be held liable for these actions. A director who was either
absent when the unlawful actions were approved or dissented at the time, may
avoid liability by causing his or her dissent to these actions to be entered in
the books containing the minutes of the meetings of the board of directors at
the time the action occurred or immediately after the absent director receives
notice of the unlawful acts.
Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages
for breach of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to WaveSplitter or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under the section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated Bylaws provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
. we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined
by our board of directors; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law.
The indemnification provisions contained in our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws are not exclusive
of any other rights to which a person may be entitled by law, agreement, vote
of stockholders or disinterested directors or otherwise. In addition, we
maintain insurance on behalf of our directors and executive officers insuring
them against any liability asserted against them in their capacities as
directors or officers or arising out of this status.
We intend to enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
the person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
Item 15. Recent Sales of Unregistered Securities.
Since inception, we have issued unregistered securities to a limited number
of persons as described below. The share numbers and per share prices below
reflect the four-for-one stock split of the outstanding common stock effected
in June 2000.
(a) Prior to December 20, 1996, Registrant issued and sold an aggregate of
5,656,000 shares of capital stock to 3 investors for $0.06 per share, or an
aggregate of $353,500. All 5,656,000 shares were converted into an aggregate of
5,656,000 shares of Series A preferred stock, effective March 15, 1997 at which
time Registrant repurchased 1,408,000 of such shares from one investor leaving
an aggregate of 4,248,000 shares outstanding. Upon the closing of this
offering, each share
II-2
<PAGE>
of Series A preferred stock will automatically convert into one share of common
stock. The foregoing purchases and sales were exempt from registration under
the Securities Act pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder on the basis that the transaction did not involve a
public offering.
(b) Effective March 15, 1997, we issued and sold an aggregate of 3,000,000
shares of common stock to 3 founders at a purchase price of $0.003 per share
for an aggregate of $7,500. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof and
Regulation D promulgated thereunder on the basis that the transaction did not
involve a public offering.
(c) On April 16, 1997, we issued and sold an aggregate of 2,000,000 shares of
Series B preferred stock to 6 investors for $0.15 per share, or an aggregate of
$300,000. On April 18, 1997, we issued and sold an aggregate of 5,200,000
shares of Series B preferred stock to 11 investors for $0.25 per share, or an
aggregate of $1,300,000. From October 20, 1997 through October 28, 1997, we
issued and sold and aggregate of 3,200,000 shares of Series B preferred stock
to 19 investors for $0.31 per share for an aggregate of $1,000,000. Upon the
closing of this offering, each share of Series B preferred stock will
automatically convert into one share of common stock. The foregoing purchases
and sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder on the basis that
the transactions did not involve a public offering.
(d) On December 24, 1997, we issued a warrant to GBC Venture Capital, Inc. to
purchase 80,000 shares of Series B preferred stock at an exercise price of
$0.31 per share. Upon the closing of this offering this warrant will be
exercisable for the number of shares of our common stock into which the Series
B preferred stock will be convertible. The issuance of this warrant was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transaction did not involve a public offering.
(e) On June 29, 1998, we issued and sold an aggregate of 11,743,120 shares of
Series C preferred stock to a total of 3 investors for $0.68 per share, or an
aggregate of $8,000,000.50. Upon the closing of this offering, each share of
Series C preferred stock will automatically convert into one share of common
stock. The foregoing purchases and sales were exempt from registration under
the Securities Act pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder on the basis that the transactions did not involve a
public offering.
(f) On January 28, 1999, we issued a warrant to Comdisco to purchase 220,180
shares of Series C preferred stock at an exercise price of $0.68 per share.
Upon the closing of this offering this warrant will be exercisable for the
number of shares of our common stock into which the Series C preferred stock
will be convertible. The issuance of this warrant was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(g) On April 6, 1999 we issued warrants to purchase an aggregate of 460,000
shares of Series D preferred stock at an exercise price of $1.00 per share to 3
existing stockholders in connection with bridge loans to us of an aggregate of
$2,000,000. Upon the closing of this offering these warrants may terminate at
our discretion, provided 20-day advance written notice has been given to the
warrantholders. The issuance of these warrants was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(h) Between July 13, 1999 and September 8, 1999, we issued and sold an
aggregate of 20,877,000 shares of Series D preferred stock to 23 investors for
$1.00 per share, for an aggregate
II-3
<PAGE>
of $20,877,000, which amount included the conversion of $2,000,000 of bridge
loans plus interest thereon at a rate of 6% from April 6, 1999. Upon the
closing of this offering, each share of Series D preferred will automatically
convert into one share of common stock. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof and Regulation D promulgated thereunder.
(i) On October 28, 1999, we issued a warrant to GBC Venture Capital, Inc. to
purchase 160,000 shares of Series D preferred stock for $1.00 per share. Upon
the closing of this offering this warrant will be exercisable for the number of
shares of our common stock into which the Series D preferred stock will have
converted. The issuance of this warrant was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(j) On March 23, 2000, we issued and sold an aggregate of 3,012,720 shares of
Series E preferred stock to 1 investor for $3.32 per share, or an aggregate of
$9,999,970.86. Upon the closing of this offering, each share of Series D
preferred stock will automatically convert into one share of common stock. The
foregoing purchase and sale was exempt from registration under the Securities
Act pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
(k) On June 30, 2000, we issued a warrant to Fremont Ventures LLC to purchase
20,000 shares of Series F preferred stock for $8.54 per share. Upon the closing
of this offering, this warrant will be exercisable for the number of shares of
our common stock into which the Series F preferred stock will be convertible.
The issuance of this warrant was exempt from registration under the Securities
Act pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
(l) On September 21, we issued and sold an aggregate of 6,012,764 shares of
Series F preferred stock to 48 investors for $8.54 per share, or an aggregate
of $51,342,030. Upon the closing of this offering, each share of Series F
preferred stock will automatically convert into one share of common stock. The
foregoing purchases and sales were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder.
(m) On September 1, 2000, we issued a warrant to Lucent Technologies GRL
Corp. to purchase 500,000 shares of Series F preferred stock at an exercise
price of $0.01 per share. Upon closing of this offering this warrant will be
exercisable for the number of shares of our common stock into which the Series
F preferred stock will be convertible. The issuance of this warrant was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof and
Regulation D promulgated thereunder.
(n) As of September 30, 2000, an aggregate of 10,471,161 shares of common
stock had been issued upon exercise of options under our 1997 Stock Plan at a
weighted average exercise price of $3.59 per share. The foregoing purchases and
sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof or Rule 701 promulgated thereunder.
The recipients in these transactions represented their intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution, and appropriate legends were affixed to the
share certificates and instruments issued in those transactions.
II-4
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
a. Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Registrant
3.2* Amended and Restated Certificate of Incorporation of the Registrant
3.3 Bylaws of the Registrant
3.4* Amended and Restated Bylaws of the Registrant
4.1* Specimen common stock certificate
4.2 Form of Fifth Amended and Restated Rights Agreement, dated as of
September 21, 2000, among the Registrant and certain holders of the
Registrant's preferred stock
4.3 Warrant to Purchase Series B Preferred Stock, dated as of December
24, 1997 issued to GBC Venture Capital, Inc.
4.4 Warrant to Purchase Series C Preferred Stock, dated as of January 28,
1999, issued to Comdisco, Inc.
4.5 Warrant to Purchase Series D Preferred Stock, dated as of April 6,
1999, issued to Mayfield IX
4.6 Warrant to Purchase Series D Preferred Stock, dated as of April 6,
1999 issued to Mayfield Associates Fund IV
4.7 Warrant to Purchase Series D Preferred Stock, dated as of April 6,
1999 issued to Lucent Venture Partners Inc.
4.8 Warrant to Purchase Series D Preferred Stock, dated as of October 28,
1999, issued to GBC Venture Capital, Inc.
4.9 Warrant to Purchase Series F Preferred Stock, dated as of June 30,
2000, issued to Fremont Ventures LLC
4.10 Warrant to Purchase Series F Preferred Stock, dated as of September
21, 2000, issued to Lucent Technologies GRL Corp.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 1997 Stock Plan, as amended, and form of stock option thereunder
10.3 Form of 2000 Stock Incentive Plan
10.4 Form of 2000 Employee Stock Purchase Plan
10.5 Letter Employment Agreement, dated as of June 16, 2000 between the
Registrant and William H. Diamond, Jr.
10.6 Form of Letter Employment Agreement between the Registrant and its
executive officers
10.7 Standard Industrial/Commercial Multi-Tenant Lease Modified Net, dated
June 27, 2000, between Fremont Ventures LLC and WaveSplitter
Technologies, Inc.
10.8 Commercial Lease Agreement, dated as of July 1, 2000, between Dream
Maker Properties, LLC and the Registrant
10.9 Commercial Lease Agreement, dated as of August 27, 1998, between
CarrAmerica Realty Corporation and the Registrant
10.10+* Patent License Agreement, dated as of September 21, 2000, between
Lucent Technologies GRL Corp. and the Registrant
16.1 Letter regarding change in independent auditors
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (See II-7)
</TABLE>
--------
* To be filed by amendment.
+ We have sought confidential treatment from the Commission for selected
portions of this exhibit. The omitted portions will be separately filed with
the Commission.
II-5
<PAGE>
b. The following financial statement schedule is filed herewith:
i) Schedule II--Valuation and Qualifying Accounts
ii) Report of Independent Accountants on Financial Statement Schedule
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing certificates in the denominations and registered in the names as
required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the maser has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b) (1) or (4) or 497 (h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on October 4, 2000.
WaveSplitter Technologies, Inc.
/s/ William H. Diamond, Jr.
By: _________________________________
William H. Diamond, Jr.
President and Chief Executive
Officer
Each person whose signature appears below hereby constitutes and appoints
William H. Diamond, Jr. and Bruce C. Pollock, and each of them, his true and
lawful attorneys-in-fact and agents 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 (i) amendments (including post-effective
amendments) and additions to this Registration Statement and (ii) Registration
Statements, and any and all amendments thereto (including post-effective
amendments), relating to the offering contemplated pursuant to Rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grants to such attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or his substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
/s/ William H. Diamond, Jr. President, Chief October 4, 2000
_________________________________ Executive Officer and
William H. Diamond, Jr. Director (Principal
Executive Officer)
/s/ Bruce C. Pollock Chief Financial Officer October 4, 2000
_________________________________ (Principal Financial
Bruce C. Pollock Officer)
/s/ Barbara M. Hubbard Vice President, Corporate October 4, 2000
_________________________________ Controller (Principal
Barbara M. Hubbard Accounting Officer)
/s/ Sheau Sheng Chen Chairman of the Board of October 4, 2000
_________________________________ Directors
Sheau Sheng Chen
/s/ David Ladd Director October 4, 2000
_________________________________
David Ladd
/s/ Charles Lau Director October 4, 2000
_________________________________
Charles Lau
/s/ Henry R. Nothhaft Director October 4, 2000
_________________________________
Henry R. Nothhaft
</TABLE>
II-7
<PAGE>
SCHEDULE II
WAVESPLITTER TECHNOLOGIES, INC.
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1998, 1999
and the six months ended June 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
beginning Charged to Credited to at end
Description of period expenses expenses of period
----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:
Fiscal year ended December 31,
1997........................... -- -- -- --
Fiscal year ended December 31,
1998........................... -- -- -- --
Fiscal year ended December 31,
1999........................... -- $ 10 -- $ 10
Six months ended June 30, 2000.. $ 10 25 -- 35
Deferred tax valuation allowance:
Fiscal year ended December 31,
1997........................... 57 598 -- 655
Fiscal year ended December 31,
1998........................... 655 2,295 -- 2,950
Fiscal year ended December 31,
1999........................... 2,950 5,399 -- 8,349
Six months ended June 30, 2000.. 8,349 3,807 -- 12,156
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
WaveSplitter Technologies, Inc.
Our audits of the financial statements referred to in our report dated
September 15, 2000 appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule listed in Item 16-b of
such Registration Statement. In our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 15, 2000
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Registrant
3.2* Amended and Restated Certificate of Incorporation of the
Registrant
3.3 Bylaws of the Registrant
3.4* Amended and Restated Bylaws of the Registrant
4.1* Specimen common stock certificate
4.2 Form of Fifth Amended and Restated Rights Agreement, dated as of
September 21, 2000, among the Registrant and certain holders of
the Registrant's preferred stock
4.3 Warrant to Purchase Series B Preferred Stock, dated as of
December 24, 1997, issued to GBC Venture Capital, Inc.
4.4 Warrant to Purchase Series C Preferred Stock, dated as of
January 28, 1999, issued to Comdisco, Inc.
4.5 Warrant to Purchase Series D Preferred Stock, dated as of April
6, 1999, issued to Mayfield IX
4.6 Warrant to Purchase Series D Preferred Stock, dated as of April
6, 1999 issued to Mayfield Associates Fund IV
4.7 Warrant to Purchase Series D Preferred Stock, dated as of April
6, 1999 issued to Lucent Venture Partners Inc.
4.8 Warrant to Purchase Series D Preferred Stock, dated as of
October 28, 1999, issued to GBC Venture Capital, Inc.
4.9 Warrant to Purchase Series F Preferred Stock, dated as of June
30, 2000, issued to Fremont Ventures LLC
4.10 Warrant to Purchase Series F Preferred Stock, dated as of
September 21, 2000, issued to Lucent Technologies GRL Corp.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2 1997 Stock Plan, as amended, and form of stock option thereunder
10.3 Form of 2000 Stock Incentive Plan
10.4 Form of 2000 Employee Stock Purchase Plan
10.5 Letter Employment Agreement, dated as of June 16, 2000 between
the Registrant and William H. Diamond, Jr.
10.6 Form of Letter Employment Agreement between the Registrant and
its executive officers
10.7 Standard Industrial/Commercial Multi-Tenant Lease Modified Net,
dated June 27, 2000, between Fremont Ventures LLC and
WaveSplitter Technologies, Inc.
10.8 Commercial Lease Agreement, dated as of July 1, 2000, between
Dream Maker Properties, LLC and the Registrant
10.9 Commercial Lease Agreement, dated as of August 27, 1998, between
CarrAmerica Realty Corporation and the Registrant
10.10+* Patent License Agreement, dated as of September 21, 2000,
between Lucent Technologies GRL Corp. and the Registrant
16.1 Letter regarding change in independent auditors
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (see II-7)
</TABLE>
--------
* To be filed by amendment.
+ We have sought confidential treatment from the Commission for selected
portions of this exhibit. The omitted portions will be separately filed
with the Commission.
