OPTICAL COMMUNICATION PRODUCTS INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-31861

OPTICAL COMMUNICATION PRODUCTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of
Incorporation or Organization)

95-4344224

(I.R.S. Employer

Identification No.)

20961 Knapp Street

Chatsworth, California 91311

(Address of principal executive offices, including zip code)

Registrant’s Telephone Number, Including Area Code: (818) 701-0164

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

As of August 8, 2002, there were approximately 42,832,400 shares of Class A common stock outstanding.

OPTICAL COMMUNICATION PRODUCTS, INC.

INDEX TO FORM 10-Q FOR THE

QUARTERLY PERIOD ENDED JUNE 30, 2002

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Balance Sheets as of June 30, 2002 (unaudited) and September 30, 2001	1
	Statements of Income (Loss) for the Three and Nine Months Ended June 30, 2002 and 2001 (unaudited)	2
	Statements of Cash Flows for the Nine Months Ended June 30, 2002 and 2001 (unaudited)	3
	Notes to Financial Statements (unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	7

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23

PART II. OTHER INFORMATION AND SIGNATURES

Item 1.	Legal Proceedings	25

Item 2.	Changes in Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 5.	Other Information	26

Item 6.	Exhibits and Reports on Form 8-K	26

Signature		27

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OPTICAL COMMUNICATION PRODUCTS, INC.

BALANCE SHEET

(Dollars In thousands)

	June 30, 2002		September 30, 2001
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	71,682	$	62,529
Marketable securities		75,874		76,102
Accounts receivable less allowance for doubtful accounts:
$559 at June 30, 2002 and $1,156 at September 30, 2001		2,970		8,004
Income taxes receivable		509
Inventories		9,350		15,852
Deferred income taxes		9,296		9,296
Prepaid expenses and other current assets		2,336		2,306

Total current assets		172,017		174,089
PROPERTY, PLANT AND EQUIPMENT, Net		30,487		30,179

TOTAL	$	202,504	$	204,268


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	471	$	471
Accounts payable		797		1,365
Accounts payable to related parties		89		1,260
Accrued bonus		2,372		1,900
Accrued expenses		2,007		2,249
Income taxes payable				428

Total current liabilities		5,736		7,673

LONG-TERM DEBT		1,471		1,825

DEFERRED INCOME TAXES		57		57

STOCKHOLDERS’ EQUITY:
Class A—common stock, $.001 par value; 200,000,000 shares authorized, 42,802,510 and 42,006,602 shares issued and outstanding at June 30, 2002 and September 30, 2001, respectively.		43		42
Class B—common stock $.001 par value; 66,000,000 shares authorized, 66,000,000 shares issued and outstanding at June 30, 2002 and September 30, 2001, respectively.		66		66
Additional paid-in capital		130,252		129,707
Retained earnings		64,879		64,898

Total stockholders’ equity		195,240		194,713

TOTAL	$	202,504	$	204,268

OPTICAL COMMUNICATION PRODUCTS, INC.

STATEMENTS OF INCOME (LOSS)

(In thousands, except per share data)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2002			2001			2002			2001
	(Unaudited)						(Unaudited)
REVENUE	$	9,837		$	39,364		$	28,298		$	129,161
COST OF REVENUE		7,145			26,296			20,594			74,870

GROSS PROFIT		2,692			13,068			7,704			54,291

EXPENSES:
Research and development		1,424			780			3,652			2,301
Selling and marketing		1,024			1,070			2,904			3,577
General and administritive		1,499			1,589			3,883			3,540

Total expenses		3,947			3,439			10,439			9,418

INCOME (LOSS) FROM OPERATIONS		(1,255	)		9,629			(2,735	)		44,873

OTHER INCOME (EXPENSE):
Interest income		758			1,919			2,527			4,822
Interest expense		(20	)		(42	)		(65	)		(148	)
Other income		75			36			241			108

OTHER INCOME, Net		813			1,913			2,703			4,782

INCOME (LOSS) BEFORE INCOME TAXES		(442	)		11,542			(32	)		49,655
INCOME TAX PROVISION (BENEFIT)		(177	)		4,617			(13	)		19,862

NET INCOME (LOSS)	$	(265	)	$	6,925		$	(19	)	$	29,793

BASIC EARNINGS (LOSS) PER SHARE	$	0.00		$	0.06		$	0.00		$	0.31

DILUTED EARNINGS (LOSS) PER SHARE	$	0.00		$	0.06		$	0.00		$	0.27

BASIC SHARES OUTSTANDING		108,460			107,613			108,195			97,667

DILUTED SHARES OUTSTANDING		108,460			112,613			108,195			111,279

OPTICAL COMMUNICATION PRODUCTS, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	June 30, 2002			June 30, 2001
	(Unaudited)
Operating Activities:
Net Income (Loss)	$	(19	)	$	29,793
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,787			919
Amortization of premium on marketable securities		1,554
Tax benefit from exercise of non-qualified stock options		398			4,760
Changes in operating assets and liabilities:
Accounts receivable, net		5,034			(1,029	)
Income taxes receivable		(509	)
Inventories		6,502			(14,761	)
Prepaid expense and other current assets		(30	)		(1,762	)
Other assets					460
Accounts payable		(568	)		(448	)
Accounts payable to related parties		(1,171	)		9,035
Accrued bonus		472			683
Accrued expenses		(242	)		1,474
Income taxes payable		(428	)		(4,207	)

Net cash provided by operating activities		12,780			24,917

Investing Activities:
Purchase of marketable securities		(46,326	)		(141,200	)
Maturities of marketable securities		45,000			79,500
Purchase of property, plant and equipment		(2,095	)		(22,801	)

Net Cash used in investing activities		(3,421	)		(84,501	)

Financing Activities:
Principal payments on long term debt		(354	)		(353	)
Proceeds from initial public offering		—			122,078
Issuance of common stock		148			350

Net Cash (used in) provided by financing activities		(206	)		122,075

Increase in cash and cash equivalents		9,153			62,491
Cash and cash equivalents, beginning of year		62,529			3,202

Cash and cash equivalents end of period	$	71,682		$	65,693

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	65		$	148
Income taxes	$	549		$	19,295

OPTICAL COMMUNICATION PRODUCTS, INC.

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Optical Communication Products, Inc., a Delaware Corporation (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America and Article 10 of the Securities and Exchange Commission’s Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In management’s opinion, the unaudited financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial statements as of June 30, 2002 and for all interim periods presented. The financial statements should be read in conjunction with the audited financial statements included in the Annual Report of the Company filed on Form 10-K with the Securities and Exchange Commission for the year ended September 30, 2001. The results of operations for the three and nine months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2002. The Company’s operations are primarily located in Chatsworth, California. The Company is a majority-owned subsidiary of The Furukawa Electric Company, Ltd. of Japan (“Furukawa”). Furukawa beneficially owned 60.7% of the Company’s common stock at June 30, 2002.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, Statement of Financial Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“FAS 144”) was issued. FAS 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-lived Assets to be Disposed of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently occurring Events and Transactions.” FAS 144 retains the fundamental provisions of FAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while resolving significant implementation issues associated with FAS 121. Among other things, FAS 144 provides guidance on how long-lived assets used as part of a group should be evaluated for impairment, establishes criteria for when long-lived assets are held for sale, and prescribes the accounting for long-lived assets that will be disposed of other than by sale. FAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of FAS 145 will not have a significant impact on our financial statements.

In April 2002, Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“FAS 145”) was issued. FAS 145 updates, clarifies and simplifies existing accounting pronouncements and is generally effective for transactions occurring after May 15, 2002. The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

OPTICAL COMMUNICATION PRODUCTS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

3. INVENTORIES

Inventories consist of the following:

	June 30, 2002		September 30, 2001
	(Unaudited)
	(in thousands)
Raw materials	$	7,491	$	10,865
Work-in-process		832		1,593
Finished goods		1,027		3,394

Total	$	9,350	$	15,852

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	June 30, 2002		September 30, 2001
	(Unaudited)
	(in thousands)				Useful Lives
Land	$	8,074	$	8,074
Buildings and improvements		16,082		15,961	39 years
Machinery and equipment		10,135		8,277	5 years
Furniture and fixtures		233		230	5 years
Computer hardware and software		701		602	3 years

		35,225		33,144
Less accumulated depreciation		4,738		2,965

	$	30,487	$	30,179

5. EARNINGS PER SHARE

The following is a calculation of basic and diluted earnings per share (“EPS”)

OPTICAL COMMUNICATION PRODUCTS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

	Three Months Ended June 30,					Nine Months Ended June 30,
	2002			2001		2002			2001
	(Unaudited)
	(in thousands, except per share data)
BASIC EPS COMPUTATION:
Net Income (Loss) applicable to common stock	$	(265	)	$	6,925	$	(19	)	$	29,793

Weighted average common shares outstanding		108,460			107,613		108,195			97,667

Basic earnings (loss) per share	$	0.00		$	0.06	$	0.00		$	0.31

DILUTED EPS COMPUTATION:
Net income (Loss) applicable to common stock	$	(265	)	$	6,925	$	(19	)	$	29,793

Weighted average common shares outstanding		108,460			107,613		108,195			97,667
Effect of diluted securities
Convertible preferred stock										8,220
Common stock option					5,000					5,392

Diluted weighted average shares outstanding		108,460			112,613		108,195			111,279

Diluted earnings (loss) per share	$	0.00		$	0.06	$	0.00		$	0.27

6. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain facilities. Lease payment are made monthly. The Company’s leases are renewable either monthly or annually. Rent expense for these leases for the nine months ended June 30, 2002 and 2001 was $50,000 and $20,000, respectively.

Legal Proceedings

On April 12, 2002, the Company resolved its patent infringement litigation with Stratos Lightwave, Inc. (“Stratos”). As part of the settlement, the Company entered into a five-year license agreement with Stratos covering Stratos’ portfolio of optoelectronic transceiver patents. In consideration of the license agreement, the Company is required to pay a total of $2 million over the license term. The Company began recognizing the expense for the licensing agreement in March 2002. At the end of the five-year term, the Company has the option to renew the license.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to such financial statements included elsewhere in this Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “may,” “will” or similar expressions are intended to identify forward-looking statements. The statements are based on current expectations and actual results could differ materially from those discussed herein. Factors that could cause or contribute to the differences are discussed below in this Report under “Risk Factors” and elsewhere in this Report, and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed with the Securities and Exchange Commission.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended September 30, 2001 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory write-downs, and accrued expenses. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.

The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected.

Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden or significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to write down our inventory and our gross margin could be adversely affected.

We use estimates in the determination of the required accrual for warranty costs. This estimate is based upon a detailed examination of past experience and current information. The information available to us may change in the future and may require us to revise this accrual.

We continually reassess our assumptions and judgments and make adjustments when significant facts and circumstances dictate. Historically, actual results have not been materially different than the estimates that are described above.

Overview

We design, manufacture and sell a comprehensive line of high performance, highly reliable fiber optic subsystems and modules for fiber optic transmission systems used to address the bandwidth limitations in metropolitan area networks and high-speed premises networks. Our subsystems and modules include optical transmitters, receivers, transceivers and transponders that convert electronic signals into optical signals and back to electronic signals, enabling high-speed communication of voice and data traffic over public and private networks. We began our operations and shipped our first products in November of 1991.

Furukawa beneficially owns all of our outstanding Class B common stock, representing 60.7% of our outstanding shares of common stock and 93.9% of the combined voting power of all of our outstanding common stock as of June 30, 2002. Since our inception, we have purchased substantially all

of our lasers and the majority of our other fiber optic components from Furukawa. We have relied on Furukawa’s research and development capabilities to provide us with technologically advanced lasers and fiber optic components which we purchase from Furukawa for inclusion in our products. We currently purchase the majority of lasers from Furukawa using short-term purchase orders.

We operate in one industry segment, the design and manufacture of fiber optic subsystems and modules. We sell our products to fiber optic communication equipment manufacturers, directly and through contract manufacturers, who incorporate them into systems they assemble for equipment manufacturers. We define our customers as equipment manufacturers who have purchased our products directly or ordered our products for incorporation into systems produced by contract manufacturers. We recognize revenue upon product shipment, and sales returns and allowances have been insignificant.

Historically, a relatively small number of customers have accounted for a significant percentage of our revenues. Our ten largest customers accounted for approximately 61.4% of our total revenue for the quarter ended June 30, 2002 and 62.7% of our total revenue for the quarter ended March 31, 2002. Nortel Networks and Cisco Systems accounted for approximately 14.0% and 11.4%, respectively, of our total revenue for the quarter ended June 30, 2002. Alcatel, Nortel Networks and Cisco Systems accounted for approximately 14.3%, 12.5% and 11.0%, respectively, of our total revenue for the quarter ended March 31, 2002. No other customer accounted for more than 10.0% of our total revenue for the quarters ended June 30, 2002 and March 31, 2002.

During the nine months ended June 30, 2002, the telecommunications sector, and in particular the fiber optic networking sector, continued to suffer an economic downturn. System providers scaled back on deployment and have dramatically slowed their purchases of systems from equipment manufacturers. As a result, equipment manufacturers have also slowed purchases of components and modules from our competitors and from us. Moreover, as equipment manufacturers’ sales declined, they have relied on their excess component inventories to meet their reduced demand. Consequently, the slowdown continues to have a negative impact on our business as we face declining revenues as the result of our customers’ declining business and the resulting adjustment to their inventory levels.

The average selling prices of our products generally decrease as the products mature from factors such as increased competition, the introduction of new products and increased unit volumes. We anticipate that average selling prices of our existing products will continue to decline in future periods although the timing and degree of the declines cannot be predicted with any certainty. We must continue to develop and introduce new products that incorporate features that can be sold at higher average selling prices on a timely basis.

Our cost of revenue consists principally of materials, as well as salaries and related expenses for manufacturing personnel, manufacturing overhead and provisions for excess and obsolete inventory. We purchase several key components for our products from a limited number of suppliers.

Our research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel, costs of developing prototypes, and depreciation of test and prototyping equipment. Our research and development expenses also consist of materials and overhead costs related to major product development projects. We charge all research and development expenses to operations as incurred. We believe that continued investment in research and development is critical to our future success. Accordingly, we intend to expand our internal research and development capabilities in the future to develop new products. As a result, we expect that our research and development expenses in absolute dollar amounts will increase in future periods.

Sales and marketing expenses consist primarily of personnel costs, product marketing and promotion costs. We intend to expand our sales and marketing operations and efforts, both domestically and internationally, in order to increase sales and market awareness of our products. In December 1999 we opened a sales office in Franklin, Massachusetts, in July 2000 we opened sales offices in Bury St. Edmunds, England and Richardson, Texas, in May 2001 we opened a sales office in Ottawa, Canada and in May 2002, we opened a sales office in San Jose, California. We believe that investment in sales and marketing is critical to our success and expect these expenses to increase in the future.

General and administrative expenses consist primarily of salaries and related expenses for our administrative, finance and human resources personnel, professional fees and other corporate expenses. We expect that general and administrative expenses will increase particularly due to the increase in our directors and officers insurance premiums as a result of market changes for such insurance coverage, and increases in our legal and consulting fees associated with an analysis of strategic alternatives, including future market opportunities, that has been undertaken by our management and board of directors.

Results of Operations—Comparison of Three Months Ended June 30, 2002 and 2001

Revenue—Revenue decreased 75.0% to $9.8 million in the quarter ended June 30, 2002 from $39.4 million in the quarter ended June 30, 2001. This decrease was primarily due to a general economic downturn, which has caused system providers to scale back on deployment of fiber optic networks and draw down on existing inventory levels. This resulted in a decrease in demand from our customers and equipment manufacturers of their purchases of components and modules that we provide. Sales of our products for metropolitan area networks decreased to approximately 84.0% of revenue for the quarter ended June 30, 2002 from approximately 92.0% of revenue for the quarter ended June 30, 2001. We expect our revenue to continue to be affected by the economic downturn and its impact on the overall market growth in the foreseeable future. In addition, the average selling prices for existing products may decline in response to product introductions by competitors or us, and pressure from our significant customers for price concessions.

Cost of Revenue—Cost of revenue decreased 72.8% to $7.1 million in the quarter ended June 30, 2002 from $26.3 million in the quarter ended June 30, 2001. Gross margin decreased to 27.4% in the quarter ended June 30, 2002 from 33.2% in the same period last year. The decrease in gross margin was primarily due to an increase in manufacturing overhead as a result of decreased production.

Research and Development—Research and development expenses increased 82.6% to $1.4 million in the quarter ended June 30, 2002 from $780,000 in the quarter ended June 30, 2001. This increase was primarily due to an increase in salaries and other operating costs resulting from the addition of engineering personnel hired. We expect research and development expenses to increase in absolute dollars as we continue to expand our research and development efforts.

Sales and Marketing—Sales and marketing expenses decreased 4.3% to $1.0 million in the quarter ended June 30, 2002 from $1.1 million in the quarter ended June 30, 2001. This decrease was primarily due to a decrease of $460,000 in commissions to independent manufacturers’ representatives, offset by an increase of $370,000 in salaries and employee benefits resulting from the addition of sales and marketing personnel hired. We believe that investment in sales and marketing is critical to our success and expect these expenses to increase in absolute dollars in the future.

General and Administrative—General and administrative expenses decreased 5.7% to $1.5 million in the quarter ended June 30, 2002 from $1.6 million in the quarter ended June 30, 2001. This decrease was primarily due to a decrease of $500,000 in bad debt expense as a result of a decrease in past due accounts, offset by an increase in consulting fees associated with an analysis of strategic alternatives,

including future market opportunities, that has been undertaken by our management and board of directors. We expect the dollar level of legal and consulting fees to increase as we continue to explore and evaluate strategic alternatives.

Other Income, net—Other income, net decreased 57.5% to $813,000 in the quarter ended June 30, 2002 from $1.9 million in the quarter ended June 30, 2001. This decrease was primarily due to decreased investment income, which was the result of a decrease in interest rates.

Income Taxes—The benefit for income taxes was $177,000 in the quarter ended June 30, 2002, based on an effective tax rate of 40.0%, compared to a provision for income taxes of $4.6 million in the quarter ended June 30, 2001, based on an effective tax rate of 40.0%.

Results of Operations—Comparison of Nine Months Ended June 30, 2002 and 2001

Revenue—Revenue decreased 78.1% to $28.3 million in the nine months ended June 30, 2002 from $129.2 million in the nine months ended June 30, 2001. This decrease was primarily due to a general economic downturn, which has caused system providers to scale back on deployment of fiber optic networks and draw down on existing inventory levels. This resulted in a decrease in demand from our customers and equipment manufacturers of their purchases of components and modules that we provide. We expect that our year-to-year revenue will continue to be affected by the economic downturn. In addition, the selling prices for our existing products may decline in response to new product introductions by our competitors or us, and pressure from our significant customers for price concessions.

Cost of Revenue—Cost of revenue decreased 72.5% to $20.6 million in the nine months ended June 30, 2002 from $74.9 million in the nine months ended June 30, 2001. Gross margin decreased to 27.2% in the nine months ended June 30, 2002 from 42.0% in the same period last year. The decrease in gross margin was primarily due to an increase in manufacturing overhead as a result of decreased production.

Research and Development—Research and development expenses increased 58.7% to $3.7 million in the nine months ended June 30, 2002 from $2.3 million in the nine months ended June 30, 2001. This increase was due to an increase in salaries and other operating costs resulting from the addition of engineering personnel hired during this period.

Sales and Marketing—Sales and marketing expenses decreased 18.8% to $2.9 million in the nine months ended June 30, 2002 from $3.6 million in the nine months ended June 30, 2001. This decrease was primarily due to a decrease of $1.8 million in commissions to independent manufacturers’ representatives, partially offset by an increase of $670,000 in salaries and employee benefits from the addition of sales and marketing personnel hired and an increase of $485,000 in licensing fees for the license agreement entered into with Stratos Lightwave, Inc. in March 2002. See “Legal Proceedings.”

General and Administrative—General and administrative expenses increased 9.7% to $3.9 million in the nine months ended June 30, 2002 from $3.5 million in the nine months ended June 30, 2001. This increase was primarily due to increased legal expenses related to the patent infringement litigation with Stratos Lightwave, Inc. and an increase in consulting fees associated with an analysis of strategic alternatives, including future market opportunities, that has been undertaken by our management and board of directors. We expect the dollar level of legal and consulting fees to increase as we continue to explore and evaluate strategic alternatives.

Other Income, net—Other income, net decreased 43.5% to $2.7 million in the nine months ended June 30, 2002 from $4.8 million in the nine months ended June 30, 2001. This decrease was primarily due to decreased investment income, which was the result of a decrease in interest rates.

Income Taxes—The income tax benefit was $13,000 in the nine months ended June 30, 2002, based on an effective tax rate of 40.0%, compared to a provision for income taxes of $19.9 million in the nine months ended June 30, 2001, based on an effective tax rate of 40.0%.

Liquidity and Capital Resources

As of June 30, 2002, our primary source of liquidity was our cash and cash equivalents balance of $71.7 million and our marketable securities balance of $75.9 million, which consist primarily of United States Treasury notes. Our unused revolving line of credit totaling approximately $1.0 million provided an additional source of liquidity. Since inception, we have financed our operations primarily with cash generated from operations. Additional financing has been generated through lines of credit and term loans, and through our initial public offering of our Class A common stock which we completed on November 3, 2000. As of June 30, 2002, our working capital was $166.3 million with a current ratio of 30.0. Because of our low debt balances, we believe that additional cash could be borrowed if necessary; however, cash flow from operations, cash and equivalents and existing loan facilities are expected to be sufficient to fund operations for the next twelve months.

As of June 30, 2002, we had a $1.9 million balance outstanding under our term loan and no balance outstanding under our $1.0 million revolving line of credit. The term loan and the revolving credit facility bear interest on amounts outstanding at various time intervals and the market rates based on our election at a per annum rate equal to either (a) the prime rate or (b) LIBOR plus 1.8%. The term loan matures in July 2006, and the proceeds of the term loan were used to purchase our primary corporate and manufacturing facility in Chatsworth, California. The revolving credit facility can be used to fund working capital requirements.

The term loan and our revolving credit facility contain customary covenants, including covenants limiting indebtedness and the disposition of assets. To secure our payment and performance obligations under the term loan we have pledged all of our assets as collateral. The term loan and the revolving credit facility also require that we comply with financial covenants, which require us to maintain our tangible net worth, cash position and revenue at specified levels. Our need to comply with these covenants does not materially affect the operation of our business.

We have plans to make capital expenditures totaling approximately $400,000 to purchase additional production equipment to continue to automate our manufacturing capabilities and to upgrade our facilities through the end of our fiscal fourth quarter 2002 .

On April 12, 2002, we resolved the patent litigation with Stratos Lightwave, Inc. As part of the settlement, we entered into a five-year license agreement with Stratos covering Stratos’ portfolio of optoelectronic transceiver patents. In consideration of the license agreement, the Company is required to pay a total of $2 million over the license term.

During the nine months ended June 30, 2002 and 2001, we generated cash flow from operations of $12.8 million and $24.9 million, respectively. The cash generated by operating activities during the nine months ended June 30, 2002 was the result of net income after adjustments for non cash charges and decreases in accounts receivable and inventories. The cash generated from operating activities during the nine months ended June 30, 2001 was the result of net income after adjustments for non cash charges and an increase in accounts payable to related parties, partially offset by an increase in inventories.

During the nine months ended June 30, 2002 and 2001, cash used in investing activities was $3.4 million and $84.5 million, respectively. The cash used in investing activities during the nine months ended June 30, 2002 was for the purchase of marketable securities and property, plant and equipment. The majority of cash used in investing activities during the nine months ended June 30, 2001 was for the purchase of marketable securities.

During the nine months ended June 30, 2002 and 2001, cash (used in) provided by financing activities was ($206,000) and $122.1 million, respectively. The cash used in financing activities during the nine months ended June 30, 2002 was for principal payments on the long-term debt. The cash provided by financing activities during the nine months ended June 30, 2001 was provided by the proceeds from the issuance of our Class A common stock in our initial public offering on November 3, 2000.

We believe that our existing cash, cash equivalents and investments on hand, together with cash that we expect to generate from our operations, will be sufficient to meet our capital needs for at least the next twelve months. However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling more stock to the public or to selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:

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the market acceptance of our products;

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the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a competitive position in the marketplace;

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price discounts on our products to our customers;

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our business, product, capital expenditure and research and development plans and product and technology roadmaps;

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the levels of inventory and accounts receivable that we maintain;

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capital improvements to new and existing facilities;

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technological advances;

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our competitors’ response to our products;

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our pursuant of strategic alternatives, including future market opportunities; and

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our relationships with suppliers and customers.

In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies.

RISK FACTORS

This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about us and our industry. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report. These forward-looking statements involve risks and uncertainties. You should carefully consider the following risks before you decide to buy shares of our Class A common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above and elsewhere in this Report, may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our Class A common stock could decline, and you may lose all or part of the money you paid to buy our stock. We do not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Our continued success in generating revenue depends on growth in construction of fiber optic metropolitan area networks and high-speed premises networks.

Our fiber optic subsystems and modules are used primarily in metropolitan area networks and high-speed premises networks. These markets are evolving, and it is difficult to predict their potential size or future growth rate. In addition, we are uncertain as to the extent to which fiber optic technologies will be used in these markets. Our success in generating revenue will depend on the growth of these markets and their adoption of fiber optic technologies.

The current downturn in our industry, and unfavorable economic and market conditions have caused communications service providers to reduce their capital spending on fiber optic equipment and delayed the deployment of new and build-out of existing fiber optic networks. As a result, (a) our revenue is declining, (b) we are unable to predict future revenue accurately, and (c) we are currently unable to provide guidance for future financial performance. The conditions contributing to this difficulty include:

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uncertainty regarding the capital spending plans of the major telecommunications carriers, upon whom our customers and, ultimately we, depend for revenue;

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the telecommunications carriers’ current limited access to the capital required for expansion;

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our customers decreasing their excess inventory levels, which, in turn, reduces our revenue;

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lower near term revenue visibility; and

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general market and economic uncertainty.

Based on these and other factors, many of our major customers had reduced, modified, cancelled or rescheduled orders for our products and have expressed uncertainty as to their future requirements. As a result, our revenue in future periods may continue to decline. In addition, our ability to meet financial expectations for future periods may be harmed.

We derive a significant portion of our total revenue from a few significant customers, and our total revenue may decline significantly if any of these customers cancels, reduces or delays purchases of our products or extracts price concessions from us.

Our success depends on our continued ability to develop and maintain relationships with a limited number of significant customers. We sell our products into markets dominated by a relatively small number of systems manufacturers, a fact that limits the number of our potential customers. Our

dependence on orders from a relatively small number of customers makes our relationship with each customer critical to our business. Our ten largest customers accounted for approximately 61.4% of our total revenue for the quarter ended June 30, 2002 and 62.7% of our total revenue for the quarter ended March 31, 2002. Nortel Networks and Cisco Systems accounted for approximately 14.0% and 11.4%, respectively, of our total revenue for the quarter ended June 30, 2002. Alcatel, Nortel Networks and Cisco Systems accounted for approximately 14.3%, 12.5% and 11.0%, respectively, of our total revenue for the quarter ended March 31, 2002. No other customer accounted for more than 10.0% of our total revenue for the quarters ended June 30, 2002 and March 31, 2002.

We do not have long-term sales contracts with our customers. Instead, sales to our customers are made on the basis of individual purchase orders that our customers may cancel or defer on short notice without significant penalty. In the past, some of our major customers canceled, delayed or significantly accelerated orders in response to changes in the manufacturing schedules for their systems, and they are likely to do so in the future. The reduction, cancellation or delay of individual customer purchase orders would cause our revenue to decline. Moreover, these uncertainties complicate our ability to accurately plan our manufacturing schedule. Additionally, if any of our customers cancel or defer orders, our operating expenses may increase as a percentage of revenue.

In the past, our customers have sought price concessions from us, and they are likely to continue to do so in the future. In addition, some of our customers may shift their purchases of products from us to our competitors. The loss of one or more of our significant customers, our inability to successfully develop relationships with additional customers or future price concessions could cause our revenue to decline significantly.

We are dependent on a limited number of suppliers for most of our key components. If these suppliers are unable to meet our manufacturing requirements, we may experience production delays leading to delays in shipments, increased costs and cancellation of orders for our products.

We purchase several key components that we incorporate into our products from a limited number of suppliers. We also purchase the majority of lasers from Furukawa. We do not have long-term supply contracts with any of our key suppliers. Our dependence on a small number of suppliers and our lack of long-term supply contracts exposes us to several risks, including our potential inability to obtain an adequate supply of quality components, price increases and late deliveries. We have experienced shortages and delays in obtaining key components in the past and expect to experience shortages and delays in the future.

In the past, industry capacity has been constrained and some of our component suppliers placed limits on the number of components sold to us. If industry capacity becomes constrained in the future, our component suppliers may place similar limits on us. We do not have any control over these limits, and our suppliers may choose to allocate more of their production to our competitors. In addition, our suppliers could discontinue the manufacture or supply of these components at any time.

A disruption in, or termination of, our supply relationship with Furukawa or any of our other key suppliers, or our inability to develop relationships with new suppliers would interrupt and delay the manufacturing of our products which could result in delays in our revenue or the cancellation of orders for our products. We may not be able to identify and integrate alternative suppliers in a timely fashion, or at all. Any transition to alternative suppliers would likely result in delays in shipment, quality control issues and increased expenses, any of which would limit our ability to deliver products to our customers. Furthermore, if we are unable to identify an alternative source of supply, we may have to redesign or modify our products, which would cause delays in shipments, increase design and manufacturing costs and require us to increase the prices of our products.

Our future operating results are likely to fluctuate from quarter to quarter, and if we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

Our historical quarterly operating results have varied significantly, and our future quarterly operating results are likely to continue to vary significantly from period to period. As a result, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance. Some of the factors which could cause our operating results to vary include:

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fluctuations in demand for, and sales of, our products, which is dependent on the implementation of fiber optic networks;

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the timing of customer orders, particularly from our significant customers;

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competitive factors, including introductions of new products, product enhancements and the introduction of new technologies by our competitors, the entry of new competitors into the fiber optic subsystems and modules market and pricing pressures;

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our ability to control expenses;

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the mix of our products sold; and

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economic conditions specific to the communications and related industries.

We incur expenses from time to time that may not generate revenue until subsequent quarters. In addition, in connection with new product introductions, we incur research and development expenses and sales and marketing expenses that are not matched with revenue until a subsequent quarter when the new product is introduced. We cannot assure you that our expenditures on manufacturing capacity will generate increased revenue in subsequent quarters. If growth in our revenue does not outpace the increase in our expenses, our quarterly operating results may fall below expectations and cause our stock price to decline significantly.

Due to these and other factors, we believe that our quarterly operating results are not an indicator of our future performance. If our operating results are below the expectations of public market analysts or investors in future quarters, the trading price of our Class A common stock would be likely to decrease significantly.

General economic factors could negatively impact our growth plan.

Since early 2001, unfavorable economic conditions in the United States have detrimentally affected the U.S. manufacturing industry, particularly sales of fiber optics equipment to service providers and communication equipment companies. Announcements by fiber optics equipment manufacturers and their customers during this period indicate that there is a reduction in spending for fiber optic equipment as a result of the economic slowdown and efforts to reduce existing inventories. Based on these and other factors, some of our customers have reduced, modified, cancelled or rescheduled orders for our products and have expressed uncertainty as to their future requirements. In addition, the economic slowdown has required us to aggressively manage our costs and expenses, including our July 2001 and April 2002 announcements of the elimination of approximately 110 and 45 jobs, respectively, primarily in the manufacturing area, and may require us to implement further cost management procedures in the future. Our business, operating results and financial condition will suffer if economic conditions in the United States worsen, the fiber optics equipment market continues to slow down, or if a wider or global economic slowdown occurs.

If we do not develop and introduce new products with higher average selling prices in a timely manner, the overall average selling prices of our products will decrease.

The market for fiber optic subsystems and modules is characterized by declining average selling prices for existing products due to increased competition, the introduction of new products, product obsolescence and increased unit volumes as manufacturers deploy new network equipment. We have in the past experienced, and in the future may experience, period-to-period fluctuations in operating results due to declines in our overall average selling prices. We anticipate that the selling prices for our existing products will decrease in the future in response to product introductions by competitors or us, or other factors, including pressure from significant customers for price concessions. Therefore, we must continue to develop and introduce new products that can be sold at higher prices on a timely basis to maintain our overall average selling prices. Failure to do so could cause our revenue and gross margins to decline.

If our customers do not approve our manufacturing process and qualify our products, we will lose significant customer sales and opportunities.

Customers generally will not purchase any of our products before they qualify them and approve our manufacturing process and quality control system. Our customers may require us to register under international quality standards, such as ISO 9002. Delays in product qualification or loss of ISO 9002 certification may cause a product to be dropped from a long-term supply program and result in a significant lost revenue opportunity. If particular customers do not approve of our manufacturing process, we will lose the sales opportunities with those customers.

If we fail to predict our manufacturing requirements accurately, we could incur additional carrying costs and have excess and obsolete inventory or experience manufacturing delays, which could cause us to lose orders or customers.

We currently use historical data, a backlog of orders and estimates of future requirements to determine our demand for components and materials. We must accurately predict both the demand for our products and the lead-time required to obtain the necessary components and materials. Lead times for components and materials vary significantly, depending on factors such as the specific supplier, the size of the order, contract terms and demand for each component at a given time. We generally maintain excess inventory of parts which increases our inventory carrying costs and periodically causes us to have excess and obsolete inventory. However, if we were to underestimate our purchasing requirements, manufacturing could be interrupted, resulting in delays in shipments.

Our markets are highly competitive, some of our customers are also our competitors, and our other customers may choose to purchase our competitors’ products rather than our products or develop internal capabilities to produce their own fiber optic subsystems and modules.

The market for fiber optic subsystems and modules is highly competitive and we expect competition to intensify in the future. Our primary competitors include Agere Systems, Agilent Technologies, ExceLight Communications, Finisar, Infineon Technologies, JDS Uniphase, MRV Communications, Stratos Lightwave and Tyco International. We also face indirect competition from public and private companies providing products that address the same fiber optic network problems that our products address. The development of alternative solutions to fiber optic transmission problems by our competitors, particularly systems companies that also manufacture modules, such as Alcatel (via Alcatel Optronics), Fujitsu, and Nortel Networks, could significantly limit our growth and harm our competitive position.

Many of our current competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales and marketing resources than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, our competitors that have large market capitalization or cash reserves are in a much

better position to acquire other companies in order to gain new technologies or products that may displace our products. Any of these potential acquisitions could give our competitors a strategic advantage. In addition, many of our competitors have much greater brand name recognition, more extensive customer bases, more developed distribution channels and broader product offerings than we do. These companies can use their broader customer bases and product offerings and adopt aggressive pricing policies to gain market share.

In addition, existing and potential customers, especially in Japan and other international markets, may also become competitors. These customers have the internal capabilities to integrate their operations by producing their own optical subsystems and modules or by acquiring our competitors or the rights to produce competitive products or technologies, which may allow them to reduce their purchases or cease purchasing from us.

We expect our competitors to introduce new and improved products with lower prices, and we will need to do the same to remain competitive. We may not be able to compete successfully against either current or future competitors with respect to new products. We believe that competitive pressures may result in price reductions, reduced margins and our loss of market share.

Our sales cycle runs from our customers’ initial design to production for commercial sale. This cycle is long and unpredictable and may cause our revenue and operating results to vary from our forecasts.

The period of time between our initial contact with a customer and the receipt of a purchase order from that customer may span to more than a year and varies by product and customer. During this time, customers may perform, or require us to perform, extensive evaluation and qualification testing of our products. Generally, they consider a wide range of issues before purchasing our products, including interoperation with other subsystems and components, product performance and reliability. We may incur substantial sales and marketing expenses and expend significant management effort while potential customers are qualifying our products. Even after incurring these costs, we ultimately may not sell any or only small amounts of our products to a potential customer. If sales forecasts to specific customers are not realized, our revenue and results of operations may be negatively impacted.

If we do not achieve acceptable manufacturing yields in a cost-effective manner, or we are required to develop new manufacturing processes to improve our yields, our operating results would be impaired.

The manufacture of our products involves complex and precise processes. As a result, it may be difficult to cost-effectively meet our production goals. In addition, changes in our manufacturing processes or those of our suppliers, or our suppliers’ inadvertent use of defective materials, could significantly reduce our manufacturing yields, increase our costs and reduce our product shipments. To increase our gross margin, while offering products at prices acceptable to customers, we will need to develop new manufacturing processes and techniques that will involve higher levels of automation.

We could be subjected to additional litigation regarding intellectual property rights, which may divert management attention, cause us to incur significant costs or prevent us from selling our products.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights in the networking technologies industry. Many companies aggressively use their patent portfolios to bring infringement claims against competitors. As a result, we may be a party to litigation or be involved in disputes over our alleged infringement of others’ intellectual property

in the future. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and prevent us from making or selling some of our products. These lawsuits, regardless of their merit, would likely be time-consuming and expensive to resolve and would divert management’s time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:

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stop selling, incorporating or using our products that use the infringed intellectual property;

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obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable terms, if at all; or

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redesign the products to not use the infringed intellectual property, which may not be technically or commercially feasible.

If we are forced to take any of these actions, we may be limited in our ability to execute our business plan.

We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights. These claims could result in costly litigation and the diversion of our technical and management personnel. In the process of asserting our intellectual property rights, these rights could be found to be invalid, unenforceable or not infringed. Failure to successfully assert our intellectual property rights could result in our inability to prevent our competitors from utilizing our proprietary rights.

If we are unable to protect our proprietary technology, this technology could be misappropriated, which would make it difficult for us to compete in our industry.

Our success and ability to compete is dependent in part on our proprietary technology. We currently have three provisional patent applications filed with the Patent and Trademark Office. There can be no assurance that any of our patent applications will result in the issuance of any patents or that any patents issued will lead to commercially viable products or provide competitive advantages for our products. We also rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements to establish and protect our proprietary rights. Existing copyright, trademark and trade secret laws afford only limited protection. The laws of some foreign countries do not protect the unauthorized use of our proprietary technology and processes to the same extent as do the laws of the United States, and policing the unauthorized use of our products is difficult. Many U.S. companies have encountered substantial infringement problems in some foreign countries. Because we sell some of our products overseas, we exposure to foreign intellectual property risks. Any infringement of our proprietary rights could result in costly litigation, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue.

If we are unable to generate adequate additional revenue as a result of the planned expansion of our sales operations, our competitive position may be harmed and our revenue or margins may decline.

Historically, we have relied primarily on a limited direct sales force, supported by third party manufacturers’ representatives and distributors, to sell our products. Our sales strategy focuses primarily on developing and expanding our direct sales force, manufacturers’ representatives and distributors. We will incur significant costs related to the expansion of our sales operations. If the expansion of our sales operations does not generate adequate additional revenue, the cost of any expansion may exceed the revenue generated, and our margins may decline. To the extent we are unsuccessful in expanding our

direct sales force, we will likely be unable to compete successfully against the significantly larger and well-funded sales and marketing operations of many of our current or potential competitors. In addition, if we fail to develop relationships with significant manufacturers’ representatives or distributors, or if these representatives or distributors are not successful in their sales or marketing efforts, sales of our products may decrease and our competitive position would be harmed. Our representatives or distributors may not market our products effectively or may not continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Our inability to effectively manage the expansion of our domestic sales and support staff or maintain existing or establish new relationships with manufacturer representatives and distributors would harm our revenue and result in declining margins.

The market for our products is new and is characterized by rapid technological changes and evolving industry standards. If we do not respond to the changes in a timely manner, our products likely will not achieve market acceptance.

The market for our products is characterized by rapid technological change, new and improved product introductions, changes in customer requirements and evolving industry standards. Our future success will depend to a substantial extent on our ability to develop, introduce and support cost-effective new products and technology on a successful and timely basis. We plan to increase our budget for research and development of new products and technology. Since these costs are expensed as incurred, we expect a negative impact on our reported net income. If we fail to develop and deploy new cost-effective products and technologies or enhancements of existing products on a timely basis, or if we experience delays in the development, introduction or enhancement of our products and technologies, our products will no longer be competitive and our revenue will decline.

The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products on a timely basis, if at all. Furthermore, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Our failure to respond to product announcements, technological changes or industry changes in standards would likely prevent our products from gaining market acceptance and harm our competitive position.

Recent terrorist activities and resulting military and other actions could adversely affect our business.

Recent terrorist attacks in the United States, as well as continued threats of terrorism within the United States and abroad and current and future military response to them have created many economic and political uncertainties that make it extremely difficult for us, our customers and our suppliers to accurately forecast and plan future business activities. This reduced predictability challenges our ability to operate profitably or to grow our business. In particular, it is difficult to develop and implement strategies, sustainable business models and efficient operations, and effectively manage contract manufacturing and supply chain relationships. In addition, the continued threats of terrorism and the heightened security measures in response to such threats have and may continue to cause significant disruption to commerce throughout the world. Disruption in air transportation in response to these threats or future attacks may result in transportation and supply-chain disruptions, increase our costs for both receipt of inventory and shipment of products to our customers, and cause customers to defer their purchasing decisions. Disruptions in commerce could also cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. They also could result in economic recession in the U.S. or abroad. Any of these occurrences could have a

significant impact on our operating results, revenue and costs and may result in the volatility of the market price for our Class A common stock and on the future price of our Class A common stock.

Our success depends on our key personnel, including our executive officers, the loss of any of whom could harm our business.

Our success depends on the continued contributions of our senior management and other key research and development, sales and marketing and operations personnel, including Muoi Van Tran, our Chief Executive Officer and President, Susie Nemeti, our Chief Financial Officer and Vice President of Finance and Administration, and Mohammad Ghorbanali, our Chief Operating Officer and Vice President of Technical Operations. Competition for employees in our industry is intense. We do not have life insurance policies covering any of our executives. There can be no assurance that we will be successful in retaining such key personnel, or that we will be successful in hiring replacements or additional key personnel. Our loss of any key employee, the failure of any key employee to perform in his or her current position, or the inability of our officers and key employees to expand, train and manage our employee base would prevent us from executing our growth strategy.

We will need to attract and retain highly qualified managers, sales and marketing and technical support personnel. We have had difficulty hiring the necessary engineering, sales and marketing and management personnel in the past. If we fail to hire and retain qualified personnel when needed, our product development efforts and customer relations will suffer. Our key management personnel have limited experience in managing the growth of technologically complex businesses in a rapidly evolving environment. If we are unable to manage our growth effectively, we will incur additional expenses which will negatively impact our operating results.

Our products may have defects that are not detected until full deployment of a customer’s system. Any of these defects could result in a loss of customers, damage to our reputation and substantial costs.

We design our products for large and complex fiber optic networks, and our products must be compatible with other components of the network system, both current and future. We have experienced in the past, and may continue to experience in the future, defects in our products. Defects in our products or incompatibilities in our products may appear only when deployed in networks for an extended period of time. In addition, our products may fail to meet our customers’ design specifications, or our customers may change their design specifications after the production of our product. A failure to meet our customers’ design specification often results in a loss of the sale due to the length of time required to redesign the product. We may also experience defects in third party components that we incorporate into our products. We have experienced the following due to our inability to detect or fix errors in the past:

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increased costs associated with the replacement of defective products, redesign of products to meet customer design specification and/or refund of the purchase price;

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diversion of development resources; and

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increased service and warranty costs.

Our products and the systems into which our products are incorporated must comply with domestic and international governmental regulations, and if our products do not meet these regulations, our ability to sell our products will be restricted.

Our products are subject to various regulations of U.S. and foreign governmental authorities principally in the areas of radio frequency emission standards and eye safety. Radio frequency emission standards govern allowable radio interference with other services. Eye safety standards govern the

labeling and certification of laser products to ensure that they are used in a way that does not create a hazard to the human eye. Our products and the systems into which they are incorporated must also comply with international standards and governmental standards of the foreign countries where our products are used. Our inability, or the inability of our customers, to comply with existing or evolving standards established by regulatory authorities, or to obtain timely domestic or foreign regulatory approvals or certificates will restrict our ability to sell our products.

We are subject to environmental laws and other legal requirements that have the potential to subject us to substantial liability and increase our cost of doing business.

Our properties and business operations are subject to a wide variety of federal, state and local environmental, health and safety laws and other legal requirements, including those relating to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous substances. We may be required to incur substantial costs to comply with current or future legal requirements. In addition, if we fail to obtain required permits or otherwise fail to operate within these or future legal requirements, we may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities. We believe our properties and business operations are in compliance with applicable environmental laws. We do not anticipate any material capital expenditures for environmental control facilities for the 2002 fiscal year.

We face risks associated with our international operations that could prevent us from marketing and distributing our products internationally.

Historically, approximately 80% of our sales have been in North America, and we have limited experience in marketing and distributing our products internationally. We intend to expand our international operations in the future. Significant management attention and financial resources are needed to develop our international sales, support and distribution channels and manufacturing. We may not be able to establish or maintain international market demand for our products.

In addition, international operations are subject to other risks, including:

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greater difficulty in accounts receivable collection and longer collection periods;

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difficulties and costs of staffing and managing foreign operations with personnel who have expertise in fiber optic technology;

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unexpected changes in regulatory or certification requirements for optical networks; and

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political or economic instability.

A portion of our international revenue and expenses may be denominated in foreign currencies in the future. Accordingly, we could experience the risks of fluctuating currencies and may choose to engage in currency hedging activities.

Disruption of our operations at our Chatsworth, California manufacturing facility could require us to lease alternative manufacturing facilities or limit our manufacturing operations.

All of our manufacturing operations are conducted in our Chatsworth, California headquarters. Due to this geographic concentration, a disruption of our manufacturing operations, resulting from sustained process abnormalities, human error, government intervention or natural disasters, such as earthquakes, fires or floods, or other causes, could require us to cease or limit our manufacturing operations.

Our limited experience in acquiring other businesses, product lines and technologies may make it difficult for us to overcome problems encountered in connection with any acquisition we may undertake.

We expect to review opportunities to buy other businesses, products or technologies that would enhance our technical capabilities, complement our current products or expand the breadth of our markets or which may otherwise offer growth opportunities. Our acquisition of businesses or technologies will require significant commitment of resources. We may be required to pay for any acquisition with cash, but we cannot be certain that additional capital will be available to us on favorable terms, if at all. In lieu of paying cash, we could issue stock as consideration for an acquisition that would dilute existing stockholders’ percentage ownership, incur substantial debt or assume contingent liabilities. We have no experience in acquiring other businesses and technologies. Potential acquisitions also involve numerous risks, including:

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problems assimilating the purchased operations, technologies or products;

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unanticipated costs associated with the acquisition;

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diversion of management’s attention from our core business;

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adverse effects on existing business relationships with suppliers and customers;

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risks associated with entering markets in which we have no or limited prior experience; and

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potential loss of key employees of purchased organizations.

Our stock price is likely to be volatile and could drop unexpectedly.

Our Class A common stock has been publicly traded only since November 3, 2000. The market price of our Class A common stock has been subject to significant fluctuations since the date of our initial public offering. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of telecommunications and fiber optic companies. As a result, the market price of our Class A common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.

We have business conflicts of interest with Furukawa, the resolution of which may not be as favorable to us as if we were dealing with an unaffiliated third party.

We have historically relied on Furukawa’s research and development capabilities to provide us with technologically advanced lasers and fiber optic components which we purchase from Furukawa for inclusion in our products, and we expect to continue to rely on Furukawa in the future. We currently purchase the majority of lasers from Furukawa. We currently have no written agreements with Furukawa with respect to our research and development and supply relationship. We cannot assure you that Furukawa will continue to provide services and components to us, and if not, whether or on what terms we could find adequate alternative sources for these services and components. We believe that our past business dealings with Furukawa and its subsidiaries and affiliates were on terms that were no less favorable than terms that would be available from third parties for similar transactions. We intend to continue to maintain our relationship with Furukawa and Furukawa will continue to control us. The terms of future transactions with Furukawa may or may not be comparable to those that would be available from unaffiliated third parties.

Conflicts of interest may arise between Furukawa and us in a number of areas, including the nature and quality of services rendered by Furukawa to us, potential competitive business activities, sales

or distributions by Furukawa of all or any portion of its ownership interest in us, or Furukawa’s ability to control our management and affairs. It is possible that business decisions made by management that are in the best interest of our stockholders may conflict with Furukawa’s interests. For example, we may decide to enter into or acquire a line of business competitive with Furukawa, or Furukawa may decide to enter into or acquire a line of business competitive with us. Any of these events may alter or eliminate our ability to rely on Furukawa to supply key components to us in the future, increase our costs of producing our products and result in increased competition in our markets. We cannot assure you that we will be able to resolve any conflicts we may have with Furukawa or, if we are able to do so, that the resolution will be favorable to us.

Furukawa will control the outcome of stockholder voting and there may be an adverse effect on the price of our Class A common stock due to disparate voting rights of our Class A common stock and our Class B common stock.

Furukawa beneficially owns all of our outstanding shares of Class B common stock, which as of June 30, 2002 represented 93.9% voting control over all stockholder issues. The holders of our Class A common stock and Class B common stock have identical rights except that holders of our Class A common stock are entitled to one vote per share while holders of our Class B common stock are entitled to ten votes per share on matters to be voted on by stockholders. The differential in the voting rights of our Class A common stock and Class B common stock could adversely affect the price of our Class A common stock to the extent that investors or any potential future purchaser of our shares of Class A common stock give greater value to the superior voting rights of our Class B common stock. Each share of our Class B common stock will automatically convert into one share of Class A common stock if it is transferred to any entity, other than an entity controlling, controlled by or under common control with Furukawa. In addition, our Class B common stock will automatically convert into shares of our Class A common stock if the total number of outstanding shares of Class B common stock falls below 20% of the total number of outstanding shares of our common stock. As long as Furukawa has a controlling interest, it will continue to be able to elect our entire board of directors and generally be able to determine the outcome of all corporate actions requiring stockholder approval. As a result, Furukawa will be in a position to continue to control all matters affecting us, including:

•

a change of control, including a merger;

•

our acquisition or disposition of assets;

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our future issuances of common stock or other securities;

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our incurrence of debt; and

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our payment of dividends on our common stock.

Three members of our board of directors are also executives of Furukawa. These individuals have obligations to both our company and Furukawa and may have conflicts of interest with respect to matters potentially or actually involving or affecting us, such as acquisitions and other corporate opportunities that may be suitable for both Furukawa and us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are currently exposed to interest rate risk on our existing term loan and revolving credit facility and on our investment portfolio. Our variable rate debt consists of term loan borrowing of $1.9 million. To date we have not utilized our floating rate debt under the revolving credit facility. The primary objective of our investment activities is to preserve capital. We have not used derivative financial instruments in our investment portfolio. Our cash and cash equivalents includes $71.7 million

the majority of which is invested in money market and other interest bearing accounts. In addition, we have $75.9 million invested in marketable securities, which represents investments in United States treasury notes.

As of June 30, 2002, our investment in marketable securities had a weighted-average time to maturity of approximately 165 days. Marketable securities represent United States treasury notes and treasury bonds with maturity on the date purchased of greater than three months. These securities are classified as held to maturity because we have the intention and ability to hold the securities to maturity. Gross unrealized gains and losses on held-to-maturity marketable securities have historically not been material. Maturities on the date purchased of held-to-maturity marketable debt securities range from three months to two years.

If interest rates were to increase or decrease 1%, the result would be an annual increase or decrease of interest expense of approximately $19,000 on our term loan and an annual increase or decrease of interest income of $1.5 million on our investment portfolio. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment. Sales to foreign customers are denominated in U.S. dollars and as such we have no foreign currency fluctuation risk.

PART II.

OTHER INFORMATION AND SIGNATURES

ITEM 1. LEGAL PROCEEDINGS

Reference is made to our Quarterly Report on Form 10-Q filed with the SEC on February 14, 2002 under the heading “Legal Proceedings” for a complete discussion of litigation involving us relating to patent infringement litigation with Stratos Lightwave, Inc.

On April 12, 2002, we resolved our patent infringement litigation with Stratos Lightwave, Inc. The lawsuit, originally filed by Methode Electronics, Inc. in October 1999 against us and Infineon Technologies Corporation, alleged that our 1x9 pin configuration products and our gigabit interface converter (GBIC) products infringe one or more of Methode’s patents. Stratos, a Methode Electronics, Inc. spin-off and assignee of the patents-in-suit, was added as an additional plaintiff to the lawsuit in June 2000. The settlement resolves all claims in the lawsuit among us and Stratos.

As part of the settlement, we entered into a five-year license agreement with Stratos covering Stratos’ portfolio of optoelectronic transceiver patents. In consideration of the license agreement, we are required to pay a total of $2 million over the license term. Our optoelectronic products covered by this license include our 1x9, GBIC, small form factor (SFF) and small form-factor pluggable (SFP) product families. At the end of the five-year term, we have the option to renew the license.

We are not currently involved in any other material legal proceedings, nor have we been involved in any such proceedings that has had or may have a significant effect on our company. We are not aware of any other material legal proceedings threatened or pending against us.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

(d) Use of Proceeds From Sales of Registered Securities.

On November 3, 2000, we completed an initial public offering of our Class A common stock pursuant to our Registration Statement on Form S-1 (File No. 383-44862) that was declared effective by the Securities Exchange Commission on November 2, 2000. There has been no material change with respect to our use of proceeds from our initial public offering to the information discussed on our annual Report on Form 10-K for the year ended September 30, 2000.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

On April 30, 2002, we eliminated approximately 45 jobs, primarily related to manufacturing. Positions in research and development and sales and marketing were unaffected. Total cost of this workforce reduction is immaterial and was reflected in our June 30, 2002 financial results.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit Number		Description
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Report on Form 8-K filed during the quarter ended June 30, 2002:

Not applicable.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		OPTICAL COMMUNICATION PRODUCTS, INC.,
		a Delaware corporation

Date:	August 13, 2002	By:	/s/ Muoi Van Tran
		Name: Muoi Van Tran Title: Chief Executive Officer and President


Date:	August 13, 2002	BY:	/s/ Susie Nemeti
		Name: Susie Nemeti Title: Chief Financial Officer (Principal
		Financial and Accounting Officer)

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