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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 0-29811
NEW FOCUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN THE STATE OF DELAWARE
I.R.S. EMPLOYER IDENTIFICATION NUMBER 33-0404910
5215 HELLYER AVENUE, SAN JOSE, CALIFORNIA 95138-1001
TELEPHONE: (408) 284-4700
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 [X] No [ ].
On March 20, 2001, 75,864,202 shares of the Registrant's common stock,
$0.001 par value, were issued and outstanding.
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NEW FOCUS, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders....... 21
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 22
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 7A. Qualitative and Quantitative Disclosure of Market Risk...... 31
Item 8. Consolidated Financial Statements and Supplementary Data.... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 32
SIGNATURES............................................................ 58
POWER OF ATTORNEY..................................................... 58
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
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ITEM 1. BUSINESS
In addition to historical information, this Annual Report on Form 10-K
(Annual Report) contains predictions, estimates and other forward-looking
statements within the meaning of Section 27(a) of the Securities Act of 1933 and
Section 21(c) of the Securities and Exchange Act of 1934 that relate to future
events or our future financial performance. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. These risks
and other factors include those listed under "Risk Factors" and elsewhere in
this Annual Report. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. In addition, these
forward-looking statements include, but are not limited to, statements regarding
the following:
- the revenue outlook for future periods including the first and second
quarters of 2001 and fiscal year 2001;
- the effect of lower production volume on our gross margin performance;
- improvement of our manufacturing efficiencies;
- anticipated development and release of new products such as our tunable
laser for the network;
- anticipated sources of future revenues;
- anticipated expenditures for research and development, sales and
marketing and general and administrative expenses;
- the adequacy of our capital resources to fund our operations;
- the anticipated market trends and uncertainties; and
- the effectiveness of our current business strategy.
These statements are only predictions and are subject to risks and
uncertainties, including the following:
- the difficulty of forecasting anticipated revenues due to weakness and
uncertainties regarding overall demand within the telecommunications
industry, inventory levels within the industry, sudden order reductions
and cancellations by customers, lower backlog of customer orders, and
potential pricing pressures that may arise from supply-demand conditions
within the industry;
- the difficulty of minimizing the negative effect of lower unit volumes on
gross margin performance due to the level of fixed manufacturing
expenses;
- our ability to lower production output;
- our ability to predict manufacturing yields;
- the challenge of managing inventory levels during periods of weakening
demand;
- our ability to introduce and gain customer acceptance of new products on
a timely basis;
- the difficulty in anticipating the outcome of current litigation; and
- our ability to generate future revenue from new products commensurate
with prior investments in research and development activities.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined under "Risk Factors." Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
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OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks(TM) brand.
We have leveraged our extensive experience in advanced optics to develop optical
components and modules that enhance network performance by enabling higher
channel counts and data rates, longer reach lengths, new service capabilities,
and lower costs of ownership. Our high-performance products are compact, consume
less power and are designed to be manufacturable in high volumes.
On January 16, 2001, we acquired JCA Technology, Inc. JCA designs,
manufactures, and markets a full line of fiber optic products for OC-48 and
OC-192 modulators, including high-speed clock amplifiers and broadband data
driver amplifiers. This acquisition will add to our products and the
capabilities of our high-speed products. By combining our expertise in optics
and high-speed opto-electronics with JCA's expertise in microwave electronics
and packaging we plan to develop a family of hybrid products that will offer a
higher level of integration to our customers.
On February 15, 2001, we acquired Globe Y. Technology, Inc. Globe Y
manufactures fused fiber coupling machines, which will add to our line of
telecom manufacturing equipment and supplements our manufacturing capability for
telecom products.
INDUSTRY BACKGROUND
The growing volume of high-speed data traffic over communications networks
has dramatically increased the demand for high capacity, or high bandwidth,
communications networks. According to RHK, a leading market research and
consulting firm, North American Internet traffic will continue its aggressive
growth, increasing 200% annually through 2004. This growth is primarily
attributable to the increasing use of the Internet among consumer and business
users, easier and cheaper access to the Internet, widespread use of e-commerce
as a standard mode of business, and the large and growing number of personal
computers in the home and the workplace. Network service providers have had
difficulty in meeting this increased demand in bandwidth due to significant
constraints of the existing communications infrastructure, which was originally
designed to carry only voice traffic. To alleviate this bottleneck, network
service providers are increasingly deploying next-generation optical networks
that address the demand for high-speed communications.
Optical networks transmit data by pulses of light through an optical fiber.
Light through a glass medium can carry more information over longer distances
than electrical signals can carry over a copper medium. Optical signals are
generated by lasers that produce light at specific wavelengths. A variety of
other fiber optic components are used to create, combine, isolate, amplify,
split, channel and perform various other functions on these optical signals.
Fiber optic components are split into two broad categories: actives, which
process both optical and electrical signals, and passives, which process only
optical signals.
Innovations at the fiber optic component level have historically enabled a
number of major advances in optical networking systems. Until recently, optical
signals carried information on one wavelength. In the last several years,
however, components have been developed that are capable of separating light
into different specified wavelengths for transmission in an optical fiber, and
network systems vendors have used these components to develop enhanced
equipment, which have greatly increased network capacity, including wavelength
division multiplexing, or WDM systems, that are capable of transmitting data
simultaneously on a number of different wavelengths along the same optical
fiber.
In addition to increasing the number of wavelengths, component innovation
has also increased the amount of data that can be transmitted per wavelength, or
data rate. And as the technology has improved, network service providers have
been upgrading the data rates of their optical networks. Today, service
providers are beginning to deploy OC-192, or 10 gigabits per second, equipment
throughout their networks and are in the early stages of developing and testing
equipment with OC-768, or 40 gigabits per second capability, creating a need for
innovative components capable of operating at these high speeds.
Component innovations have also led to the development of the fiber
amplifier. A fiber amplifier amplifies the optical signals, resulting in a
dramatic increase in the distance over which optical signals can be
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transmitted without regeneration. Regeneration is the process of converting the
signals from optical to electrical and back to optical to restore signal quality
and strength. Regeneration requires large, expensive equipment, often in remote
locations, which can be costly to deploy, operate and maintain. Fiber amplifiers
restore the signal strength without regeneration and result in significantly
lower equipment, operations and maintenance costs. Prior to the development of
fiber amplifiers, signal attenuation, or loss, limited the distance over which
an optical signal could be transmitted without regeneration to approximately 70
kilometers. With fiber amplifiers, optical signals can be transmitted thousands
of kilometers. Improvements in fiber amplifiers enable network equipment
manufacturers to continue to develop longer reach capability that has led to,
among other things, all-optical networks that operate without any regeneration.
In order to address the growing requirements of communications networks,
there is a demand for increasingly sophisticated systems and components. The
fiber optic components market, including actives and passives, is one of the
fastest growing portions of the telecommunications sector. RHK estimates that
the market for fiber optic components for terrestrial dense wavelength
multiplexing, or DWDM, alone was approximately $5 billion in 2000 and is
expected to grow to over $24 billion by 2004. As a result of the rapid pace of
new product introductions and the difficulty of designing and producing the
requisite components, systems providers are increasingly turning to suppliers of
fiber optic products. These suppliers must offer high performance products that
are compact, consume less power and are designed to be manufacturable in high
volumes. These new innovative fiber optic products enable systems companies to
offer solutions with increased channel counts, higher data rates, longer reach
lengths and new services, and which reduce overall network cost of ownership.
COMPANY STRATEGY
Our objective is to be the leading provider of innovative, fiber optic
products that enable our customers to deploy and optimize next-generation
optical networks. Key elements of our strategy include:
Leverage our position as a leading market innovator. We believe that we
have a unique combination of component design and systems architecture
knowledge, an extensive intellectual property portfolio, and strong management
experience in the optical and high technology manufacturing industries. Since
1990, we have focused exclusively on developing optical products and have formed
close relationships with leading research and development organizations in
addition to optical networking companies. We intend to leverage our position as
a leading market innovator in the industry to obtain new customers, partners and
employees.
Focus our research and development efforts on continuing to broaden our
product offerings. We believe that the breadth and depth of our product line,
including both actives and passives, differentiates us from many of our
competitors. We intend to continue to expand the breadth of our product line by
developing and offering best-in-class products. We believe we can accomplish
this goal by continuing to aggressively invest in product development and by
leveraging our existing technological capabilities, including our intellectual
property and optical expertise. For example, we are presently leveraging our
expertise in tunable lasers for test and measurement to develop advanced tunable
transmitters as solutions to replace existing fixed wavelength lasers.
Collaborate with leading innovative systems companies. We believe that we
are integral to the development efforts of our customers, which provides us with
unique insight into the requirements of next-generation optical networks.
Regular contact with key decision-makers in both service and equipment
providers' organizations provides us with opportunities to collaborate with
these companies to provide the right solutions, solve implementation problems
and aid in the design of future systems architecture. In addition, we believe
our ability to design and offer our customers innovative fiber optic products
for their system solutions gives us a strategic advantage over our competitors
with respect to system design wins. We intend to continue to target our
development efforts to both the current systems manufacturers as well as
emerging optical systems companies, whose innovative designs, we believe, will
drive the next-generation optical network.
Pursue strategic acquisitions. We intend to continue to leverage our
reputation to aggressively pursue strategic acquisitions that can provide us
with key intellectual property, strategic products and highly qualified
engineering personnel to rapidly increase our technological expertise and expand
the breadth of our product portfolio.
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PRODUCTS AND TECHNOLOGY
Our Smart Optics for Networks(TM) products enable our customers to develop
next-generation optical networks with increased channel counts, higher data
rates, longer reach lengths and new services, and which reduce overall network
cost of ownership. Our product offerings are grouped into three primary
categories: passives, actives, and photonics tools.
Passives
Our passive components are used in the following applications:
- fiber amplifiers, including erbium-doped fiber amplifiers ("EDFAs") and
Raman amplifiers;
- wavelength management, including optical add-drop and
multiplexing-demultiplexing, dispersion compensation; and
- other optical networking applications.
Our passive components include the following:
- C- and L-band optical circulators;
- polarization beam combiners and splitters;
- pump-pump combiners;
- pump-signal combiners;
- band splitters; and
- other products in development.
Our C- and L-band optical circulators are used to route signals to the
desired sections of a network, such as in EDFAs or wavelength management
applications. Polarization beam combiners and splitters, pump-pump combiners and
pump-signal combiners are used in Raman amplifiers and EDFAs for combining the
optical power from pump lasers and optical signals. Our band splitters are used
to split or combine C- and L-band signals in wavelength management applications.
Our passive components feature low loss, wide wavelength performance, compact
size, high optical power handling, and cost-effective design. These features
result in optical networks with longer reach lengths, increased channel counts,
new services, and more cost-effective systems. Our passive components are all
tested to Telcordia industry standards for high reliability.
Our passives components were developed utilizing our technical capabilities
in advanced crystal design, optics design and modeling, high power handling
design and test, passive athermalization, and advanced fiber optic packaging.
Our advanced crystal design technology allows us to tailor crystal materials for
novel optical components with high performance and wide wavelength operation,
such as for our optical circulators and polarization beam combiners. Our optics
design and modeling capabilities produce components with optimized performance
and low loss. Our capabilities in high power handling design and test ensure our
passive components operate under the highest optical power levels needed for new
applications such as Raman amplifiers. Our passive athermalization technology is
used to develop new passive components that require no electrical heating or
cooling for temperature stabilization. Finally, our advanced fiber optic
packaging platform is used in all of our passive components to ensure the
highest reliability to Telcordia requirements.
Actives
Our actives products include swept-wavelength lasers, test and measurement
tunable lasers, network tunable laser modules, and high-speed opto-electronics.
These and other actives products are in various stages of production and
development. Our high performance swept-wavelength and test and measurement
tunable lasers are used for testing and measuring fiber optic components and
systems in manufacturing, development and research environments. These lasers
provide rapid, precise, and wide tuning or wavelength scanning for efficient
testing. We are developing network tunable laser modules to replace conventional
fixed wavelength
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lasers in telecommunications networks. These network tunable laser modules are
designed for high output power and wide wavelength range to provide a high
degree of flexibility in next-generation networks. Our high-speed products
include modulator data drivers and clock drivers operating at OC-192 and OC-48,
as well as other products in development. These products are designed to
increase the data rate in optical networks.
Our actives products are based on our technologies in tunable lasers and
high-speed opto-electronics. Our tunable laser capabilities include advanced
laser design, development and manufacturing, advanced laser packaging for high
reliability, dynamic filter technology for wide tuning, advanced thin films for
extremely low optical reflections, and integrated wavelength locking technology
that results in minimal error in the laser wavelength from the desired channel.
These capabilities have resulted in tunable laser products with high output
power and wide wavelength coverage. Our high-speed opto-electronics capabilities
include analog chip design, photodetector design and advanced manufacturing,
packaging and assembly. These capabilities have resulted in our 60 gigahertz
photodetector product and electronic amplifier products at speeds greater than
15 gigahertz, while allowing us to develop products that operate at data rates
of OC-192 or OC-768.
Photonics Tools
We offer a wide range of photonics tools for advanced research, development
and manufacturing. These products leverage our core competencies in optics for a
number of applications including telecommunications research and product
development. For example, our precision opto-mechanics and picomotor products
are used for advanced manufacturing of fiber optic components and for research
and development of high-speed network products. Our photodetectors, which are
devices that convert optical signals to electrical signals faster than the
products being measured, are needed to accurately characterize the optical
performance of the tested device, and our high-speed photodetectors are being
used to develop OC-768 products.
CUSTOMERS
We sell our fiber optic products to network equipment providers and our
advanced photonics tools to customers in the telecommunications, semiconductor,
and metrology industries. For the year ended December 31, 2000, Corvis
Corporation, Agilent Technologies, and Corning Incorporated accounted for 17.6%,
14.4%, and 10.6% of our net revenues, respectively. No single customer accounted
for more than 10% of our revenues for the nine-month period ended December 31,
1999.
CUSTOMER AGREEMENTS
In December 1996, we entered into a development agreement with
Hewlett-Packard GmbH, now Agilent Technologies Deutschland GmbH, for the
development of tunable laser modules for test and measurement applications that
would meet specifications established by Agilent. Pursuant to this development
agreement, as amended in November 1997, December 1999 and December 2000, we
agreed to develop tunable laser modules for Agilent and Agilent agreed to make
installment payments to us to cover part of the development costs of the tunable
laser modules with each installment payment payable upon the completion of
specified development phases. In addition, the agreement provides for a base
price to Agilent per tunable laser module purchased, with increases or decreases
in the price based upon increases or decreases in Agilent's list prices to its
customers. Effective in the fourth quarter of 2000, we entered into a further
agreement with Agilent, whereby the base price is adjusted based upon the sales
and manufacturing performances of Agilent and New Focus, respectively. Agilent
does not have any minimum purchase obligations, and may stop placing orders with
us at any time, regardless of any forecast Agilent has previously provided.
Additionally, sales to our customers are generally made pursuant to purchase
orders that are subject to cancellation, modification or rescheduling without
significant penalties. Agilent has recently reduced its orders with us as a
result of the slowdown in the telecommunications industry. Pursuant to these
agreements, Agilent has an irrevocable, exclusive, transferable right to
manufacture and distribute the product developed by us, and Agilent may
manufacture the product itself or have the tunable laser modules manufactured by
a third party. We may not sell the tunable laser modules developed under our
contract with Agilent to anyone other than Agilent without Agilent's prior
written consent.
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In January 2000, we entered into a memorandum of agreement with Alcatel USA
in which Alcatel committed to purchase from us a minimum percentage of Alcatel's
demand for one of our products. The issuance of purchase orders is subject to
receipt of final approval by internal management of Alcatel and to mutually
agreed upon terms and conditions. If the required management approval is
withheld, Alcatel will not place a purchase order and will not be subject to
penalties, costs or other liabilities.
In January 2000, we entered into an agreement with Corning Incorporated,
pursuant to which Corning agrees to pay certain negotiated prices for our
products during the term of the agreement and offers prospective price
protection to Corning should Corning receive offers from one of our competitors
for similar quantity and quality goods under like terms and conditions. Corning
is not obligated to purchase any minimum amounts of our products under the terms
of the agreement, and they may stop placing orders with us at any time,
regardless of any forecast they may have previously provided. The agreement
terminates by its terms in December 2001, unless we agree with Corning to extend
the term for another one-year period.
In August 2000, JCA, acquired by us in January 2001, entered into an
agreement with Corvis Corporation in which Corvis agreed to purchase one of
JCA's amplifier products. The agreement provides that Corvis will submit rolling
twelve-month forecasts to JCA. However, orders are not binding on Corvis until
Corvis places purchase orders with JCA. The agreement is for a two-year term,
with an option to renew the agreement upon mutual agreement of the parties.
SALES, MARKETING AND CUSTOMER SUPPORT
We focus our sales and marketing efforts on a select set of key customers.
We take a collaborative approach with our customers and establish relationships
at all levels -- engineering, procurement, and senior management. By actively
collaborating with world-class network system providers, we develop a clear
understanding of the needs in the marketplace. Our collaborative approach allows
us to rapidly respond to customer needs and to stay at the forefront of the
technology required for next-generation networks.
We sell and market our fiber optic products primarily through our direct
sales force. We sell and market our photonics tools primarily through a
combination of direct sales, catalog sales and distributors. We focus our direct
sales efforts on optical network equipment manufacturers. Our direct sales
account managers cover the market on an assigned account basis. We believe that
support services are essential to the successful installation and ongoing
support of our products. Our support services include customer service and
technical support. Our customer service representatives assist customers with
orders, returns and other administrative functions. Our technical support
engineers provide customers with answers to technical and product related
questions as well as application support relating to the use of our products in
the customer's applications. These engineers also help to define the features
that are required for our products to be successful in specific applications.
MANUFACTURING
We manufacture the majority of our products. We do, however, outsource on a
limited basis manufacturing of selected subcomponents, primarily for our
commercial photonics products. We have manufacturing operations in San Jose,
California, Santa Clara, California, Camarillo, California, Fremont, California,
Middleton, Wisconsin and Shenzhen, China. We are currently expanding our
manufacturing facilities in San Jose, California and Shenzhen, China. In
addition, in conjunction with our acquisition of JCA in January 2001, we are
expanding our manufacturing facilities in Camarillo, California. In March 2001,
we announced that we would slow the rate of production in our U.S. and China
factories to bring production in line with lower unit demand anticipated for the
first half of 2001. We will complete facility construction projects that are
currently underway but will not add production equipment in these new facilities
until demand merits.
We are committed to designing and manufacturing high quality products that
have been thoroughly tested for reliability and performance. Our manufacturing
processes utilize stringent quality controls, including incoming material
inspection, in-process testing and final test. We perform extensive in-house
thermal, shock and environmental testing, including testing to industry accepted
standards developed by Telcordia, a company that provides certain centralized
research and standard coordination for Regional Bell Operating Companies.
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Our products are designed to be fully compliant with standards for quality and
interoperability with existing installation and maintenance systems. As a result
of our continuing commitment to manufacturing high quality products, our
operations in San Jose and Santa Clara, California and Shenzhen, China are each
ISO certified.
We will also continue to leverage our competencies in rapid prototyping,
automation and proprietary tools and processes to improve our manufacturing
abilities.
Rapid prototyping. As advances in optical network technologies accelerate,
the time required to introduce new products into the market needs to be
minimized. Our capabilities include precision machining and advanced tooling
design for quick turn implementation of new designs into product prototypes.
These capabilities result in reduced development times for new products and
support yields and capacity improvement efforts within manufacturing.
Automation and proprietary tools and processes. Traditional manufacturing
processes for fiber optic components and modules are highly manual, yet require
high precision and high yields. We have developed automated precision processes
and proprietary tools to increase our manufacturing yields and capacity. For
example, we have developed robotics technology with pick-and-place capability at
the one micro-meter level. We will continue to seek opportunities for automation
to increase yields and capacity.
RESEARCH AND DEVELOPMENT
We have assembled a team of engineers, technicians and operators with
significant experience in highly specialized manufacturing industries such as
optical networking, semiconductor capital equipment, optical storage, and
communications. Our product development efforts focus on high-speed
opto-electronics, innovative fiber optic products and advanced automation
techniques, which will enable us to offer next-generation products in volume.
We have made, and will continue to make, a substantial investment in
research and development. Our gross research and development expenses, excluding
funding received from research and development contracts, totaled $27.2 million
for the fiscal year ended December 31, 2000, $8.4 million for the nine-month
period ended December 31, 1999 and $9.1 million for the fiscal year ended March
31, 1999.
COMPETITION
Competition in the optical component and module market is intense. We face
competition from companies, including JDS Uniphase Corporation, Lucent
Technologies and Nortel Networks Corporation. Some of our competitors, including
JDS Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation
are also our customers. Lucent Technologies and Nortel Networks Corporation are
vertically integrated and provide both entire fiber optic systems and the
components that comprise fiber optic systems. We compete with these companies
with respect to the development, marketing and sale of fiber optic components.
In some cases, we supply test equipment and photonics tools to competitors of
our fiber optics components business.
Many of our competitors 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 than we can to the development, promotion, sale and
support of their products. In addition, some of our competitors have large
market capitalizations or cash reserves and 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,
more extensive customer bases, better developed distribution channels, broader
product offerings and greater manufacturing capacity than we have. These
companies can leverage their customer bases and broader product offerings and
adopt aggressive pricing policies to gain market share. Additional competitors
may enter the market and we
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are likely to compete with new companies in the future. We expect to encounter
potential customers that, due to existing relationships with our competitors,
are committed to the products offered by these competitors.
The principal factors upon which we compete are:
- the innovative nature and features of fiber optic component products;
- ability to rapidly develop and introduce new products;
- responsive customer service and support; and
- price.
We believe we compete favorably on each of these factors.
INTELLECTUAL PROPERTY
Our success and ability to compete depend substantially upon our
technology. We pursue patent protection in the United States and abroad, and as
of December 31, 2000 we have been granted 29 U.S. patents and one European
patent. As of December 31, 2000, we have 47 U.S. utility filings, of which three
have been allowed by the U.S. Patent and Trademark Office, 13 U.S. provisional
filings and 22 overseas filings in various stages of prosecution, and we
continue to file new patent applications in the United States and overseas. The
expiration dates of our patents range from May 25, 2009 to August 17, 2018.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as our existing
contracts with equipment manufacturers, our licensing agreements with companies
and universities, the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. We cannot assure you that others will not develop
technologies that are similar or superior to our technologies.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our proprietary information. Our confidentiality agreements
generally prohibit the disclosure or use of the technology being evaluated or
licensed. From time to time we license our technology to various third parties
pursuant to non-exclusive license agreements that prohibit the disclosure or use
of the technology except as set forth in the agreements. 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 there can be no assurance that the steps taken
by us will 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
each of the market segments in which we participate. We expect that the optical
networking industry may be increasingly subject to third-party infringement
claims as the number of competitors 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. We are
currently defending a claim brought against us by U.S.A. Kaifa Technology, Inc.,
which was acquired by E-Tek Dynamics, Inc., which has been acquired by JDS
Uniphase, alleging, among other things, that we have infringed some of their
intellectual property rights. We cannot make any assurances that additional
third parties in the future will not claim infringement by us with respect to
our products and our associated technology. The Kaifa claim and other claims of
this kind in the future, with or without merit, could be time-consuming to
defend, result in costly litigation, divert management's attention and
resources, result in injunctions against us, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements of this kind, 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.
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EMPLOYEES
At December 31, 2000, we had a total of 1,622 employees located in both the
United States and the People's Republic of China. Of the total, 1,327 were in
manufacturing, 162 were in research and development, 33 were engaged in sales
and marketing, and 100 were in administration. None of our employees are subject
to a collective bargaining agreement.
During January and February 2001, we added approximately 230 employees as a
result of our acquisitions of JCA Technology, Inc. and Globe Y. Technology, Inc.
In March 2001, we announced that we would slow the rate of production in
our U.S. and China factories to bring production in line with anticipated lower
demand for the first half of 2001. To accomplish this goal, we furloughed
approximately 260 direct production employees in training at our China
operations and reduced our U.S. workforce by approximately 70 people,
predominantly direct labor employees.
As of March 20, 2001, we employ approximately 1,725 employees.
RISK FACTORS
You should carefully consider the risks described below and all of the
information contained in this Annual Report. If any of the following risks
actually occur, our business, financial condition and results of operations
could be harmed, 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 HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We incurred net losses of $36.0 million for the fiscal year ended December
31, 2000, $7.7 million for the nine-month period ended December 31, 1999, and
$5.0 million for our fiscal year ended March 31, 1999. As of December 31, 2000,
we had an accumulated deficit of $51.5 million. In March 2001 we announced lower
net revenue guidance for our fiscal year ending December 30, 2001 from $240
million to $170-190 million due to the unanticipated widespread softening of the
U.S. economy and the telecommunications industry. We have experienced order
cancellations and extensions of product shipment dates by our customers who are
adjusting their inventory levels in response to slower industry growth. These
cancellations and extensions adversely impact our revenues and have resulted in
higher inventory levels than required to support our current sales forecast.
These conditions may significantly delay, and could prevent, our ability to
operate profitably. We expect to incur significant product development, sales
and marketing and administrative expenses, and, as a result, we will need to
generate increased revenues to achieve profitability. Additionally, the Company
has recently completed two acquisitions and will record significant intangible
assets based on the underlying book value of the assets of the two companies
acquired. Amortization of these intangible assets and other acquisition-related
charges will reduce the Company's profitability. Even if we achieve
profitability, given the competition in, and the evolving nature of, the optical
networking market, we may not be able to sustain or increase profitability on a
quarterly or annual basis. As a result, we will need to generate significantly
higher revenues while containing costs and operating expenses if we are to
achieve profitability.
ORDER CANCELLATIONS AND EXTENSIONS OF PRODUCT SHIPMENT DATES BY SOME OF OUR
CUSTOMERS WILL ADVERSELY IMPACT OUR OPERATING RESULTS.
Our sales are generally made pursuant to purchase orders that are subject
to cancellation, modification or rescheduling without significant penalties. We
have recently experienced order cancellations and extensions of product shipment
dates by some of our customers. If these or other current customers stop placing
orders, or further reduce orders, we may not be able to replace these orders
with orders from new customers. None of our current customers have any minimum
purchase obligations, and they may stop placing orders with us at any time,
regardless of any forecast they may have previously provided. The loss of any of
our key customers or further significant reductions in sales to these customers
would reduce our net revenues from the levels currently expected.
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WE HAVE ONLY RECENTLY BEGUN SELLING FIBER OPTIC PRODUCTS TO THE
TELECOMMUNICATIONS INDUSTRY, AND WE MAY NOT ACCURATELY PREDICT OUR REVENUES FROM
THESE PRODUCTS, WHICH COULD CAUSE QUARTERLY FLUCTUATIONS IN OUR NET REVENUES AND
RESULTS OF OPERATIONS AND MAY RESULT IN VOLATILITY OR DECLINES IN OUR STOCK
PRICE.
We have only recently begun selling our fiber optic products to the
telecommunications industry, and we have only generated revenues from the sale
of these products since March 1999. Moreover, our ability to accurately forecast
revenues is impacted by weaknesses and uncertainties regarding overall demand
within the telecommunications industry, inventory levels within the industry,
sudden order reductions and cancellations by customers, lower backlog of
customer orders, and potential pricing pressures that may arise from supply-
demand conditions within the industry. Because we have only recently begun to
sell these products, we have in the past and may in the future be unable to
accurately forecast our revenues from sales of these products, and we have
limited meaningful historical financial data upon which to plan future operating
expenses. In March 2001, we announced lower net revenue guidance for our fiscal
year ending December 30, 2001 from $240 million to $170-190 million due to the
unanticipated widespread softening of the U.S. economy and the
telecommunications industry. Many of our expenses are fixed in the short term,
and we may not be able to quickly reduce spending if our revenue is lower than
we project. Major new product introductions will also result in increased
operating expenses in advance of generating revenues, if any. Therefore, net
losses in a given quarter could be greater than expected. We may not be able to
address the risks associated with our limited operating history in an emerging
market and our business strategy may not be sustainable. Failure to accurately
forecast our revenues and future operating expenses could cause quarterly
fluctuations in our net revenues and may result in volatility or a decline in
our stock price.
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF THESE CUSTOMERS OR A
SIGNIFICANT REDUCTION IN SALES TO THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR
REVENUES.
In the fiscal year ended December 31, 2000, Corvis Corporation, Agilent
Technologies, and Corning Incorporated accounted for 17.6%, 14.4%, and 10.6% of
our net revenues, respectively. In the nine-month period ended December 31,
1999, none of our customers accounted for more than 10% of our net revenues. We
anticipate that our operating results will continue to depend on sales to a
relatively small number of customers. The loss of any of these customers or a
significant reduction in sales to these customers could adversely affect our
revenues.
RISKS RELATED TO THE OPTICAL NETWORKING INDUSTRY
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AND OPTICAL NETWORKS ARE NOT
DEPLOYED TO SATISFY THE INCREASED BANDWIDTH REQUIREMENTS AS WE ANTICIPATE, SALES
OF OUR PRODUCTS MAY DECLINE, AND OUR NET REVENUES MAY BE ADVERSELY AFFECTED.
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communications, the continuing increase in
the amount of data transmitted over communications networks, or bandwidth, and
the growth of optical networks to meet the increased demand for bandwidth. If
the Internet does not continue to expand as a widespread communications medium
and commercial marketplace, the need for significantly increased bandwidth
across networks and the market for optical networking products may not continue
to develop. Future demand for our products is uncertain and will depend to a
great degree on the continued growth and upgrading of optical networks. If the
growth and upgrading of optical networks does not continue, sales of our
products may decline, which would adversely affect our revenues.
THE OPTICAL NETWORKING MARKET IS NEW AND UNPREDICTABLE AND CHARACTERIZED BY
RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES NOT
DEVELOP AND EXPAND AS WE ANTICIPATE, DEMAND FOR OUR PRODUCTS MAY DECLINE, WHICH
WOULD ADVERSELY IMPACT OUR REVENUES.
The optical networking 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 rate. Widespread
adoption of optical networks
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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 revenues in this emerging market will depend on, among
other things:
- 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 changing market conditions, the sales of our products
may decline, which would adversely impact our revenues.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICES
OF OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.
We have experienced decreases in the average selling prices of some of our
products, including most of our passive component products. We anticipate that
as products in the optical component and module market become more commoditized,
the average selling prices of our products may decrease in response to
competitive pricing pressures, new product introductions by us or our
competitors or other factors. The optical component and module market is
experiencing extreme volatility as a result of lower product demand, which will
make our efforts to increase our sales volume difficult. If we are unable to
offset the anticipated decrease in our average selling prices by increasing our
sales volumes or product mix, our net revenues and gross margins will decline.
In addition, to maintain or improve our gross margins, we must continue to
reduce the manufacturing cost of our products, and we must develop and introduce
new products and product enhancements with higher margins. If we cannot maintain
or improve our gross margins, our financial position may be harmed and our stock
price may decline.
RISKS RELATED TO OUR BUSINESS
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS IN A TIMELY
MANNER.
Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. 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 the efforts of our suppliers to rapidly achieve
volume production. We recently announced our plan to deliver samples of our new
tunable laser product to systems provider customers in April 2001, with
production to start in late 2001. If we fail to effectively transfer production
processes, develop product enhancements or introduce new products that meet the
needs of our customers as scheduled, our net revenues may decline.
WE HAVE RECENTLY ACQUIRED TWO BUSINESSES. IF WE EXPERIENCE DIFFICULTY IN
INTEGRATING THESE NEW ACQUISITIONS, OUR BUSINESS MAY BE ADVERSELY AFFECTED. ANY
ACQUISITIONS WE MIGHT MAKE IN THE FUTURE COULD DISRUPT OUR BUSINESS AND HARM OUR
FINANCIAL CONDITION.
We recently acquired JCA Technology, Inc. and Globe Y. Technology, Inc. The
efficient integration of these businesses into our organization will be
important to our success. If our integration efforts are unsuccessful, our
business will suffer. We expect to spend significant resources to integrate
these businesses into our organization. Our headcount increased by approximately
230 employees as a result of the acquisitions, and these new employees must be
integrated with our existing employees. Both JCA and Globe Y were privately held
and may require substantial investments in operational and financial
infrastructure to ensure that their systems and processes adequately support
operating as a publicly held organization. Each of these organizations will also
need additional investments in manufacturing infrastructure in order to ramp
production volumes. A key employee of JCA previously owned substantially all of
the stock of JCA, and a key employee of Globe Y previously owned all the stock
of Globe Y. Although each of these individuals has executed employment
agreements with the Company, we cannot assure you that we can retain either or
both
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of these individuals. We have limited experience with integrating acquired
businesses into our organization. Our integration efforts may not be successful
and may result in unanticipated operations problems, expenses and liabilities
and the diversion of management attention. If we are unable to integrate these
companies into our organization in a timely and effective manner, our business
and our operating results will be adversely affected.
We anticipate that in the future, as part of our business strategy, we will
continue to make strategic acquisitions of complementary companies, products or
technologies. In the event of any further future acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities; or
- incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These acquisitions also involve numerous risks, including:
- problems combining the acquired operations, technologies or products;
- unanticipated costs or liabilities;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.
COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS, OR
CAUSE US TO LOSE MARKET SHARE.
Competition in the optical component and module market in which we compete
is intense. We face competition from public companies, including JDS Uniphase
Corporation, Lucent Technologies and Nortel Networks Corporation. Many of our
competitors 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
than we can to the development, promotion, sale and support of their products.
In addition, the market capitalization and cash reserves of several of our
competitors are much larger than ours, and, as a result, these competitors 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. For example,
JDS Uniphase Corporation acquired E-Tek Dynamics in June 2000 and acquired SDL,
Inc. in February 2001. Such acquisitions could give our competitors a strategic
advantage. For example, if our competitors acquire any of our significant
customers, these customers may reduce the amount of products they purchase from
us. Alternatively, some of our competitors may spin-out new companies in the
optical component and module market. For example, Lucent Technologies has
announced that it intends to spin-off its microelectronics business, including
Lucent's optoelectronics components and integrated circuits division. These
companies may compete more aggressively than their former parent companies due
to their greater dependence on our markets. In addition, many of our potential
competitors have significantly more established sales and customer support
organizations, much greater name recognition, more extensive customer bases,
more developed distribution channels and broader product offerings than we have.
These companies can leverage their customer bases and broader product offerings
and adopt aggressive pricing policies to gain market share. Additional
competitors may enter the market, and we are likely to compete with new
companies in the future. We expect to encounter potential customers that, due to
existing relationships with our
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competitors, are committed to the products offered by these competitors. As a
result of the foregoing factors, we expect that competitive pressures may result
in price reductions, reduced margins and loss of market share.
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 AND CAUSE US TO LOSE CUSTOMERS.
Some of our products are designed to be deployed in large and complex
optical networks. Because of the nature of these products, they can only be
fully tested for reliability when deployed in networks for long periods of time.
Our fiber optic products may contain undetected defects when first introduced or
as new versions are released, and our customers may discover defects in our
products only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things:
- loss of customers;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
The occurrence of any one or more of the foregoing factors could cause our
net revenues to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUE AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CONTINUE TO CAUSE VOLATILITY IN OUR
STOCK PRICE.
The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed 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
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of up to one year or more. In addition, some of
our customers require that our products be subjected to Telcordia qualification
testing, which can take up to nine months or more. While our customers are
evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to the customer's 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 component and module market, we cannot predict
the length of these sales and development cycles. The recent slowdown in the
U.S. economy has resulted in order cancellations and extensions of product
shipment dates by our customers. These long sales cycles, coupled with the
uncertain affects of the slowdown in the U.S. economy, may cause our revenues
and operating results to vary significantly and unexpectedly from quarter to
quarter, which could continue to cause volatility in our stock price.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL OR
RETAIN EXISTING PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel. Except for certain employment agreements entered into in connection
with our acquisitions of JCA and Globe Y, none of our officers or key employees
are bound by an employment agreement for any specific term and these individuals
may terminate
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their employment at any time. In addition, we do not have "key person" life
insurance policies covering any of our employees.
We recently furloughed approximately 260 direct production employees
currently in training at our operations in Shenzhen, China. We also reduced our
U.S. workforce by approximately 70 people, predominantly direct labor employees.
However, we will continue to hire selectively in the engineering, sales and
marketing and administrative functions. 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 San Francisco Bay Area. We may not be successful in
attracting, assimilating or retaining qualified personnel to fulfill our current
or future needs, which could adversely impact our ability to develop and sell
our products.
WE HAVE LIMITED PRODUCT OFFERINGS, AND IF THE CURRENT DECLINE IN DEMAND FOR
THESE PRODUCTS CONTINUES OR FAILS TO DEVELOP AS WE EXPECT, OUR NET REVENUES WILL
DECLINE.
We derive a substantial portion of our net revenues from a limited number
of products. Specifically, in the fiscal year ended December 31, 2000, we
derived approximately 37% and 14%, respectively, of our net revenues from our
circulators and tunable laser modules for test and measurement. We expect that
net revenues from a limited number of products will continue to account for a
substantial portion of our total net revenues. Demand for these and other
optical component and module products has declined as a result of the recent
slowdown in the economy and we have recently experienced order cancellations and
delays in product shipment dates by our customers. Aside from the current
slowdown in the telecommunications industry, continued and widespread market
acceptance of our products is critical to our future success. We cannot assure
you that, once the telecommunication industry conditions improve, our current
products will achieve market acceptance at the rate at which we expect, or at
all, which could adversely affect our net revenues.
IF WE FAIL TO ACCURATELY TIME OUR MANUFACTURING CAPACITY WITH THE DEMAND FOR OUR
PRODUCTS, OUR BUSINESS MAY NOT SUCCEED.
We face a challenge in accurately timing the installation of our
manufacturing capacity with the demand for our products. Throughout 2000 we
aggressively expanded our manufacturing capacity in both the U.S. and China,
through the expansion of facilities and the hiring of employees. At December 31,
2000, we had a total of 1,622 employees, up from 289 employees at December 31,
1999. As a result of the recent, and sudden, order cancellations and extensions
of product shipment dates by our customers, we are slowing the rate of
production in our U.S. and China factories. We recently reduced our U.S.
workforce by approximately 70 people and furloughed approximately 260 direct
production employees currently in training at our China operations. We intend to
complete construction of facilities currently underway, but we are curtailing
efforts to install equipment in these facilities until market conditions
improve. We believe this approach will allow us to quickly ramp production if
unit demand for our products merits. However, if demand for our products
continues to decline, we may have more employees and facility space than
necessary to deliver our products, which would adversely impact our ability to
achieve profitability, and could require us to further reduce the size of our
operations.
Despite our recent announcement to slow down expansion of our business, we
still face challenges as a result of our rapid expansion over the past year. We
currently operate facilities in San Jose, California, Santa Clara, California,
Camarillo, California, Fremont, California, Middleton, Wisconsin and Shenzhen,
China. The increase in employees as a result of the acquisitions and the growth
in our operations over the past year, combined with the challenges of managing
geographically-dispersed operations, have placed, and 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 recent growth and to
accurately time any future growth with market demand for our products could
adversely impact our ability to manufacture and sell our products, which could
reduce our revenues.
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WE MUST EXPAND SUBSTANTIALLY OUR SALES ORGANIZATION IN ORDER TO INCREASE MARKET
AWARENESS AND SALES OF OUR PRODUCTS OR OUR REVENUES MAY NOT INCREASE.
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 in order 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 sales personnel and
applications engineers we need. If we are unable to expand our sales operations,
we may not be able to increase market awareness or sales of our products, which
would prevent us from increasing our revenues.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT MAY
SUBSTANTIALLY INCREASE OUR COSTS AND HARM OUR BUSINESS.
We may from time to time become involved in various lawsuits and legal
proceedings. For example, in March 2000, a former employee filed a complaint
against us in Santa Clara Superior Court. The former employee is alleging
wrongful termination in violation of public policy, breach of the covenant of
good faith and fair dealing and fraud. The former employee seeks unspecified
general and special damages, punitive damages, attorneys' fees and costs in the
form of cash and shares of the Company's common stock. In September 2000 the
parties participated in mediation but were unable to reach resolution. The
parties are currently in the process of completing discovery. The Company will
be filing a motion to dismiss shortly as to the causes of action for breach of
contract and fraud. A trial date has not yet been set. Litigation is subject to
inherent uncertainties, and an adverse result in this or other matters that may
arise from time to time may adversely impact our operating results or financial
condition.
On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc. et al., Civil Action No. 01-1020, was filed against the Company
and several of its officers and directors in the United States District Court
for the Northern District of California. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions were filed thereafter against New Focus and several of its officers and
directors in the United States District Court for the Northern District of
California. Those actions are Rosen v. New Focus, Inc., et al., Civil Action No.
01-1065, Solomon v. New Focus, Inc., et al., Civil Action No. 01-2023, Speck v.
New Focus, Inc., et al., Civil Action No. 01-1093, Deutch v. New Focus, Inc., et
al., Civil Action No. 01-1123, and Connors v. New Focus, Inc., et al., Civil
Action No. 01-1148. We intend to vigorously defend against these claims.
Any litigation to which we are subject could require significant
involvement of our senior management and may divert management's attention from
our business and operations. For more information about current legal
proceedings, see "Part I, Item 3 -- Legal Proceedings."
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the fiscal year ended December 31, 2000, 30.7% of our net revenues were
from international sales. We plan to increase our international sales
activities. Our international sales will be limited if we cannot establish
relationships with international distributors, establish additional foreign
operations, expand international sales channel management, hire additional
personnel and develop relationships with international service providers.
Additionally, our international sales may be adversely affected if international
economies weaken. Even if we are able to successfully continue international
operations, we may not be able to maintain
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or increase international market demand for our products. Our international
operations are subject to risks including the following:
- greater difficulty in accounts receivable collection and longer
collection periods;
- difficulties and costs of staffing and managing foreign operations;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- sudden and unexpected reductions in demand in particular countries in
response to exchange rate fluctuations;
- certification requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- political and economic instability.
While we expect our international revenues and expenses to be denominated
predominantly in U.S. dollars, a portion of our international revenues 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 to reduce these risks.
ELECTRICAL BLACKOUTS AND OTHER BUSINESS INTERRUPTIONS COULD ADVERSELY EFFECT OUR
BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We do not
have a detailed disaster recovery plan and carry only a limited amount of
business interruption insurance to compensate us for losses that may occur. Our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power in the
state. We currently do not have backup generators or alternate sources of power
in the event of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our affected facilities. Any losses
or damages incurred by us as a result of blackouts or other business
interruptions could impair our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operations.
RISKS RELATED TO MANUFACTURING OUR PRODUCTS
IF WE DO NOT ACCURATELY PROJECT DEMAND FOR OUR PRODUCTS, WE WILL HAVE EXCESS
MANUFACTURING CAPACITY OR INSUFFICIENT MANUFACTURING CAPACITY, EITHER OF WHICH
WILL SERIOUSLY HARM OUR RESULTS OF OPERATIONS.
We currently manufacture substantially all of our products in our
facilities located in Santa Clara, San Jose and Camarillo, California and in
Shenzhen, China. Based on the recent and sudden change in U.S. economic
conditions, we now expect lower demand for our products in 2001. We recently
announced that we will slow the rate of production in our U.S. and China
factories to bring production in line with the lower unit demand anticipated for
the first half of 2001. To accomplish this goal, we will immediately furlough
approximately 260 direct production employees currently in training at our
operations in Shenzhen, China. We will further lower production output through
the adjustment of work schedules at our China manufacturing facilities. We plan
to complete facility construction projects that are currently underway, in
particular the second phase of our second and larger manufacturing facility in
Shenzhen, China, but will not add production equipment in these new facilities
until demand merits. These actions will allow us to lower production output
during the first half of 2001 while retaining flexibility to meet demand if it
should increase in the near future. We expect that the production slowdown will
negatively impact our gross margins during the first half of 2001. If we fail to
accurately coordinate our facility build out schedule with demand for our
products in the future, we will have excess capacity or insufficient capacity,
either of which will seriously harm our results of operations.
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Furthermore, we may experience delays, disruptions or quality control
problems in our manufacturing operations, and, as a result, product shipments to
our customers could be delayed beyond the revised shipment schedules requested
by our customers, which would negatively impact our revenues, competitive
position and reputation. For example, we have, in the past, experienced a
disruption in the manufacture of some of our products due to changes in our
manufacturing processes, which resulted in reduced manufacturing yields and
delays in the shipment of our products. If we experience similar disruptions in
the future, it may result in lower yields or delays of our product shipments,
which could adversely affect our revenues, gross margins and results of
operations.
OUR FAILURE TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS COULD
CAUSE US TO INCUR ADDITIONAL COSTS, HAVE EXCESS INVENTORIES OR HAVE INSUFFICIENT
MATERIALS TO BUILD OUR PRODUCTS, ANY OF WHICH COULD HARM OUR RESULTS OF
OPERATIONS.
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 or materials at a given 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. Any of these occurrences would negatively
impact our results of operations. Recent order cancellations and extension of
product delivery dates by our customers have created a risk of material
obsolescence due to our overestimation of component and material requirements
for our manufacturing facilities. Additionally, in order to avoid excess
material inventories we may incur cancellation charges associated with modifying
existing purchase orders with our vendors.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED AND
OUR REVENUES MAY SUFFER.
The manufacture of our products involves complex and precise processes. Our
manufacturing costs are relatively fixed, and, thus, manufacturing yields are
critical to our results of operations. 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. In
addition, we may experience manufacturing delays and reduced manufacturing
yields upon introducing new products to our manufacturing lines. We have in the
past experienced lower than targeted product yields, which have resulted in
delays of customer shipments, lost revenues and impaired gross margins. We may
experience lower than targeted product yields in the future which could
adversely affect our operating results.
OUR MANUFACTURING OPERATIONS IN CHINA SUBJECT US TO RISKS INHERENT IN DOING
BUSINESS IN CHINA, WHICH MAY HARM OUR MANUFACTURING CAPACITY AND OUR NET
REVENUES.
We have a manufacturing facility located in Shenzhen, China that became
operational in June 2000. In addition, in July 2000, we acquired a second
facility in Shenzhen, China. These facilities and our ability to operate the
facilities may be adversely affected by changes in the laws and regulations of
the People's Republic of China, such as those relating to taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters. These manufacturing facilities are located on land leased from China's
government by Shenzhen New and High-Tech Village Development Co. and the
Shenzhen Libaoyi Industry Development Co., Ltd. pursuant to land use
certificates and agreements, each with terms of 50 years. We lease the smaller
of our manufacturing facilities from Shenzhen New and High-Tech Village
Development Co. pursuant to a lease agreement that will expire in November 2002,
subject to our option to renew for an additional three-year period. We purchased
the second facility in Shenzhen, China. Our assets and facilities located in
China are subject to the laws and regulations of China and our results of
operations in China are subject to the economic and political situation there.
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We believe that our operations in Shenzhen, China are in compliance with
China's applicable legal and regulatory requirements. However, there can be no
assurance that China's central or local governments will not impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures. China's economy differs from the economies of
many countries in such respects as structure, government involvement, level of
development, growth rate, capital reinvestment, allocation of resources, self-
sufficiency, rate of inflation and balance of payments position, among others.
In the past, China's economy has been primarily a planned economy subject to
state plans. Since 1978, China's government has been reforming its economic and
political systems. Reforms of this kind have resulted in significant economic
growth and social change. We cannot assure you that China's policies for
economic reforms will be consistent or effective. Our results of operations and
financial position may be harmed by changes in the political, economic or social
conditions in China.
We plan to export substantially all the products manufactured at our
facilities in China. Accordingly, upon application to and approval by the
relevant government authorities, we will not be subject to certain of China's
taxes and are exempt from customs duties on imported components or materials and
exported products. We are required to pay income tax in China, subject to
certain tax holidays. We may become subject to other taxes in China or may be
required to pay customs duties in the future. In the event that we are required
to pay other taxes in China or customs duties, our results of operations could
be materially and adversely affected.
To successfully meet our overall production goals, we will have to
coordinate and manage effectively between our facilities in the United States
and in China. We have limited experience in coordinating and managing production
facilities that are located on different continents or in the transfer of
manufacturing operations from one facility to another. Our failure to
successfully coordinate and manage multiple sites on different continents or to
transfer our manufacturing operations could seriously harm overall production.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.
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. This customer 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 over the
term of that program.
WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We currently purchase several key components and materials used in the
manufacture of our products from single or limited source suppliers. We may fail
to obtain required components in a timely manner in the future, or could
experience further delays from evaluating and testing the products of these
potential alternative suppliers. The recent softening of demand in the
telecommunications industry could adversely impact the financial condition of
our suppliers, many of whom have limited financial resources. We have in the
past, and may in the future, be required to provide advance payments in order to
secure key components or materials from financially limited suppliers. Financial
or other difficulties faced by these suppliers could limit the availability of
key components or materials. Additionally, financial difficulties could impair
our ability to recover advances made to these suppliers. Any interruption or
delay in the supply of any of these components or materials, or the inability to
obtain these components and 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.
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RISKS RELATED TO OUR INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD SERIOUSLY
HARM OUR ABILITY TO USE OUR PROPRIETARY TECHNOLOGY TO GENERATE REVENUE.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We cannot assure you that our patent applications will be approved, that any
patents that may issue will protect our intellectual property or that third
parties will not challenge any issued patents. Other parties may independently
develop similar or competing technology or design around any patents that may be
issued to us. Our contract with Agilent provides Agilent the right to
manufacture our products using our proprietary intellectual property if Agilent
terminates the contract for cause, including if we are unable to supply
specified quantities of our products to Agilent. The contract contains a
confidentiality provision designed to prevent misappropriation of our
intellectual property. However, we cannot be certain that the steps we have
taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES AND LITIGATION, WHICH
COULD SUBJECT US TO SIGNIFICANT LIABILITY, DIVERT THE TIME AND ATTENTION OF OUR
MANAGEMENT AND PREVENT US FROM SELLING OUR PRODUCTS.
We anticipate, based on the size and sophistication of our competitors and
the history of rapid technological advances in our industry, that several
competitors may have patent applications in progress in the United States or in
foreign countries that, if issued, could relate to our product. If such patents
were to be issued, the patent holders or licensees may assert infringement
claims against us or claim that we have violated other intellectual property
rights. These claims and any resulting lawsuits, if successful, could subject us
to significant liability for damages and invalidate our proprietary rights. The
lawsuits, regardless of their merits, could be time-consuming and expensive to
resolve and would divert management time and attention. Any potential
intellectual property litigation could also force us to do one or more of the
following, any of which could harm our business:
- stop selling, incorporating or using our products that use the disputed
intellectual property;
- obtain from third parties a license to sell or use the disputed
technology, which license may not be available on reasonable terms, or at
all; or
- redesign our products that use the disputed intellectual property.
WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S INTELLECTUAL
PROPERTY RIGHTS, AND IF WE ARE UNSUCCESSFUL IN DEFENDING THIS CLAIM, WE MAY HAVE
TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS NON-INFRINGING
AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES.
On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, acquired by
E-Tek Dynamics, Inc., which was acquired by JDS Uniphase, filed a complaint
against us for patent infringement in the United States District Court for the
Northern District of California. On December 30, 1999, Kaifa filed a first
amended complaint adding state law claims against us and adding as defendants
ten individuals currently employed by us. In addition to maintaining its
original claim of patent infringement against us, Kaifa asserted claims of
intentional and negligent interference with contract against us, trade secret
misappropriation against all of the defendants, unfair competition against all
of the defendants, and breach of contract against several of the individual
defendants. Kaifa seeks a declaratory judgment, damages, preliminary and
permanent injunctive relief, and specific enforcement of the individual
defendants' alleged contractual obligations. Kaifa alleges that our infringement
is willful and seeks enhanced damages and attorneys fees.
On April 28, 2000, Kaifa voluntarily dismissed its claims against two of
the individual defendants. On May 3, 2000, the Court dismissed Kaifa's claim for
negligent interference with contract against us and both of Kaifa's claims for
trade secret misappropriation and unfair competition against an individual
defendant.
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On June 2, 2000, we answered the complaint, denying any liability,
asserting various affirmative defenses and seeking a declaration that the patent
is not infringed by us, is invalid and/or is unenforceable. Currently, the
parties are engaged in fact and expert discovery. A claim construction hearing
regarding the asserted patent claims was held in January 2001, however no ruling
has yet been delivered by the court. Trial is scheduled for October 2001.
To date, we have spent nearly $1.0 million defending this action. If we are
unsuccessful in defending this action, any remedies awarded Kaifa may harm our
business. Furthermore, defending this action will be costly and divert
management's attention regardless of whether we successfully defend the action.
For more information about current legal proceedings, see "Part I, Item
3 -- Legal Proceedings."
IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY
BE UNABLE TO COMPETE EFFECTIVELY.
We regard substantial elements of our technology as proprietary and attempt
to protect them by relying on patent, trademark, service mark, copyright and
trade secret laws. We also rely on confidentiality procedures and contractual
provisions with our employees, consultants and corporate partners. The steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property,
which could harm our business.
It may be necessary to litigate to enforce our patents, copyrights, and
other intellectual property rights, to protect our trade secrets, to determine
the validity of and scope of the proprietary rights of others or to defend
against claims of infringement or invalidity. Such litigation can be time
consuming, distracting to management, expensive and difficult to predict. Our
failure to protect or enforce our intellectual property could have an adverse
effect on our business, financial condition, prospects and results of operation.
For more information about current legal proceedings, see "Part II -- Other
Information, Item 1 -- Legal Proceedings."
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT 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. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, or at all. The inability to obtain any third-party license required to
develop 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 seriously harm our ability to manufacture and sell
our products.
ITEM 2. PROPERTIES
Our corporate headquarters facility of approximately 130,000 square feet is
located in San Jose, California. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in August 2007. We also have
facilities of 52,000 square feet in San Jose and 55,000 square feet in Santa
Clara, California.
We own a 243,000 square foot manufacturing facility in Shenzhen, China. We
have a second Shenzhen facility of approximately 20,000 square feet located on
land leased from China's government by the Shenzhen New and High-Tech Village
Development Co. under land use certificates and agreements with terms of 50
years. We lease this manufacturing facility from the Shenzhen New and High-Tech
Village Development Co. under a lease agreement that will expire in November
2002, subject to our option to renew for an additional three-year period. In
addition, in January 2001, we purchased six acres of land in Shenzhen for future
development.
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Our newly acquired JCA Technology subsidiary leases 42,000 square feet in
Camarillo, California. In January 2001, we entered into a ten-year lease for a
new facility of 145,000 square feet in Camarillo. We plan to vacate the existing
Camarillo facility and occupy the new facility beginning late in 2001 or early
2002.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, acquired by
E-Tek Dynamics, Inc., which was acquired by JDS Uniphase, filed a complaint
against us for patent infringement in the United States District Court, Northern
District of California. On December 30, 1999, Kaifa filed a first amended
complaint adding state law claims against us and adding as defendants ten
individuals currently employed by us. In addition to maintaining its original
claim of patent infringement against us, Kaifa asserted claims of intentional
and negligent interference with contract against us, trade secret
misappropriation against all of the defendants, unfair competition against all
of the defendants, and breach of contract against several of the individual
defendants. Kaifa seeks a declaratory judgment, damages, preliminary and
permanent injunctive relief, and specific enforcement of the individual
defendants' alleged contractual obligations. Kaifa alleges that our infringement
is willful and seeks enhanced damages and attorneys fees.
On April 28, 2000, Kaifa voluntarily dismissed its claims against two of
the individual defendants. On May 3, 2000, the court dismissed Kaifa's claim of
negligent interference with contract against us and both of Kaifa's claims for
trade secret misappropriation and unfair competition against an individual
defendant. On June 2, 2000, we answered the complaint, denying any liability,
asserting various affirmative defenses and seeking a declaration that the patent
is not infringed by us, is invalid and/or is unenforceable. Currently, the
parties are engaged in fact and expert discovery.
We intend to defend the action vigorously. A claim construction hearing
regarding the asserted patent claims was held in January 2001; however, no
ruling has yet been delivered by the court. Trial is scheduled for October 2001.
If we are unsuccessful in defending this action, any remedies awarded to Kaifa
may harm our business. Furthermore, defending this action will be costly and
divert management's attention regardless of whether we successfully defend the
action.
A former employee filed a lawsuit against us in Santa Clara Superior Court
on March 10, 2000 alleging three causes of action of wrongful termination in
violation of public policy, breach of the covenant of good faith and fair
dealing, and fraud. The former employee's claims stem from the termination of
his employment with us in February 2000. The former employee seeks unspecified
general and special damages, punitive damages, attorneys' fees and costs in the
form of cash and shares of our common stock. We intend to vigorously defend
against these claims. In September 2000 the parties participated in mediation
but were unable to reach resolution. The parties are currently in the process of
completing discovery. We will be filing a motion to dismiss shortly as to the
causes of action for breach of contract and fraud. We are currently in the
process of taking depositions. A trial date has not yet been set.
On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc. et al., Civil Action No. 01-1020, was filed against the Company
and several of its officers and directors in the United States District Court
for Northern District of California. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions were filed thereafter against New Focus and several of its officers and
directors in the United States District Court for the Northern District of
California. Those actions are Rosen v. New Focus, Inc., et al., Civil Action No.
01-1065, Solomon v. New Focus, Inc., et al., Civil Action No. 01-2023, Speck v.
New Focus, Inc., et al., Civil Action No. 01-1093, Deutch v. New Focus, Inc., et
al., Civil Action No. 01-1123, and Connors v. New Focus, Inc., et al., Civil
Action No. 01-1148. We intend to vigorously defend against these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "NUFO" since May 18, 2000. Prior to that time, there was no public market
for the common stock. The following table sets forth, for the period indicated,
the high and low closing prices per share of the common stock as reported on the
Nasdaq National Market.
HIGH LOW
------- ------
2000
Second Quarter (since May 18, 2000)..................... $100.00 $45.25
Third Quarter........................................... $158.00 $73.73
Fourth Quarter.......................................... $ 89.56 $17.13
2001
First Quarter (through March 20, 2001).................. $ 60.19 $13.75
On March 20, 2001 the reported last sale price of the common stock on the
Nasdaq National Market was $17.06. As of February 28, 2001 there were in excess
of 400 stockholders of record.
We filed a Registration Statement on Form S-1 that was declared effective
by the SEC on May 17, 2000. On May 18, 2000, New Focus shares commenced trading
and we completed the sale of all 5,650,000 registered shares of common stock at
a price of $20.00 per share in the initial public offering pursuant to the
Registration Statement. The net proceeds received by us after deducting
underwriting discounts, commissions and other issuance costs of approximately
$9.5 million were approximately $103.5 million.
Immediately prior to the closing of the offering, all of the outstanding
shares of convertible preferred stock were automatically converted into
42,060,284 shares of common stock.
We filed a second Registration Statement on Form S-1 that was declared
effective by the SEC on August 10, 2000. On August 11, 2000, we completed the
sale of all 4,025,000 registered shares of common stock at a price of $115.00
per share in the secondary public offering pursuant to the Registrant Statement.
The net proceeds received by us after deducting underwriting discounts,
commissions and other issuance costs of approximately $24.0 million were $438.9
million.
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends for
the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and
other operating information. The financial data and operating information is
derived from our consolidated financial statements and should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
FISCAL YEAR NINE MONTHS
ENDED ENDED FISCAL YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues...................... $ 80,358 $18,101 $17,285 $15,482 $10,543
Cost of net revenues.............. 64,346 12,525 9,225 8,186 5,946
-------- ------- ------- ------- -------
Gross profit................... 16,012 5,576 8,060 7,296 4,597
Operating Expenses:
Research and development,
net.......................... 26,391 7,352 7,379 3,721 3,115
Sales and marketing............ 5,880 2,982 2,987 2,193 1,662
General and administrative..... 9,813 2,704 2,360 1,355 1,269
Deferred compensation.......... 23,747 132 -- -- --
-------- ------- ------- ------- -------
Total operating
expenses................ 65,831 13,170 12,726 7,269 6,046
-------- ------- ------- ------- -------
Operating income (loss)........... (49,819) (7,594) (4,666) 27 (1,449)
Interest and other income
(expense), net................. 13,851 (81) (303) (303) (210)
-------- ------- ------- ------- -------
Loss before provision for income
taxes.......................... (35,968) (7,675) (4,969) (276) (1,659)
Provision for income taxes........ 6 2 2 10 2
-------- ------- ------- ------- -------
Net loss.......................... $(35,974) $(7,677) $(4,971) $ (286) $(1,661)
======== ======= ======= ======= =======
Basic and diluted net loss per
share.......................... $ (0.92) $ (3.11) $ (2.18) $ (0.25) $ (1.52)
======== ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per share..... 38,914 2,468 2,284 1,148 1,096
======== ======= ======= ======= =======
MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... $485,493 $28,067 $ 51 $ 196 $ 250
Working capital................... 501,983 29,026 479 1,166 616
Total assets...................... 600,944 44,852 8,240 8,197 5,564
Long-term debt, less current
portion........................ 111 368 588 79 129
Total stockholders' equity (net
capital deficiency)............ 567,110 35,013 (1,183) (702) (431)
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The following is a summary of our quarterly results for the calendar years
ended December 31, 2000 and 1999.
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
DEC. 31, OCT. 1, JULY 2, APRIL 2, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- -------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $ 33,875 $ 22,250 $ 14,451 $ 9,782 $ 6,845 $ 6,675 $ 4,581 $ 4,741
Cost of net revenues.................. 23,256 17,248 13,056 10,786 5,337 4,367 2,821 2,600
-------- -------- -------- -------- ------- ------- ------- -------
Gross profit (loss)................. 10,619 5,002 1,395 (1,004) 1,508 2,308 1,760 2,141
Operating Expenses:
Research and development, net....... 10,620 7,270 4,892 3,609 3,501 2,259 1,592 2,129
Sales and marketing................. 1,789 1,526 1,465 1,100 1,126 930 926 874
General and administrative.......... 3,483 2,538 2,368 1,424 1,159 940 605 636
Deferred compensation............... 4,812 5,879 7,508 5,548 94 29 9 --
-------- -------- -------- -------- ------- ------- ------- -------
Total operating expenses........ 20,704 17,213 16,233 11,681 5,880 4,158 3,132 3,639
-------- -------- -------- -------- ------- ------- ------- -------
Operating loss........................ (10,085) (12,211) (14,838) (12,685) (4,372) (1,850) (1,372) (1,498)
Interest and other income (expense),
net................................. 7,834 5,082 711 224 (19) 33 (95) (96)
-------- -------- -------- -------- ------- ------- ------- -------
Loss before provision for income
taxes............................... (2,251) (7,129) (14,127) (12,461) (4,391) (1,817) (1,467) (1,594)
Provision for income taxes............ 4 2 -- -- 2 -- -- 2
-------- -------- -------- -------- ------- ------- ------- -------
Net loss.............................. $ (2,255) $ (7,131) $(14,127) $(12,461) $(4,393) $(1,817) $(1,467) $(1,596)
======== ======== ======== ======== ======= ======= ======= =======
Basic and diluted net loss per
share............................... $ (0.04) $ (0.12) $ (0.45) $ (2.12) $ (1.74) $ (0.74) $ (0.61) $ (0.66)
======== ======== ======== ======== ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per share.......... 60,463 58,140 31,691 5,891 2,530 2,455 2,419 2,406
======== ======== ======== ======== ======= ======= ======= =======
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks(TM) brand.
We were founded in April 1990 and initially developed and offered advanced
optical products principally for research and commercial applications. In
January 1997, we began development of a high performance tunable laser module, a
laser module with a dynamically adjustable wavelength, for test and measurement
in the manufacturing and development of optical networking products. In May
1998, we began leveraging our extensive experience in advanced optics to develop
optical components and modules that enhance network performance by enabling
higher channel counts and data rates, longer reach lengths, new service
capabilities, and lower costs of ownership. Our high-performance products are
compact, consume less power and are designed to be manufacturable in high
volumes.
We currently derive revenues from the sales of two product groups, telecom
products and photonics tools. Throughout fiscal 1999, comprised of the
twelve-month period ended March 31, 1999, substantially all of our revenues were
generated from sales of photonics tools products. Our photonics tools products
include advanced photonics tools, which are primarily used for commercial and
research applications in a wide variety of industries. Beginning in 1999, we
began to derive an increasing amount of our revenues from sales of telecom
products. Our telecom products include fiber amplifier products, wavelength
management products, high-speed opto-electronics and tunable laser modules. We
sell these products primarily to manufacturers of networking and test equipment
in the optical telecommunications market. For the nine-month period ended
December 31, 1999, sales of our telecom products accounted for 27.6% of overall
net revenues. For the fiscal year ended December 31, 2000, sales of our telecom
products accounted for 66.7% of overall net revenues and are expected to
continue to increase as a percentage of our overall net revenues. In the year
ended December 31, 2000, Corvis Corporation, Agilent Technologies and Corning
Incorporated accounted for 17.6%, 14.4% and 10.6% of our net revenues,
respectively.
In March 2001 we announced lower net revenue guidance for our fiscal year
ending December 30, 2001 from $240 million to $170-190 million due to the
unanticipated widespread softening of the U.S. economy and the
telecommunications industry. We currently expect net revenue for the first
quarter of 2001 to be approximately $38 - 41 million.
On January 16, 2001, we acquired JCA Technology, Inc., a designer,
manufacturer and marketer of a full line of fiber optic products for OC-48 and
OC-192 modulators, including high-speed clock amplifiers and broadband data
driver amplifiers, for a total purchase price of approximately $311.9 million in
a transaction to be accounted for as a purchase. The consideration consisted of
$75.0 million in cash and approximately 7,954,000 shares of our common stock for
a combined total fair value of $303.4 million in exchange for all of the
outstanding stock of JCA. In addition, we issued approximately 2,079,000 shares
of restricted stock subject to forfeiture. We will record $56.0 million of
unearned compensation related to the issuance of approximately 1,951,000 shares
of restricted stock. The remaining 128,000 shares of restricted stock will vest
upon meeting certain fiscal 2001 operating objectives. The value of these shares
will be measured and recorded as compensation at the time the contingency is
satisfied. JCA will operate as a wholly owned subsidiary of New Focus.
On February 15, 2001, we acquired Globe Y. Technology, Inc., a manufacturer
of fused fiber coupling machines, for a total purchase price of approximately
$45.2 million in a transaction to be accounted for as a purchase. The
consideration consisted of approximately 1,002,000 shares of our common stock in
exchange for all of the outstanding stock of Globe Y. In addition, we will
record approximately $2.3 million of unearned compensation related to the
issuance of approximately 53,000 shares of restricted stock subject to
forfeiture. Globe Y will operate as a wholly owned subsidiary of New Focus.
We market and sell our telecom products predominantly through our direct
sales force. To date, most of our direct sales have been in North America,
however, we recently began marketing and selling our telecom products
internationally, principally in Europe. We market and sell our photonics tools
products through a combination of catalog sales, international distributors and
direct sales primarily in the United States, Europe
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and Asia. For the year ended December 31, 2000, 30.7% of our net revenues were
from international sales. Of our international sales, 60.8% were from telecom
products and 39.2% were from photonics tools products.
Our cost of net revenues consists of raw materials, direct labor and
manufacturing overhead, which includes, among other costs, production start-up
and prototype costs. In addition, we rely on contract manufacturers for some of
our key components, which are included in our cost of net revenues.
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
materials costs and other expenses related to the design, development, testing
and enhancements of our products. We expense our research and development costs
as they are incurred. In addition, from time to time, we receive funding for
research and development projects. For fiscal year 2000, the nine-month period
ended December 31, 1999 and fiscal year 1999, we received $774,000, $1.0 million
and $1.7 million, respectively, for research and development activities, which
was used to offset research and development costs. The majority of this funding
was from government agency contracts. We expect to focus less on funded research
and development projects and therefore expect such funding to continue to
decline in future periods. We believe that a significant level of investment for
product research and development is required to remain competitive. Accordingly,
we expect to continue to devote substantial resources to product research and
development, and we expect our research and development expenses will continue
to increase in absolute dollars.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. We intend to expand our sales and
marketing operations and efforts substantially for our telecom products, both
domestically and internationally, in order to increase market awareness and to
generate sales of our products. However, we cannot be certain that any increased
expenditures will result in higher net revenues. In addition, we believe our
future success depends upon establishing successful relationships with a variety
of key customers. We believe that continued investment in sales and marketing is
critical to our success and expect these expenses will increase in absolute
dollars in the future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding our information systems. We expect these
expenses will increase in absolute dollars as we continue to add personnel and
incur additional costs related to the growth of our business and our
acquisitions of JCA and Globe Y.
In connection with the grant of stock options to our employees, we recorded
deferred compensation of approximately $50.3 million through December 31, 2000,
representing the difference between the estimated fair market value of the
common stock for accounting purposes and the option exercise price at the date
of grant. These amounts are being amortized using the graded vesting method over
the vesting period of the stock options, which for us is generally five years
from the date of grant.
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RESULTS OF OPERATIONS
You should be aware that we changed our fiscal year end to December 31 in
December 1999. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended on March 31, 1999.
FISCAL YEAR NINE MONTHS FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ -----------
SUMMARY OF OPERATIONS DATA:
Net revenues......................................... 100.0% 100.0% 100.0%
Cost of net revenues................................. 80.1 69.2 53.4
------ ------ ------
Gross profit...................................... 19.9 30.8 46.6
Operating Expenses:
Research and development, net..................... 32.8 40.6 42.7
Sales and marketing............................... 7.3 16.5 17.3
General and administrative........................ 12.2 14.9 13.6
Deferred compensation............................. 29.6 0.7 --
------ ------ ------
Total operating expenses..................... 81.9 72.7 73.6
------ ------ ------
Operating loss....................................... (62.0) (41.9) (27.0)
Interest and other income (expense), net............. 17.2 (0.5) (1.8)
------ ------ ------
Loss before provision for income taxes............... (44.8) (42.4) (28.8)
Provision for income taxes........................... -- -- --
------ ------ ------
Net loss............................................. (44.8)% (42.4)% (28.8)%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 31, 2000, THE NINE-MONTH PERIOD ENDED DECEMBER 31,
1999, AND FISCAL YEAR ENDED MARCH 31, 1999
Net Revenues
Net revenues increased to $80.4 million for the year ended December 31,
2000 from $18.1 million for the nine-month period ended December 31, 1999 and
$17.3 million in fiscal 1999 primarily as a result of increased sales of our
telecom products. We began shipping our telecom products in March 1999. Sales of
our telecom products were $53.6 million, or 66.7% of total net revenues for
fiscal year 2000, compared to $5.0 million, or 27.6% of total net revenues for
the nine-month period ended December 31, 1999.
Due to a widespread softening in the U.S. economy and the
telecommunications industry, we recently experienced order cancellations and
extensions in product delivery dates by our customers. We currently expect net
revenue for the first quarter of 2001 to be approximately $38-41 million. Net
revenue in the fourth quarter of 2000 was approximately $43 million based on the
pro forma combined results of New Focus, JCA and Globe Y, consisting of $34
million for New Focus, $7 million for JCA and $2 million for Globe Y. We
completed our acquisitions of JCA and Globe Y on January 16 and February 15,
2001, respectively. We expect first quarter 2001 net revenue to increase over
our reported fourth quarter net revenue of $34 million, but to decline relative
to the pro forma combined results for the fourth quarter of 2000. As our
customers continue to adjust their inventory levels in response to the slower
industry growth now expected for this year, we will most likely see a sequential
decline in net revenue between the first and second quarters of 2001.
Gross Margin
Gross margin, including amortization of deferred compensation expenses,
decreased to 14.7% in fiscal 2000 from 30.5% for the nine-month period ended
December 31, 1999 and 46.6% in fiscal 1999. Excluding amortization of deferred
stock compensation of $4.2 million, $62,000 and zero, respectively, gross margin
decreased to 19.9% for fiscal year 2000 from 30.8% for the nine-month period
ended December 31, 1999 and 46.6% in fiscal 1999. The decrease in gross margin
from the nine-month period ended December 31, 1999 to
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30
fiscal 2000 was primarily a result of increased manufacturing overhead costs of
approximately $15.6 million associated with the expansion of our telecom
manufacturing operations domestically and internationally. Increased U.S.
manufacturing overhead costs included increases in payroll and related costs for
additional manufacturing personnel of approximately $6.3 million and higher
equipment and facility costs of approximately $2.0 million. Manufacturing
overhead costs for our China operations, which began limited production in June
2000 and progressively ramped production throughout the third and fourth
quarters of 2000 accounted for approximately $5.7 million of the increase in
manufacturing overhead costs in the year ended December 31, 2000. The decrease
in gross margin from fiscal 1999 to the nine-month period ended December 31,
1999 was primarily due to the costs related to the expansion of our
manufacturing facilities for our telecom products. Increases in manufacturing
overhead costs from fiscal 1999 to the nine-month period ended December 31,
1999, included increases of approximately $472,000 in payroll and related costs
for additional manufacturing personnel, higher materials costs for manufacturing
prototyping of approximately $279,000, and higher depreciation costs of
approximately $127,000 related to increased investment in plant and equipment.
As a result of the recent slowdown in the telecommunications industry, we
will slow the rate of production in our U.S. and China factories to bring
production in line with the lower unit demand now anticipated for the first half
of 2001. In March 2001, we furloughed approximately 260 direct production
employees in training at our operations in Shenzhen, China and will further
lower production output through the adjustment of work schedules at these
operations. We also reduced our U.S. workforce by approximately 70 people,
predominantly direct labor employees. These actions will allow us to lower
production output during the first half of 2001 while retaining upside
flexibility for the second half of the year. We will complete facility
construction projects that are currently underway but will not add production
equipment in these new facilities until demand merits. We expect that the
production slowdown will negatively impact our gross margins during the first
half of 2001 because fixed costs will not decrease with the decline in unit
volumes.
Research and Development Expenses
Research and development expenses, including amortization of deferred
compensation expenses, increased to 41.2% of net revenues, or $33.1 million,
from 40.9% of net revenues, or $7.4 million, for the nine-month period ended
December 31, 1999 and decreased from 42.7% of net revenues, or $7.4 million, in
fiscal 1999. Excluding amortization of deferred stock compensation of $6.7
million, $54,000 and zero, respectively, research and development expenses were
32.8% of net revenues, or $26.4 million in fiscal 2000, 40.6% of net revenues,
or $7.4 million, for the nine-month period ended December 31, 1999, and 42.7% of
net revenues, or $7.4 million, in fiscal 1999. These expenses were incurred
primarily in connection with the continued development of existing telecom
products, and development of new telecom products.
Sales and Marketing Expenses
Sales and marketing expenses, including amortization of deferred
compensation expenses, decreased to 9.3% of net revenues, or $7.5 million, in
fiscal 2000 from 16.5% of net revenues, or $3.0 million for the nine-month
period ended December 31, 1999 and from 17.3% of net revenues, or $3.0 million,
in fiscal 1999. Excluding amortization of deferred stock compensation of $1.6
million, $10,000 and zero, respectively, sales and marketing expenses decreased
to 7.3% of net revenue, or $5.9 million in fiscal 2000 from 16.5% of net
revenues, or $3.0 million, for the nine-month period ended December 31, 1999 and
from 17.3% of net revenues, or $3.0 million, in fiscal 1999. Although sales and
marketing expenses decreased as a percentage of revenues, they increased in
absolute dollar spending for sales and marketing in each of these periods as a
result of hiring of additional sales and marketing personnel and to the
expansion of our sales and marketing efforts.
General and Administrative Expenses
General and administrative expenses, including amortization of deferred
compensation expenses, increased to 26.2% of net revenues, or $21.1 million, in
fiscal 2000 from 15.0% of net revenues, or $2.7 million, for the nine-month
period ended December 31, 1999 and from 13.6% of net revenues, or $2.4 million,
in fiscal 1999. Excluding amortization of deferred stock compensation of $11.2
million, $6,000 and zero, respectively,
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general and administrative expenses increased to 12.2% of net revenues, or $9.8
million, in fiscal 2000 from 14.9% of net revenues, or $2.7 million, for the
nine-month period ended December 31, 1999 and from 13.6% of net revenues, or
$2.4 million, in fiscal 1999. The increase over these periods was primarily due
to increased staffing and associated expenses necessary to manage and support
our increased scale of operations.
Interest and Other Income (Expense), Net
Interest and other income (expense) netted to an income of $13.9 million in
fiscal 2000, an expense of $81,000 for the nine-month period ended December 31,
1999 and an expense of $303,000 in fiscal 1999. Interest income was the largest
component in fiscal 2000, totaling $14.0 million. The increase in interest
income in 2000 was primarily due to interest earned on the $542.4 million in
proceeds from the combination of our May 2000 initial public offering and August
2000 follow-on public offering. Interest expense was the largest component of
these amounts for the nine-month period ended December 31, 1999 and fiscal 1999,
totaling $176,000 and $327,000, respectively. The interest expense for these
periods consisted of interest on debt and capital lease obligations.
Income Taxes
The provision for income taxes of approximately $6,000 for the year ended
December 31, 2000, $2,000 for the nine-month period ended December 31, 1999 and
$2,000 for fiscal 1999 consists of current state minimum taxes and withholding
taxes.
As of December 31, 2000, we had approximately $31.1 million of federal and
$2.8 million of state net operating loss carryforwards for tax purposes and $1.8
million and $2.2 million of federal and state research and development tax
credit carryforwards available to offset future taxable income. The net
operating loss and federal tax credit carryforwards will expire at various dates
beginning in 2004 through 2020, if not utilized. We have not recognized any
benefit from the future use of loss carryforwards for these periods or for any
other periods since inception.
Recognition of deferred tax assets is appropriate when realization of the
assets is more likely than not. Based upon the weight of available evidence,
which included our historical operating performance and the reported cumulative
net losses in all prior years, we have provided a full valuation allowance
against our net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments increased to $485.5
million at December 31, 2000 from $28.1 million as of December 31, 1999 and
$51,000 as of March 31, 1999. The increase in our cash, cash equivalents and
short-term investments in the year ended December 31, 2000 was primarily due to
cash generated by financing activities, including the receipt of $542.4 million
from our initial and follow-on public offerings, partially offset by $23.3
million of cash used in operations and $62.9 million of cash used in investing
activities. The increase in the nine-month period ended December 31, 1999 was
primarily due to cash generated by financing activities, including the receipt
of an aggregate of $43.7 million from the sales of convertible preferred stock,
partially offset by $5.7 million of cash used in operations, $5.8 million used
to purchase equipment and the net repayment of debt of approximately $4.3
million. Net working capital increased by $473.0 million for fiscal 2000, by
$28.5 million for the nine-month period ended December 31, 1999 and by $1.6
million for fiscal 1999.
Cash used in operating activities was $23.3 million in fiscal 2000, $5.7
million in the nine-month period ended December 31, 1999, and $3.9 million in
fiscal 1999. Cash used in operating activities for the year ended December 31,
2000 was primarily due to increases in inventories of $24.2 million, increases
in accounts receivable, prepaid expenses and other current assets of $15.2
million, and our net loss (excluding non-cash charges) of $7.7 million,
partially offset by increases in accounts payable and accrued expenses totaling
$23.8 million. Cash used in operating activities in the nine-month period ended
December 31, 1999, was primarily due to our net loss (excluding non-cash
charges) of $6.8 million, increases in inventories of $2.6 million and accounts
receivable of $1.0 million, partially offset by increases in accounts payable
and
29
32
accrued expenses of $4.7 million. Cash used in operating activities in fiscal
1999 was primarily due to our net loss (excluding non-cash charges) of $4.4
million and decreases in accounts payable of $884,000, partially offset by
increases in accrued expenses of $697,000.
Cash used in investing activities, excluding net purchases of
available-for-sale investments, was $62.9 million in the year ended December 31,
2000, $5.7 million in the nine-month period ended December 31, 1999 and $1.4
million in fiscal 1999. In fiscal 2000, cash was primarily used to acquire $51.7
million of property, plant and equipment. In the nine-month period ended
December 31, 1999 and fiscal 1999, cash was primarily used to acquire property,
plant and equipment.
Cash generated by financing activities was $543.5 million in fiscal 2000,
$39.5 million in the nine-month period ended December 31, 1999 and $5.1 million
in fiscal 1999. Cash generated by financing activities in the year ended
December 31, 2000 was primarily due to proceeds of $542.4 million from our
initial and follow-on public offerings of common stock. Cash generated by
financing activities in the nine-month period ended December 31, 1999, was
primarily due to proceeds of $43.7 million from the sales of convertible
preferred stock and $1.2 million under our bank lending facilities, partially
offset by $5.5 million of repayments of our bank lending facilities, an
equipment loan and promissory notes. Cash generated by financing activities in
fiscal 1999 was primarily due to proceeds of $4.2 million from the sale of
convertible preferred stock and net borrowings of $750,000 under an equipment
loan.
In January 2001, we acquired all of the outstanding stock of JCA in
exchange for $75.0 million in cash, 7,954,000 shares of our common stock, and
2,079,000 shares of restricted stock subject to forfeiture. In February 2001, we
acquired all of the outstanding stock of Globe Y in exchange for 1,002,000
shares of our common stock and 53,000 shares of restricted stock subject to
forfeiture.
Prior to the recent slowdown in the telecommunications industry, we
expected to incur approximately $90 million to $100 million of capital
expenditures over the next twelve months to purchase equipment and expand our
operations and manufacturing capacity in the United States and China. We are
currently reducing our capital expenditure requirements to defer the
installation of manufacturing equipment in our expanded facilities until demand
increases. We believe that our current cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the Company's results of
operations, financial position, or cash flows.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB 101 was effective for years
beginning after December 15, 1999 and is required to be reported as of January
1, 2000. The application of SAB 101 did not have a significant effect on the
Company's consolidated results of operations, financial position, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
30
33
hedging activities. In June 1999, the Board issued FAS 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133, which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The adoption of FAS 133 did not have
a significant impact on the Company's operating results or cash flows.
On February 14, 2001, the FASB issued a limited revision of its September
7, 1999 Exposure Draft, "Business Combinations and Intangible Assets", that
proposes to significantly change the accounting for goodwill acquired in a
purchase business combination. Under the revised proposal, goodwill would not be
amortized but would be reviewed for impairment, using a complex methodology
different from the original proposal, when an event occurs indicating the
potential for impairment. Goodwill impairment charges would be presented as a
separate line item within the operating section of the statement of operations.
The nonamortization approach would apply to previously recorded goodwill as well
as goodwill arising from acquisitions completed after the application of the new
standard. Amortization of the remaining book value of goodwill would cease and
the new impairment-only approach would apply. The FASB expects to release the
final statement in June 2001. The provisions of the proposed statement are to be
applied at the beginning of the first fiscal quarter following its issuance.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. The Company currently does not
utilize derivative financial instruments to hedge such risks.
Interest Rate Sensitivity
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
We maintain our cash and cash equivalents primarily in money market funds. Our
short-term investments consist of debt securities such as commercial paper,
corporate bonds and notes, euro dollar bonds and asset-backed securities with
original maturity dates between three months and one year. We do not have any
derivative financial instruments. Accordingly, we do not believe that our
investments have significant exposure to interest rate risk.
At December 31, 2000, our cash and cash equivalents totaled $363.4 million,
with a weighted average interest rate of 6.66%. Our short-term investments
totaled $122.1 million, with a weighted average interest rate of 6.48%.
Exchange Rate Sensitivity
A substantial majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, we do enter into these
transactions in other currencies, primarily the Chinese yuan renminbi ("CNY").
Since late 1997, the CNY has been trading at a conversion rate of approximately
8.28 CNY to the U.S. dollar. Based on fiscal 2000 expenses that were denominated
in CNY, an adverse change in exchange rates (defined as 20% in the CNY to the
U.S. dollar rate) would result in a decline in income before taxes of
approximately $2.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, which will be set forth under the
captions "Proposal No. 1 Election of Directors," "Executive Officers" and
"Section 16 (a) Beneficial Ownership Compliance" in New Focus' Proxy Statement
for its 2001 Annual Meeting of Stockholders, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which will be set forth under the
captions, "Director Compensation," "Executive Compensation" and "Compensation
Committee Interlocks and Insider Participation" in New Focus' Proxy Statement
for its 2001 Annual Meeting of Stockholders, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which will be set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management" in New
Focus' Proxy Statement for its 2001 Annual Meeting of Stockholders, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which will be set forth under the
caption "Certain Relationships and Related Transactions" in New Focus' Proxy
Statement for its 2001 Annual Meeting of Stockholders, is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 2000 and December 31, 1999
Consolidated Statements of Operations for the year ended December 31,
2000, the nine months ended December 31, 1999 and the year ended March
31, 1999
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2000, the nine months ended December 31, 1999 and the year
ended March 31, 1999
Consolidated Statements of Cash Flows for the year ended December 31,
2000, the nine months ended December 31, 1999 and the year ended March
31, 1999
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules.
The following financial statement schedule of New Focus, Inc. for the
year ended December 31, 2000, the nine months ended December 31, 1999
and the year ended March 31, 1999 is filed as part of this Annual Report
and should be read in conjunction with the Consolidated Financial
Statements of New Focus, Inc.
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits.
The exhibits listed in the Index to Exhibits Filed Together with this
Annual Report are filed as a part of this Report on Form 10-K.
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35
(b) Reports on Form 8-K:
The Company filed three reports on Form 8-K and one report on Form 8-K/A
during the quarter ended December 31, 2000. Information regarding the
items reported on is as follows:
October 27, 2000 Press release regarding definitive agreement to acquire JCA
Technology, Inc.
October 27, 2000 Press release regarding definitive agreement to acquire
Globe Y. Technology, Inc.
November 14, 2000 Amendment to include the Agreement and Plan of Merger among
New Focus, Inc., JCA Acquisition Corporation, JCA
Technology, Inc., James Chao and each of the shareholders of
JCA Technology, Inc.
December 27, 2000 Press release regarding amended agreement to acquire JCA
Technology, Inc.
33
36
NEW FOCUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 35
Consolidated Balance Sheets................................. 36
Consolidated Statements of Operations....................... 38
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... 39
Consolidated Statements of Cash Flows....................... 39
Notes to Consolidated Financial Statements.................. 40
34
37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
New Focus, Inc.
We have audited the accompanying consolidated balance sheets of New Focus,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity (net capital deficiency), and cash flows for
the year ended December 31, 2000, the nine-month period ended December 31, 1999,
and the year ended March 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of New Focus, Inc.
at December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for the year ended December 31, 2000, the nine-month period
ended December 31, 1999, and the year ended March 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
January 29, 2001, except as to Note 12,
as to which the date is March 21, 2001
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38
NEW FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $363,375 $ 28,067
Short-term investments.................................... 122,118 --
Trade accounts receivable, less allowances of $1,390 in
2000 and $160 in 1999................................... 13,835 3,102
Inventories:
Raw materials........................................... 15,218 3,247
Work in progress........................................ 10,226 1,283
Finished goods.......................................... 4,941 1,687
-------- --------
Total Inventories.................................. 30,385 6,217
Prepaid expenses and other current assets................. 4,805 364
-------- --------
Total current assets............................... 534,518 37,750
Property, plant and equipment:
Building.................................................. 13,214 --
Manufacturing and development equipment................... 26,304 6,404
Computer software and equipment........................... 5,205 1,787
Office equipment.......................................... 1,782 259
Leasehold improvements.................................... 3,857 1,120
Construction in progress.................................. 11,033 91
-------- --------
61,395 9,661
Less allowances for depreciation and amortization......... (6,651) (2,766)
-------- --------
Net property, plant and equipment.................. 54,744 6,895
Other assets, net of accumulated amortization of $200 in
2000 and $56 in 1999...................................... 11,682 207
-------- --------
Total assets....................................... $600,944 $ 44,852
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,556 $ 5,658
Accrued expenses.......................................... 10,355 2,540
Deferred research and development funding................. 343 250
Current portion of long-term debt......................... 281 276
-------- --------
Total current liabilities.......................... 32,535 8,724
Long-term debt, less current portion........................ 111 368
Deferred rent............................................... 1,188 747
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 10,000,000 in 2000
Issued and outstanding shares -- none................... -- --
Convertible preferred stock, $0.001 par value:
Authorized shares -- none in 2000 and 44,083,326 in 1999
Issued and outstanding shares -- none in 2000 and
41,939,144 in 1999..................................... -- 42
Common stock, $0.001 par value:
Authorized shares -- 250,000,000 in 2000 and 80,000,000
in 1999
Issued and outstanding -- 64,370,100 in 2000 and
2,578,824 in 1999...................................... 64 2
Additional paid-in capital................................ 652,184 51,168
Notes receivable from stockholders........................ (7,281) --
Deferred compensation..................................... (26,453) (689)
Accumulated other comprehensive income.................... 80 --
Accumulated deficit....................................... (51,484) (15,510)
-------- --------
Total stockholders' equity......................... 567,110 35,013
-------- --------
Total liabilities and stockholders' equity......... $600,944 $ 44,852
======== ========
See notes to consolidated financial statements.
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NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ ----------
Net revenues........................................... $ 80,358 $18,101 $17,285
Cost of net revenues(1)................................ 64,346 12,525 9,225
-------- ------- -------
Gross profit........................................... 16,012 5,576 8,060
Operating Expenses:
Research and development(2).......................... 27,165 8,386 9,115
Less funding received from research and development
contracts......................................... (774) (1,034) (1,736)
-------- ------- -------
Net research and development......................... 26,391 7,352 7,379
Sales and marketing(3)............................... 5,880 2,982 2,987
General and administrative(4)........................ 9,813 2,704 2,360
Deferred compensation................................ 23,747 132 --
-------- ------- -------
Total operating expenses..................... 65,831 13,170 12,726
-------- ------- -------
Operating loss......................................... (49,819) (7,594) (4,666)
Interest income........................................ 13,952 208 --
Interest expense....................................... (193) (176) (327)
Other income (expense), net............................ 92 (113) 24
-------- ------- -------
Loss before provision for income taxes................. (35,968) (7,675) (4,969)
Provision for income taxes............................. 6 2 2
-------- ------- -------
Net loss..................................... $(35,974) $(7,677) $(4,971)
======== ======= =======
Basic and diluted net loss per share................... $ (0.92) $ (3.11) $ (2.18)
======== ======= =======
Shares used to compute basic and diluted net loss per
share................................................ 38,914 2,468 2,284
======== ======= =======
- ---------------
(1) Excluding $4,206 and $62 in amortization of deferred stock compensation for
the year ended December 31, 2000 and the nine months ended December 31,
1999, respectively.
(2) Excluding $6,713 and $54 in amortization of deferred stock compensation for
the year ended December 31, 2000 and the nine months ended December 31,
1999, respectively.
(3) Excluding $1,580 and $10 in amortization of deferred stock compensation for
the year ended December 31, 2000 and the nine months ended December 31,
1999, respectively.
(4) Excluding $11,248 and $6 in amortization of deferred stock compensation for
the year ended December 31, 2000 and the nine months ended December 31,
1999, respectively.
See notes to consolidated financial statements.
37
40
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
----------- ------ ---------- ------ ---------- ------------ ------------
Balance at March 31, 1998.... 16,160,000 $ 16 1,275,900 $ 1 $ 2,143 $ -- $ --
Issuance of Series C
preferred stock, net of
issuance cost of $16..... 600,000 1 -- -- 493 -- --
Issuance of Series D
preferred stock, net of
issuance cost of $54..... 3,977,000 4 -- -- 3,919 -- --
Issuance of common stock
from exercise of
options.................. -- -- 1,443,444 1 187 -- --
Repurchase of common
stock.................... -- -- (308,964) -- (193) -- --
Warrant issued to long-term
creditor................. -- -- -- -- 78 -- --
Net loss................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at March 31, 1999.... 20,737,000 21 2,410,380 2 6,627 -- --
Issuance of Series E
preferred stock, net of
issuance cost of $489.... 10,857,616 11 -- -- 12,526 -- --
Issuance of Series F
preferred stock, net of
issuance cost of $28..... 1,113,800 1 -- -- 1,307 -- --
Issuance of series G
preferred stock, net of
issuance cost of $160.... 9,230,728 9 -- -- 29,832 -- --
Issuance of common stock
from exercise of
options.................. -- -- 168,444 -- 55 -- --
Deferred compensation...... -- -- -- -- 821 -- (821)
Amortization of deferred
compensation............. -- -- -- -- -- -- 132
Net loss................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at December 31,
1999....................... 41,939,144 42 2,578,824 2 51,168 -- (689)
Issuance of common stock
from exercise of options
and warrants............. -- -- 10,439,992 10 8,787 (7,690) --
Issuance of stock in
connection with business
acquisition.............. -- -- 116,000 -- 1,508 -- (1,300)
Issuance of warrants for
facility lease........... -- -- -- -- 279 -- --
Repurchase of common
stock.................... -- -- (500,000) -- (312) 312 --
Issuance of preferred stock
from exercise of
warrants................. 121,140 -- -- -- 145 -- --
Conversion of preferred
stock into common
stock.................... (42,060,284) (42) 42,060,284 42 -- -- --
Issuance of common stock... -- -- 9,675,000 10 542,398 -- --
Deferred compensation...... -- -- -- -- 48,211 -- (48,211)
Amortization of deferred
compensation............. -- -- -- -- -- -- 23,747
Payments on notes
receivable............... -- -- -- -- -- 97 --
Comprehensive loss:
Net loss................. -- -- -- -- -- -- --
Unrealized gain on
marketable equity
securities............. -- -- -- -- -- -- --
Total comprehensive loss... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------- --------
Balance at December 31,
2000....................... -- $ -- 64,370,100 $64 $652,184 $(7,281) $(26,453)
=========== ==== ========== === ======== ======= ========
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
INCOME DEFICIT TOTAL
------------- ----------- --------
Balance at March 31, 1998.... $-- $ (2,862) $ (702)
Issuance of Series C
preferred stock, net of
issuance cost of $16..... -- -- 494
Issuance of Series D
preferred stock, net of
issuance cost of $54..... -- -- 3,923
Issuance of common stock
from exercise of
options.................. -- -- 188
Repurchase of common
stock.................... -- -- (193)
Warrant issued to long-term
creditor................. -- -- 78
Net loss................... -- (4,971) (4,971)
--- -------- --------
Balance at March 31, 1999.... -- (7,833) (1,183)
Issuance of Series E
preferred stock, net of
issuance cost of $489.... -- -- 12,537
Issuance of Series F
preferred stock, net of
issuance cost of $28..... -- -- 1,308
Issuance of series G
preferred stock, net of
issuance cost of $160.... -- -- 29,841
Issuance of common stock
from exercise of
options.................. -- -- 55
Deferred compensation...... -- -- --
Amortization of deferred
compensation............. -- -- 132
Net loss................... -- (7,677) (7,677)
--- -------- --------
Balance at December 31,
1999....................... -- (15,510) 35,013
Issuance of common stock
from exercise of options
and warrants............. -- -- 1,107
Issuance of stock in
connection with business
acquisition.............. -- -- 208
Issuance of warrants for
facility lease........... -- -- 279
Repurchase of common
stock.................... -- -- --
Issuance of preferred stock
from exercise of
warrants................. -- -- 145
Conversion of preferred
stock into common
stock.................... -- -- --
Issuance of common stock... -- -- 542,408
Deferred compensation...... -- -- --
Amortization of deferred
compensation............. -- -- 23,747
Payments on notes
receivable............... -- -- 97
Comprehensive loss:
Net loss................. -- (35,974) (35,974)
Unrealized gain on
marketable equity
securities............. 80 -- 80
--------
Total comprehensive loss... -- -- (35,894)
--- -------- --------
Balance at December 31,
2000....................... $80 $(51,484) $567,110
=== ======== ========
See notes to consolidated financial statements.
38
41
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ ----------
OPERATING ACTIVITIES
Net loss.................................................... $ (35,974) $(7,677) $(4,971)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property, plant and equipment............. 3,918 756 588
Amortization of intangibles............................... 144 27 10
Amortization of deferred compensation..................... 23,747 132 --
Deferred rent............................................. 441 (43) --
Changes in operating assets and liabilities:
Accounts receivable..................................... (10,733) (967) 372
Inventories............................................. (24,168) (2,563) 184
Prepaid expenses and other current assets............... (4,441) (102) 93
Accounts payable........................................ 15,898 3,870 (884)
Accrued expenses........................................ 7,815 856 697
Deferred research and development funding............... 93 -- --
--------- ------- -------
Net cash used in operating activities.............. (23,260) (5,711) (3,911)
INVESTING ACTIVITIES
Purchase of available-for-sale investments.................. (122,038) -- --
Acquisition of property, plant and equipment................ (51,767) (5,771) (1,359)
Increase in other assets.................................... (11,132) 24 2
--------- ------- -------
Net cash used in investing activities.............. (184,937) (5,747) (1,357)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders................. -- -- 200
Proceeds from issuance of preferred stock................... -- 43,686 4,217
Proceeds from equipment loan................................ -- -- 800
Proceeds from capital lease obligations..................... -- -- 35
Payments on notes payable................................... -- (2,305) (21)
Payments on bank loan....................................... -- (3,000) (1,772)
Proceeds from bank loans.................................... -- 1,245 1,755
Payments on equipment loan.................................. (252) (195) (50)
Payments under capital lease obligations.................... -- (12) (36)
Proceeds from issuance of common stock...................... 543,660 55 188
Proceeds from payment of notes receivable with
shareholders.............................................. 97 -- --
Repurchase of common stock.................................. -- -- (193)
--------- ------- -------
Net cash provided by financing activities................. 543,505 39,474 5,123
--------- ------- -------
Increase (decrease) in cash and cash equivalents.......... 335,308 28,016 (145)
Cash and cash equivalents at beginning of period.......... 28,067 51 196
--------- ------- -------
Cash and cash equivalents at end of period................ $ 363,375 $28,067 $ 51
========= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 194 $ 188 $ 155
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Promissory note payable converted to equity................. $ -- $ -- $ 200
Interest on note converted to principal..................... $ -- $ -- $ 680
Warrant issued to long-term creditor/lessor................. $ 279 $ -- $ 78
Stock issued in business acquisition........................ $ 208 $ -- $ --
See notes to consolidated financial statements.
39
42
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
New Focus, Inc. (the Company) was incorporated in California on April 17,
1990 and reincorporated in Delaware on May 8, 2000. The Company is engaged in
developing, manufacturing, and marketing optical components and modules, and
photonics tools products primarily for use in the telecommunications and
research markets.
Basis of Presentation
The consolidated financial statements include the Company and its
wholly-owned subsidiaries. All intercompany transactions and balances have been
eliminated.
In December 1999, the Company changed its year-end from March to December,
resulting in a nine-month fiscal year for 1999. Beginning in 2000, the Company
maintains a fifty-two/fifty-three week fiscal year cycle ending on the Sunday
closest to December 31.
Cash Equivalents and Short-term Investments
The Company considers all liquid investment securities with an original
maturity date of three months or less to be cash equivalents, and all investment
securities with original maturities of more than three months but less than one
year to be short-term investments. The Company's short-term investments consist
of debt securities such as commercial paper, corporate bonds and notes, euro
dollar bonds and asset-backed securities. All cash equivalents and short-term
investments are classified as available-for-sale. Unrealized holding gains and
losses are included in Accumulated Other Comprehensive Income in the
accompanying balance sheets. Realized gains and losses are included in interest
income in the statement of operations, and the cost of securities sold is based
on the specific identification method.
Inventories
Inventories are stated at the lower of cost or market on a first-in,
first-out basis.
Fixed Assets
The Company records its property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years for equipment and twenty years for
buildings. Amortization is computed on leasehold improvements using the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the lease.
Other Assets
Other assets consist primarily of deposits, advances to suppliers and
intangible assets. Intangible assets, which consist primarily of goodwill and
the fair value of warrants issued in connection with a facility lease, are
amortized over their estimated useful lives of approximately three to seven
years.
At December 31, 2000, the Company had a $6,900,000 advance to a supplier to
be applied against future purchases. Under the agreement with the supplier, the
Company will be repaid over a three-year period which began in November 2000.
This advance has not been collateralized and the Company is exposed to credit
risk in the event of default by this supplier. Through December 31, 2000, the
supplier made timely payments amounting to $100,000.
40
43
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advertising Expenses
The cost of advertising is expensed as incurred. The Company's advertising
costs for the fiscal year ended December 31, 2000, the nine-month period ended
December 31, 1999 and the fiscal year ended March 31, 1999 were approximately
$611,000, $257,000 and $342,000, respectively.
Revenue Recognition
Product revenue is recorded upon shipment provided there are no significant
remaining obligations and collectibility is probable. The Company provides an
allowance for estimated returns of defective products. Revenue on the shipment
of evaluation units is deferred until customer acceptance.
Research and Development
Company-sponsored research and development costs as well as costs related
to research and development contracts are currently expensed. Total expenditures
for research and development in the fiscal year ended December 31, 2000, the
nine-month period ended December 31, 1999 and the fiscal year ended March 31,
1999 were $27,165,000, $8,386,000 and $9,115,000, respectively. Funding earned
under the contractual terms of the research and development contracts is netted
against research and development costs, which were $774,000, $1,034,000 and
$1,736,000 for the fiscal year ended December 31, 2000, the nine-month period
ended December 31, 1999, and the fiscal year ended March 31, 1999, respectively.
The funding relates to various arrangements, primarily with government agencies,
whereby the Company is reimbursed for substantially all of its costs incurred
under the related project.
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the
intrinsic value method and has adopted the disclosure-only alternative for the
effect of the fair value of such awards.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Comprehensive Income (loss)
The Company's comprehensive income (loss) is comprised of net income (loss)
and unrealized holding gains (losses) on marketable equity securities and
short-term investments. The accumulated comprehensive income component within
the stockholders' equity section of the balance sheet is comprised entirely of
unrealized gains.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000.
41
44
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The application of FIN 44 did not have a material impact on the Company's
results of operations, financial position, or cash flows.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, ("SAB 101") "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB 101 was effective for years
beginning after December 15, 1999 and is required to be reported as of January
1, 2000. The application of SAB 101 did not have a significant effect on the
Company's consolidated results of operations, financial position, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued FAS 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133", which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The adoption of FAS 133 did not have
a significant impact on the Company's operating results or cash flows.
On February 14, 2001, the FASB issued a limited revision of its September
7, 1999 Exposure Draft, "Business Combinations and Intangible Assets", that
proposes to significantly change the accounting for goodwill acquired in a
purchase business combination. Under the revised proposal, goodwill would not be
amortized but would be reviewed for impairment, using a complex methodology
different from the original proposal, when an event occurs indicating the
potential for impairment. Goodwill impairment charges would be presented as a
separate line item within the operating section of the statement of operations.
The nonamortization approach would apply to previously recorded goodwill as well
as goodwill arising from acquisitions completed after the application of the new
standard. Amortization of the remaining book value of goodwill would cease and
the new impairment-only approach would apply. The FASB expects to release the
final statement in June 2001. The provisions of the proposed statement are to be
applied at the beginning of the first fiscal quarter following its issuance.
2. CONCENTRATION OF REVENUE AND CREDIT AND OTHER RISKS
The Company sells to companies in the telecommunications and photonics
research markets. The Company performs ongoing credit evaluations of its
customers and does not require collateral. The Company provides reserves for
potential credit losses, and such losses have been within management's
expectations.
Financial instruments that potentially subject the Company to significant
concentrations of credit risks consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash
equivalents and short-term investments in high-credit quality financial
institutions and limits the amount of credit exposure to any one entity. The
Company is exposed to credit risk in the event of default by these institutions
to the extent of the amount recorded on the balance sheet.
For the year ended December 31, 2000, Corvis Corporation, Agilent
Technologies and Corning Incorporated accounted for 17.6%, 14.4% and 10.6% of
net revenues, respectively. No customers accounted for more than 10% of net
revenues for the nine-month period ended December 31, 1999 and the fiscal year
ended March 31, 1999.
The Company currently purchases several key components and materials used
in the manufacturing process from a single or limited source supplier. Any
interruption or delay in the supply of any of these components or materials, or
the ability to obtain these components and materials from alternate sources at
acceptable prices and within a reasonable amount of time would impair the
Company's ability to meet scheduled product deliveries and could cause customers
to cancel orders.
42
45
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost and estimated fair value of the Company's cash equivalents and
short-term investments at December 31, 2000 were as follows (in thousands):
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
Money market fund....................... $251,169 $ -- $ -- $251,169
Commercial paper........................ 45,914 5 (21) 45,898
Corporate bonds and notes............... 61,316 136 (88) 61,364
Euro dollar bonds....................... 29,611 36 (3) 29,644
Asset-backed securities................. 23,403 18 (3) 23,418
Floating rate securities................ 74,000 -- -- 74,000
-------- ---- ----- --------
$485,413 $195 $(115) $485,493
======== ==== ===== ========
Reported as:
Cash and cash equivalents............. $363,396 $ 4 $ (25) $363,375
Short-term investments................ 122,017 191 (90) 122,118
-------- ---- ----- --------
$485,413 $195 $(115) $485,493
======== ==== ===== ========
Gains and losses realized on the sale of short-term investments during the
year ended December 31, 2000 were immaterial. Net unrealized holding gains of
$80,000 on cash equivalents and short-term investments were included in
Accumulated Other Comprehensive Income in the accompanying balance sheet for the
year ended December 31, 2000. No short-term investments were held during the
nine months ended December 31, 1999.
4. DEBT
Note payable to stockholder/director
The Company had unsecured promissory notes payable to Dr. Milton Chang, one
of the founders and a member of the Board of Directors. On July 21, 1998, the
principal and interest outstanding was rolled over into a new promissory note
issued with interest at 7.35% per annum. At March 31, 1999, the Company had
borrowings outstanding under this arrangement of $2,305,000 and owed interest of
$117,000. The promissory note and its related interest were repaid during the
nine-month period ended December 31, 1999.
Equipment Loan Payable
On February 9, 1999, the Company entered into an agreement for an equipment
loan facility for a maximum of $2,000,000, under which the right to borrow
expired on December 31, 1999. The loan facility charges interest at 8.4% per
annum and has a termination payment for 10% of the original principal amount.
Certain equipment of the Company secures the loan facility. The Company had
borrowed $800,000 under this loan facility of which $367,000 and $598,000 were
outstanding at December 31, 2000 and December 31, 1999, respectively.
Future minimum payments on this facility at December 31, 2000 are $265,000
in 2001 and $102,000 in 2002.
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities and certain equipment under
non-cancelable operating lease agreements that expire at various dates from
fiscal 2001 through fiscal 2007. Net rent expense for these leases aggregated
43
46
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$3,082,000, $383,000 and $440,000 for the fiscal year ended December 31, 2000,
the nine-month period ended December 31, 1999 and the fiscal year ended March
31, 1999, respectively. These amounts are net of $0, $91,000 and $255,000 of
sublease income for the fiscal year ended December 31, 2000, the nine-month
period ended December 31, 1999 and the fiscal year ended March 31, 1999,
respectively.
Under the terms of a May 2000 facility lease agreement, the Company has
provided an irrevocable letter of credit for $4,000,000 as collateral for the
performance of the Company's obligations under the lease.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
DECEMBER 31,
2000
------------
2001.................................................... $ 5,578
2002.................................................... 5,558
2003.................................................... 5,716
2004.................................................... 5,873
2005.................................................... 5,519
Thereafter.............................................. 8,635
-------
Total minimum payments.................................. $36,879
=======
Purchase Commitment
In May 2000, the Company entered into a three-year supply agreement with
Fuzhou Koncent Communication, Inc. ("Koncent"), formerly Fuzhou Conet
Communication, Inc., to supply the Company with yttrium vanadate crystals. Under
the agreement, the Company will purchase a portion of its requirements for this
crystal from Koncent and Koncent will commit specified production capacity to
the manufacture of the Company's orders. Additionally, as of December 31, 2000,
the Company had advanced $6,900,000 to Koncent against future orders.
Litigation (see also Note 12)
On December 8, 1999, U.S.A. Kaifa Technology, Inc., acquired by E-Tek
Dynamics, Inc., which was acquired by JDS Uniphase Corporation, filed a
complaint against the Company for patent infringement in the United States
District Court, Northern District of California. On December 30, 1999, Kaifa
filed a first amended complaint adding state law claims against the Company and
adding as defendants ten individuals currently employed by the Company. In
addition to maintaining its original claim of patent infringement against the
Company, Kaifa asserted claims of intentional and negligent interference with
contract against the Company, trade secret misappropriation against all of the
defendants, unfair competition against all of the defendants, and breach of
contract against several of the individual defendants. Kaifa seeks a declaratory
judgment, damages, preliminary and injunctive relief and specific enforcement of
the individual defendant's alleged contractual obligations. Kaifa alleges that
the Company's infringement is willful and seeks enhanced damages and attorneys
fees. On April 28, 2000, Kaifa voluntarily dismissed its claim against two
individual defendants. On May 3, 2000, the court dismissed Kaifa's claim of
negligent interference with contract against the Company and both of Kaifa's
claims for trade secret misappropriation and unfair competition against an
individual defendant. On June 2, 2000, the Company answered the complaint,
denying any liability, asserting various affirmative defenses and seeking a
declaration that the patent is not infringed by the Company, is invalid and/or
is unenforceable. Currently the parties are engaged in fact discovery. A claim
construction hearing regarding the asserted patent claims was held in January
2001; however, no ruling has yet been delivered by the court. Trial is scheduled
for October 2001. The Company intends to defend the action vigorously. If the
Company is unsuccessful in defending this action, any remedies awarded to Kaifa
may have
44
47
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a material adverse effect on the Company. Furthermore, defending this action
will be costly and divert management's attention regardless of whether the
action is successfully defended.
On March 10, 2000, a former employee filed a lawsuit against the Company in
Santa Clara Superior Court alleging three causes of action for wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. The claims stem from the termination of his
employment with the Company in February 2000. The former employee seeks
unspecified general and special damages, punitive damages, attorneys' fees and
costs in the form of cash and shares of the Company's common stock. In September
2000 the parties participated in mediation but were unable to reach resolution.
The parties are currently in the process of completing discovery. The Company
will be filing a motion to dismiss shortly as to the causes of action for breach
of contract and fraud. A trial date has not yet been set. The Company plans to
vigorously defend against these claims.
In addition, the Company is subject to various claims that arise in the
normal course of business. In the opinion of management, the ultimate
disposition of these claims will not have a material adverse effect on the
position of the Company.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit Sharing Plan that allows voluntary
contributions by employees who have six months or more of service. Eligible
employees may elect to contribute up to the maximum allowed under the Internal
Revenue Service regulations.
The Company made 25% matching contributions of participants' salary
deferrals in each period and recognized costs of $327,000, $125,000 and $131,000
related to this plan in the fiscal year ended December 31, 2000, the nine-month
period ended December 31, 1999, and the fiscal year ended March 31, 1999,
respectively.
7. INCOME TAXES
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate (34%) to loss before
provision for income taxes is explained below (in thousands):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ ----------
Tax (benefit) at federal statutory rate........ $(12,232) $(2,609) $(1,689)
Loss for which no tax benefit is currently
recognizable................................. 7,013 2,609 1,689
Foreign losses without current benefit......... 5,219 -- --
Other.......................................... 6 2 2
-------- ------- -------
Total provision...................... $ 6 $ 2 $ 2
======== ======= =======
Pretax loss from foreign operations was approximately $15,350,000 in the
year ended December 31, 2000.
45
48
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Deferred tax liabilities:
Stock option compensation................................ $ (3,670) $ --
-------- -------
Deferred tax assets:
Net operating loss carryforwards......................... 10,730 4,363
Tax credit carryforwards................................. 3,230 1,428
Inventory valuation...................................... 2,830 210
Accruals and reserves.................................... 2,200 260
Capitalized research and development..................... 1,570 786
Other individually immaterial items...................... 450 31
-------- -------
Gross deferred tax assets.................................. 21,010 7,078
Valuation allowance........................................ (17,340) (7,078)
-------- -------
Net deferred tax assets.................................... 3,670 --
-------- -------
$ -- $ --
======== =======
The valuation allowance increased by $10,262,000, $3,078,000 and $2,016,000
for the year ended December 31, 2000, the nine-month period ended December 31,
1999, and the year ended March 31, 1999, respectively.
Recognition of deferred tax assets is appropriate when realization of such
assets is more likely than not. Based upon the weight of available evidence,
which included the Company's historical operating performance and the reported
cumulative net losses in all prior years, the Company has provided a full
valuation allowance against its net deferred tax assets.
As of December 31, 2000 the Company had federal and state net operating
loss carryforwards of approximately $31,090,000 and $2,810,000, respectively. As
of December 31, 2000, the Company also had federal and state research and
development tax credit carryforwards of approximately $1,760,000 and $2,230,000,
respectively. The net operating loss and federal tax credit carryforwards will
expire at various dates beginning in 2004 through 2020, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credit carryforwards before utilization.
8. STOCKHOLDERS' EQUITY
Stock Split
On August 20, 1999, the Company's Board of Directors and stockholders
approved a two-for-one stock split of the Company's common and preferred stock.
On February 9, 2000 the Company's Board of Directors and stockholders approved
another two-for-one stock split of the Company's common and preferred stock. All
preferred stock, common stock, common equivalent shares, and per share amounts
have been adjusted retroactively to give effect to the stock splits.
46
49
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reincorporation in Delaware
On May 8, 2000, the Company reincorporated in the state of Delaware. The
par value of the preferred and common stock is $0.001 per share. The Company's
Certificate of Incorporation was amended to authorize 10,000,000 shares of
preferred stock and 250,000,000 shares of common stock. The Board of Directors
has the authority to fix or alter the designations, powers, preferences, and
rights of the shares of each series of preferred stock.
Convertible Preferred Stock
Prior to the initial public offering in May 2000, the Company had
authorized 44,083,326 shares of preferred stock. All 42,060,284 issued and
outstanding shares of preferred stock were converted into shares of common stock
upon the closing of the public offering.
Stock Option Plans
Under its 1990 Incentive Stock Option Plan, the Company may grant incentive
stock options and nonstatutory stock options to employees, directors, and
consultants. Under its 1998 Stock Plan, the Company may grant options and stock
purchase rights to employees and consultants provided that incentive stock
options may only be granted to employees. During the nine months ended December
31, 1999, the Company established the 1999 Stock Option Plan. Under its 1999
Stock Plan, the Company may grant options and stock purchase rights to employees
and consultants provided that incentive stock options may only be granted to
employees. Options may be granted to purchase common stock at an exercise price
of not less than 100% of the fair value of the stock at the date of grant as
determined by the Board of Directors. Generally, options vest ratably over five
years and expire after ten years.
In February 2000, the Board of Directors adopted the 2000 Stock Plan (2000
Plan), which was approved by the stockholders in April 2000. The 2000 Plan
provides for the grant of stock options to purchase shares of common stock to
employees, directors and consultants. A total of 1,000,000 shares of common
stock have been reserved for issuance plus any shares reserved for issuance
under the 1998 and 1999 Stock Plans and any shares returned to the 1998 and 1999
Stock Plans. The number of shares of common stock reserved for issuance will
increase annually beginning in fiscal 2001.
In February 2000, the Board of Directors adopted the 2000 Director Option
Plan (Directors' Plan), which was approved by the stockholders in April 2000, to
provide for the automatic grant of options to purchase shares of common stock to
non-employee directors who are not employees or consultants of the Company's
affiliates. The Directors' Plan is administered by the Board of Directors, and
may be delegated to a committee. A total of 200,000 shares of common stock have
been reserved for issuance. The Director's Plan generally provides for an
automatic initial grant of an option to purchase 25,000 shares of common stock
to each non-employee director on the date when the person first becomes a
non-employee director on, or after the closing of the initial public offering,
whether through election by the Company's stockholders or appointment by the
Company's Board of Directors to fill a vacancy. In addition, upon the date of
each annual stockholders' meeting subsequent to the date of each non-employee
director's initial grant under the directors' plan, each person who is then
serving as a non-employee director automatically shall be granted an option to
purchase 5,000 shares of common stock.
47
50
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes activity under the 1990, 1998, 1999, 2000
and Director Stock Option Plans:
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
Balance at March 31, 1998........................ 224,000 6,800,000 $ 0.30
Authorized..................................... 3,200,000 -- $ --
Granted........................................ (2,984,000) 2,984,000 $ 0.62
Exercised...................................... -- (1,443,000) $ 0.13
Canceled....................................... 208,000 (208,000) $ 0.41
Repurchased.................................... 308,000 -- $ 0.63
---------- ---------- ------
Balance at March 31, 1999........................ 956,000 8,133,000 $ 0.44
Authorized..................................... 5,400,000 -- --
Granted........................................ (692,000) 692,000 $ 0.63
Exercised...................................... -- (168,000) $ 0.33
Canceled....................................... 218,000 (218,000) $ 0.55
---------- ---------- ------
Balance at December 31, 1999..................... 5,882,000 8,439,000 $ 0.45
Authorized..................................... 1,200,000 -- $ --
Granted........................................ (7,389,000) 7,389,000 $15.86
Exercised...................................... -- (9,501,000) $ 0.92
Cancelled...................................... 847,000 (847,000) $ 1.63
Repurchased.................................... 500,000 -- $ 0.63
---------- ---------- ------
Balance at December 31, 2000..................... 1,040,000 5,480,000 $20.23
========== ========== ======
Options exercisable at March 31, 1999............ 2,660,000 $ 0.22
========== ======
Options exercisable at December 31, 1999......... 3,881,000 $ 0.33
========== ======
Options exercisable at December 31, 2000......... 711,000 $ 0.89
========== ======
The weighted average fair value of options granted in the fiscal year ended
December 31, 2000, the nine-month period ended December 31, 1999, and the fiscal
year ended March 31, 1999 was $14.99, $0.56, and $0.55, respectively.
The following summarizes option information relating to outstanding options
under the plans as of December 31, 2000:
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- -------- ----------- --------
$0.125 - $0.625 1,876,000 7.86 years $ 0.58 638,000 $0.53
$1.25 - $5.00 1,108,000 9.23 years $ 3.65 73,000 $4.06
$15.00 1,020,000 9.38 years $15.00 -- $ --
$20.3125 - $57.9375 720,000 9.90 years $34.59 -- $ --
$63.50 - $138.0625 756,000 9.62 years $86.80 -- $ --
--------- -------
$0.125 - $138.0625 5,480,000 8.93 years $20.24 711,000 $0.89
========= =======
48
51
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, non-plan options to purchase 800,000 shares of common stock at
an exercise price of $0.0025 per share were granted to the Company's founder and
Chairman of the Board in fiscal 1991 and were fully exercisable at March 31,
1999. These options were exercised during the year ended December 31, 2000.
Notes Receivable
During the year ended December 31, 2000, the Company made full recourse
loans aggregating approximately $8,800,000 to certain employees in connection
with their purchase of shares of common stock. Each of these loans was made
pursuant to a full recourse promissory note secured by a stock pledge. The notes
bear no interest but interest will be imputed and reported annually as
compensation on the employee's W-2. All unvested shares purchased by employees
are subject to repurchase by the Company at the original exercise price if the
employee's employment is terminated. At December 31, 2000, the balance
outstanding under these notes is $8,651,000, of which $7,281,000 relates to the
exercise of stock options and is included in stockholders' equity. The remaining
$1,370,000 relates to the tax liability associated with the stock option
exercise and has been included in "Other Assets".
Deferred Compensation
During the year ended December 31, 2000 and the nine-month period ended
December 31, 1999, the Company recorded aggregate deferred compensation of
$48,211,000 and $821,000 representing the difference between the exercise price
of stock options granted and the then deemed fair value of the Company's common
stock. These amounts are being amortized as charges to operations, using the
graded method, over the vesting periods of the individual stock options,
generally five years. Under the graded method, approximately 51.53%, 24.62%,
14.16%, 7.37% and 2.32%, respectively, of each option's compensation expense is
recognized in each of the five years following the date of grant. For the year
ended December 31, 2000 and the nine- month period ended December 31, 1999, the
Company amortized $23,747,000 and $132,000, respectively, of deferred
compensation.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The Company uses the intrinsic value method in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
method requires use of option valuation models that were not developed for use
in valuing employee stock options. Under the intrinsic value method, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, there is no compensation expense
recognized.
Pro forma information regarding net loss as if the Company had accounted
for its employee stock options granted during the fiscal year ended December 31,
2000, the nine-month period ended December 31, 1999, and the fiscal year ended
March 31, 1999 under the fair value method was estimated at the date of grant
using the Black-Scholes option-pricing model for the year ended December 31,
2000 and the minimum value method for the nine months ended December 31, 1999
and the year ended March 31, 1999, with the following weighted average
assumptions:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ----------------- ----------
Risk-free interest rate................... 5.6% 6.0% 5.14%
Dividend yield............................ 0% 0% 0%
Expected volatility....................... 70.7% -- --
Expected option life...................... 7.6 years 5.0 years 5.0 years
49
52
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, under the
graded method. Because fair value pro forma disclosure is applicable only to
options granted subsequent to March 31, 1995, its pro forma effect was not fully
reflected until calendar year 2000.
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for awards under this
plan the Company's net loss would have been as indicated in the pro forma amount
below:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ----------------- -----------
Net loss as reported................... $(35,974,000) $(7,677,000) $(4,971,000)
Pro forma net loss..................... $(45,375,000) $(7,845,000) $(5,116,000)
Net loss per share as reported, basic
and diluted.......................... $ (0.92) $ (3.11) $ (2.18)
Pro forma net loss per share, basic and
diluted.............................. $ (1.17) $ (3.18) $ (2.24)
Employee Stock Purchase Plan
In February 2000, the Company's Board of Directors approved the 2000
Employee Stock Purchase Plan (Purchase Plan), which was approved by the
Company's stockholders in April 2000. A total of 1,000,000 shares of common
stock have been reserved for issuance. The number of shares of common stock
reserved for issuance will increase annually beginning in fiscal 2001. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no more than 24 months except for the
first purchase period for which the offering period will be no more than 27
months. The price of common stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the common stock on the
commencement date of each offering period or the relevant purchase date.
Warrants
During the year ended December 31, 2000, the Company issued to a facility
lessor a two-year warrant to purchase 30,000 shares of the Company's common
stock with an exercise price of $20.00 per share. The warrant is non-forfeitable
and immediately exercisable. The fair value of the warrant was determined to be
$279,000 using the Black-Scholes method and the following assumptions: expected
life 2 years, exercise price $20.00, stock price on date of grant $20.00,
expected dividend yield of 0%, risk free interest rate of 6%, and expected
volatility 0.8. This amount was capitalized and is being amortized over the life
of the facility lease.
During the nine-month period ended December 31, 1999 the Company committed
to issue a warrant to purchase 9,000 shares of the Company's Series E preferred
shares at a price of $1.20 per share. The fair value of the warrant was
determined to be $4,000 using the Black-Scholes method and the following
assumptions: expected life 5 years, exercise price $1.20, stock price on date of
grant $1.20, expected dividend yield of 0%,
50
53
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
risk free rate of 6%, and expected volatility of 0.27. This amount was expensed
in the current period. The warrant was exercised during the year ended December
31, 2000.
During the nine-month period ended December 31, 1999 the Company committed
to issue a warrant for the purchase of 112,000 shares of the Company's Series E
preferred stock at a price of $1.20 per share in return for fees associated with
issuance of Series E preferred stock. The fair value of the warrant was
determined to be $48,000 using the Black-Scholes method and the following
assumptions: expected life 5 years, exercise price $1.20, stock price on date of
grant $1.20, expected dividend yield of 0%, risk free rate of 6%, and expected
volatility of 0.27. This amount was offset against the proceeds of the Series E
preferred stock. The warrant was exercised during the year ended December 31,
2000.
During the year ended March 31, 1999 the Company issued a warrant for the
purchase of 140,000 shares of the Company's Series D preferred stock at $1.00
per share in connection with entering into an equipment loan agreement. The fair
value of the warrant was determined to be $78,000 using the Black-Scholes method
and the following assumptions: expected life 5 years, exercise price $1.00,
stock price on date of grant $1.00, expected dividend yield of 0%, risk free
rate of 5%, and expected volatility of 0.30. This amount was capitalized as debt
issuance costs and is being amortized over the life of the loan. The warrant was
exercised during the year ended December 31, 2000.
Common Stock
Common stock reserved for future issuance is as follows:
DECEMBER 31,
2000
------------
Stock option plan:
Outstanding options................................... 5,480,000
Reserved for future grants............................ 1,040,000
---------
6,520,000
Employee Stock Purchase Plan............................ 1,000,000
Warrants for common stock............................... 30,000
---------
7,550,000
=========
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has two reportable segments: Telecom and Photonics Tools. The
Telecom segment performs research and development, manufacturing, marketing and
sales of fiber amplifier products, wavelength management products, high-speed
opto-electronics and tunable laser modules, which are primarily sold to
manufacturers of networking and test equipment in the optical telecommunications
markets. The Photonics Tools segment performs research and development,
manufacturing, marketing and sales of photonics tools, which are primarily used
for commercial and research applications.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, excluding gains and losses on the
Company's investment portfolio. The accounting policies for the reportable
segments are consistent with those described in the summary of significant
accounting policies. There were no intercompany sales or transfers.
51
54
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company does not segregate assets or interest expense by segment.
YEAR ENDED DECEMBER 31, 2000
---------------------------------------
TELECOM PHOTONICS TOOLS TOTAL
-------- --------------- --------
(IN THOUSANDS)
Revenues from external customers................ $ 53,578 $26,780 $ 80,358
Depreciation expense............................ $ 3,153 $ 765 $ 3,918
Operating segment profit (loss)................. $(33,945) $ 7,873 $(26,072)
NINE MONTHS ENDED DECEMBER 31, 1999
---------------------------------------
TELECOM PHOTONICS TOOLS TOTAL
-------- --------------- --------
(IN THOUSANDS)
Revenues from external customers................ $ 5,002 $13,099 $ 18,101
Depreciation expense............................ $ 289 $ 467 $ 756
Operating segment profit (loss)................. $ (9,087) $ 1,625 $ (7,462)
YEAR ENDED MARCH 30, 1999
---------------------------------------
TELECOM PHOTONICS TOOLS TOTAL
-------- --------------- --------
(IN THOUSANDS)
Revenues from external customers................ $ 45 $17,240 $ 17,285
Depreciation expense............................ $ 102 $ 486 $ 588
Operating segment profit (loss)................. $ (6,658) $ 1,992 $ (4,666)
Operating segment profit and loss excludes amortization of deferred stock
based compensation.
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ ----------
(IN THOUSANDS)
LOSS
Total loss for reportable segments............. $(26,072) $(7,462) $(4,666)
Other income (expense), net.................... 13,851 (81) (303)
Amortization of deferred compensation.......... (23,747) (132) --
-------- ------- -------
Loss before income taxes....................... $(35,968) $(7,675) $(4,969)
======== ======= =======
GEOGRAPHIC INFORMATION
REVENUES
United States.................................. $ 55,716 $13,214 $12,445
Asia........................................... 2,484 1,629 2,247
Europe......................................... 22,158 3,258 2,593
-------- ------- -------
Consolidated total................... $ 80,358 $18,101 $17,285
======== ======= =======
Revenues are attributed to countries based on the location of customers.
52
55
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding during the period less
outstanding nonvested shares. Outstanding nonvested shares are not included in
the computation of basic net loss per share until the time-based vesting
restrictions have lapsed.
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ ----------
Net loss (numerator)........................... $(35,974) $(7,677) $(4,971)
======== ======= =======
Shares used in computing historical basic and
diluted net loss per share (denominator):
Weighted average common shares outstanding..... 42,692 2,468 2,284
Less shares subject to repurchase.............. (3,778) -- --
-------- ------- -------
Denominator for basic and diluted net loss per
share........................................ 38,914 2,468 2,284
=======
Conversion of preferred stock (pro forma)...... 15,813 29,755
-------- -------
Denominator for pro forma basic and diluted net
loss per share............................... 54,727 32,223
======== =======
Historical basic and diluted net loss per
share........................................ $ (0.92) $ (3.11) $ (2.18)
======== ======= =======
Pro forma basic and diluted net loss per
share........................................ $ (0.66) $ (0.24)
======== =======
The Company has excluded the impact of all convertible preferred stock,
common shares subject to repurchase, warrants for convertible preferred stock
and common stock and outstanding stock options from the calculation of
historical diluted loss per common share because all such securities are
antidilutive for all periods presented. The total number of shares, including
options and warrants to purchase shares, excluded from the calculations of
historical diluted net loss per share was 5,510,000, 38,193,000 and 27,351,000
for the year ended December 31, 2000, the nine-month period ended December 31,
1999 and the year ended March 31, 1999, respectively.
11. BUSINESS ACQUISITION
On February 28, 2000, the Company issued 116,000 shares of the Company's
common stock in connection with a business acquisition. A shareholder/employee
of the acquired company received 100,000 of the shares, which vest 20% after one
year and 1/60 each month thereafter provided the shareholder/employee is an
employee of the Company. The unvested shares are subject to repurchase by the
Company at $5.00 per share if the employee is terminated. Under Emerging Issues
Task Force No. 95-8, "Accounting for Contingent Consideration Paid to
Shareholders of an Acquired Enterprise in a Purchase Business Combination," this
arrangement is, in substance, compensation for post-combination services rather
than additional purchase price. The $1,300,000 value of the 100,000 shares
issued was recorded in deferred compensation and is being amortized into
expenses over the vesting period. The purchase price of $208,000, which is the
fair market value of the remaining 16,000 shares resulted in goodwill. The
acquisition was accounted for under the purchase method.
12. SUBSEQUENT EVENTS
Acquisition of JCA Technology, Inc.
On January 16, 2001, the Company acquired JCA Technology, Inc. (JCA), a
privately held designer and manufacturer of fiber optic products for modulators,
for a total purchase price of approximately $311.9 million
53
56
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in a transaction to be accounted for as a purchase. The Company paid $75.0
million in cash and exchanged approximately 7,954,000 shares of Common Stock
with a combined total fair value of $303.4 million for all of the outstanding
stock of JCA. In addition, the Company issued approximately 2,079,000 shares of
restricted stock subject to forfeiture. The Common Stock was valued using the
Company's average stock price for the seven-day period ending December 27, 2000.
The average price was $28.71. Direct transaction costs related to the merger are
estimated to be approximately $8.5 million. In addition, the Company will record
$56.0 million of unearned compensation related to approximately 1,951,000 shares
of restricted stock. The balance of 128,000 shares of restricted stock will vest
contingent upon meeting certain fiscal 2001 operating objectives. The value of
these shares will be measured and recorded as compensation at the time the
contingency is satisfied.
Acquisition of Globe Y. Technology, Inc.
On February 15, 2001, the Company acquired Globe Y. Technology, Inc. (Globe
Y), a privately-held manufacturer of fused fiber coupling machines, for a total
purchase price of approximately $45.2 million in a transaction to be accounted
for as a purchase. The Company exchanged approximately 1,002,000 shares of
Common Stock with a fair value of $44.4 million for all of the outstanding stock
of Globe Y. In addition, the Company issued approximately 53,000 shares of
restricted stock subject to forfeiture. The Common Stock was valued using the
Company's closing stock price of $44.31 on February 15, 2001. Direct transaction
costs related to the merger are estimated to be approximately $800,000. In
addition, the Company will record $2.3 million of unearned compensation related
to the approximately 53,000 shares of restricted stock.
Litigation
On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc. et al., Civil Action No. 01-1020, was filed against the Company
and several of its officers and directors in the United States District Court
for Northern District of California. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions were filed thereafter against New Focus and several of its officers and
directors in the United States District Court for the Northern District of
California. Those actions are Rosen v. New Focus, Inc., et al., Civil Action No.
01-1065, Solomon v. New Focus, Inc., et al., Civil Action No. 01-2023, Speck v.
New Focus, Inc., et al., Civil Action No. 01-1093, Deutch v. New Focus, Inc., et
al., Civil Action No. 01-1123, and Connors v. New Focus, Inc., et al., Civil
Action No. 01-1148. The Company plans to vigorously defend against these claims.
54
57
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1*** Agreement and Plan of Merger by and between Registrant and
JCA Technology, Inc., dated October 25, 2000.
2.2**** Amendment No. 1 to the Agreement and Plan of Merger by and
between Registrant and JCA Technology, Inc., dated December
21, 2000.
2.3**** Amendment No. 2 to the Agreement and Plan of Merger by and
between Registrant and JCA Technology, Inc., dated January
16, 2001.
2.4 First Amended and Restated Merger Agreement and Plan of
Reorganization by and between Registrant and Globe Y.
Technology, Inc., dated February 7, 2001.
2.5 Amendment No. 2 to Merger Agreement and Plan of
Reorganization by and between Registrant and Globe Y.
Technology, Inc., dated February 13, 2001.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of stock certificates.
4.2* Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing II,
Inc., see Exhibit 10.15.
4.3* Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4* Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
4.5* Form of warrant to Purchase Common Stock between Registrant
and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 2000 Stock Plan.
10.3* 2000 Employee Stock Purchase Plan.
10.4* 2000 Director Option Plan and form of agreement thereunder.
10.5* Form of change of control agreement entered into between the
Registrant and the executive officers.
10.6* Premises Lease Contract between Registrant and Shenzhen New
and High-tech Village Development Company dated September
23, 1999.
10.7* Lease Agreement between Registrant and Silicon Valley
Properties dated December 23, 1999.
10.8+* Agreement on Terms and Conditions of Purchase and Sale of
Optical Components between Registrant and Corning,
Incorporated dated January 1, 2000.
10.9 Not Used.
10.10* Fifth Amended and Restated Registration Rights Agreement.
10.11+* Development Agreement between Registrant and Hewlett-Packard
GmbH dated December 23, 1996.
10.12+* Addendum to the Development Agreement between Registrant and
Hewlett-Packard GmbH dated November 6, 1997.
10.13+* Addendum No. 2 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 10, 1999.
10.14+* Memorandum of Agreement between Registrant and Alcatel USA
Sourcing, L.P. dated January 7, 2000.
10.15* Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
10.16* Shenzhen Real Estate Sales and Purchase Contract by and
between the Registrant and Shenzhen Libaoyi Industry
Development Co., Ltd., dated April 6, 2000.
10.17* Shenzhen Futian Free Trade Zone Premises lease by and
between Registrant and Shenzhen Libaoyi Industry Development
Co., Ltd., dated April 6, 2000.
55
58
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.18+* Supply Contract by and between the Registrant and Fuzhou
Koncent Communication, Inc. (formerly Fuzhou Conet
Communications, Inc.).
10.19** Lease Agreement between Registrant and Lincoln-RECP Hellyer
Opco, LLC, a Delaware LLC, dated May 15, 2000.
10.20 Lease Agreement between Registrant and Boyd C. Smith,
Trustee, or his Successor Trustee, UTA dated 12/27/76 (John
Arrillaga 1976 Children Trusts) as amended, dated March 30,
1995.
10.21 Lease Agreement by and between Focused Research Inc. and
Western Center Properties, Inc., dated April 1, 2000.
10.22 First Amendment to Lease Agreement by and between Focused
Research, Inc. and Western Center Properties, Inc., dated
January 5, 2001.
10.23+ Purchase Agreement by and between JCA Technology, Inc. and
Corvis Corporation, dated August 14, 2000.
10.24+ Agreement to Extend Purchase Agreement by and between
Registrant and Corning Incorporated, dated September 1,
2000.
10.25+ Addendum No. 3 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 19, 2000.
10.26+ Amendment to Memorandum of Agreement between Registrant and
Alcatel USA Sourcing, L.P., dated January 1, 2001.
10.27 Lease Agreement by and between Registrant and PEGH
Investments, LLC, dated January 9, 2001.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See page 58).
- ---------------
+ The Registrant has requested confidential treatment with respect to
certain portions of this Exhibit. The omitted portions have been
separately filed with the Commission.
* Incorporated by reference from our registration statement on Form S-1,
registration number 333-31396, declared effective by the Securities and
Exchange Commission on May 17, 2000.
** Incorporated by reference from our post-effective amendment to our
registration statement on Form S-1, registration number 333-3196, declared
effective by the Securities and Exchange Commission on May 18, 2000.
*** Incorporated by reference from our report on Form 8-K/A filed with the
Securities and Exchange Commission on November 14, 2000.
**** Incorporated by reference from our report on Form 8-K filed with the
Securities and Exchange Commission on January 24, 2001.
56
59
(b) Financial Statement Schedules
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS:
ADDITIONS-
BALANCES AT CHARGED TO BALANCES
BEGINNING COSTS AND DEDUCTIONS- AT END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ---------- ----------- ---------
Year ended March 31, 1999...................... $133 $ 40 $(38) $ 135
Nine months ended December 31, 1999............ $135 $ 39 $(14) $ 160
Year ended December 31, 2000................... $160 $1,258 $(28) $1,390
Schedules other than that listed above have been omitted since they are not
required or are not applicable or the required information is shown in the
financial statements or related notes.
57
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San
Jose, State of California, on the 28th day of March 2001.
NEW FOCUS, INC.
By: /s/ KENNETH E. WESTRICK
------------------------------------
Kenneth E. Westrick
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth E. Westrick and William L. Potts,
Jr. and each of them, his attorneys-in-fact, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report on Form 10-K, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KENNETH E. WESTRICK President, Chief Executive March 28, 2001
- ----------------------------------------------------- Officer and Director
Kenneth E. Westrick (Principal Executive Officer)
/s/ WILLIAM L. POTTS, JR. Chief Financial Officer March 28, 2001
- ----------------------------------------------------- (Principal Financial and
William L. Potts, Jr. Accounting Officer)
/s/ DR. MILTON CHANG Director March 28, 2001
- -----------------------------------------------------
Dr. Milton Chang
/s/ JOHN DEXHEIMER Director March 24, 2001
- -----------------------------------------------------
John Dexheimer
/s/ DR. WINSTON FU Director March 28, 2001
- -----------------------------------------------------
Dr. Winston Fu
/s/ R. CLARK HARRIS Director March 28, 2001
- -----------------------------------------------------
R. Clark Harris
/s/ DR. DAVID L. LEE Director March 28, 2001
- -----------------------------------------------------
Dr. David L. Lee
/s/ ROBERT D. PAVEY Director March 28, 2001
- -----------------------------------------------------
Robert D. Pavey
58
61
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1*** Agreement and Plan of Merger by and between Registrant and
JCA Technology, Inc., dated October 25, 2000.
2.2**** Amendment No. 1 to the Agreement and Plan of Merger by and
between Registrant and JCA Technology, Inc., dated December
21, 2000.
2.3**** Amendment No. 2 to the Agreement and Plan of Merger by and
between Registrant and JCA Technology, Inc., dated January
16, 2001.
2.4 First Amended and Restated Merger Agreement and Plan of
Reorganization by and between Registrant and Globe Y.
Technology, Inc., dated February 7, 2001.
2.5 Amendment No. 2 to Merger Agreement and Plan of
Reorganization by and between Registrant and Globe Y.
Technology, Inc., dated February 13, 2001.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of stock certificates.
4.2* Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing II,
Inc., see Exhibit 10.15.
4.3* Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4* Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
4.5* Form of warrant to Purchase Common Stock between Registrant
and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 2000 Stock Plan.
10.3* 2000 Employee Stock Purchase Plan.
10.4* 2000 Director Option Plan and form of agreement thereunder.
10.5* Form of change of control agreement entered into between the
Registrant and the executive officers.
10.6* Premises Lease Contract between Registrant and Shenzhen New
and High-tech Village Development Company dated September
23, 1999.
10.7* Lease Agreement between Registrant and Silicon Valley
Properties dated December 23, 1999.
10.8+* Agreement on Terms and Conditions of Purchase and Sale of
Optical Components between Registrant and Corning,
Incorporated dated January 1, 2000.
10.9* Not Used.
10.10* Fifth Amended and Restated Registration Rights Agreement.
10.11+* Development Agreement between Registrant and Hewlett-Packard
GmbH dated December 23, 1996.
10.12+* Addendum to the Development Agreement between Registrant and
Hewlett-Packard GmbH dated November 6, 1997.
10.13+* Addendum No. 2 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 10, 1999.
10.14+* Memorandum of Agreement between Registrant and Alcatel USA
Sourcing, L.P. dated January 7, 2000.
10.15* Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
10.16* Shenzhen Real Estate Sales and Purchase Contract by and
between the Registrant and Shenzhen Libaoyi Industry
Development Co., Ltd., dated April 6, 2000.
10.17* Shenzhen Futian Free Trade Zone Premises lease by and
between Registrant and Shenzhen Libaoyi Industry Development
Co., Ltd., dated April 6, 2000.
62
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.18+* Supply Contract by and between the Registrant and Fuzhou
Koncent Communication, Inc. (formerly Fuzhou Conet
Communications, Inc.).
10.19** Lease Agreement between Registrant and Lincoln-RECP Hellyer
Opco, LLC, a Delaware LLC, dated May 15, 2000.
10.20 Lease Agreement between Registrant and Boyd C. Smith,
Trustee, or his Successor Trustee, UTA dated 12/27/76 (John
Arrillaga 1976 Children Trusts) as amended, dated March 30,
1995.
10.21 Lease Agreement by and between Focused Research Inc. and
Western Center Properties, Inc., dated April 1, 2000.
10.22 First Amendment to Lease Agreement by and between Focused
Research, Inc. and Western Center Properties, Inc., dated
January 5, 2001.
10.23+ Purchase Agreement by and between JCA Technology, Inc. and
Corvis Corporation, dated August 14, 2000.
10.24+ Agreement to Extend Purchase Agreement by and between
Registrant and Corning Incorporated, dated September 1,
2000.
10.25+ Addendum No. 3 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 19, 2000.
10.26+ Amendment to Memorandum of Agreement between Registrant and
Alcatel USA Sourcing, L.P., dated January 1, 2001.
10.27 Lease Agreement by and between Registrant and PEGH
Investments, LLC, dated January 9, 2001.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See page 58).
- ---------------
+ The Registrant has requested confidential treatment with respect to
certain portions of this Exhibit. The omitted portions have been
separately filed with the Commission.
* Incorporated by reference from our registration statement on Form S-1,
registration number 333-31396, declared effective by the Securities and
Exchange Commission on May 17, 2000.
** Incorporated by reference from our post-effective amendment to our
registration statement on Form S-1, registration number 333-3196, declared
effective by the Securities and Exchange Commission on May 18, 2000.
*** Incorporated by reference from our report on Form 8-K/A filed with the
Securities and Exchange Commission on November 14, 2000.
**** Incorporated by reference from our report on Form 8-K filed with the
Securities and Exchange Commission on January 24, 2001.