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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission file number 000-31861
OPTICAL COMMUNICATION PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------------
Delaware 95-4344224
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
20961 Knapp Street
Chatsworth, California 91311
(Address of principal executive offices,
including zip code)
Registrant's Telephone Number, Including Area Code: (818) 701-0164
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The registrant has two classes of common stock authorized, Class A Common
Stock and Class B Common Stock. The rights, preferences and privileges of each
class of common stock are substantially identical except for voting rights. The
holders of Class A Common Stock are entitled to one vote per share while holders
of Class B Common Stock are entitled to ten votes per share on matters to be
voted on by stockholders. As of August 5, 2003, there were approximately
46,284,300 shares of Class A common stock outstanding and 66,000,000 shares of
Class B Common Stock outstanding.
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OPTICAL COMMUNICATION PRODUCTS, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2003
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2003 (unaudited) and September 30, 2002......... 1
Unaudited Statements of Operations for the Three and Nine Months Ended 2
June 30, 2003 and 2002........................................................
Unaudited Statements of Cash Flows for the Nine Months Ended June 30,
2003 and 2002................................................................. 3
Unaudited Notes to Financial Statements....................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk..................... 26
Item 4. Controls and Procedures....................................................... 26
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings............................................................. 27
Item 6. Exhibits and Reports on Form 8-K.............................................. 27
Signature............................................................................. 28
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICAL COMMUNICATION PRODUCTS, INC.
- ---------------------------------------------------------------------------------------------------------
BALANCE SHEETS
(Dollars in thousands)
June 30, September 30,
2003 2002
- ---------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 66,830 $ 85,426
Marketable securities 70,797 65,774
Accounts receivable less allowance for doubtful accounts:
$459 at June 30, 2003 and $127 at September 30, 2002 4,781 3,463
Income taxes receivable 4,848 1,008
Inventories 6,008 7,415
Deferred income taxes 6,976 9,156
Prepaid expenses and other current assets 1,751 1,367
------------ ------------
Total current assets 161,991 173,609
PROPERTY, PLANT AND EQUIPMENT, Net 36,334 30,519
OTHER LONG-TERM ASSETS 2,460 933
------------ ------------
TOTAL $ 200,785 $ 205,061
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 471 $ 471
Accounts payable 742 623
Accounts payable to related parties 1,822 30
Accrued bonus 3,178 2,302
Other accrued expenses 2,467 2,200
Income taxes payable 118
------------ ------------
Total current liabilities 8,680 5,744
LONG-TERM DEBT 1,000 1,353
OTHER LONG-TERM LIABILITIES 600 750
DEFERRED INCOME TAXES 18
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A - common stock, $.001 par value; 200,000,000 shares
authorized, 47,644,864 and 43,035,110 shares issued
at June 30, 2003 and September 30, 2002, respectively 48 43
Class B - common stock $.001 par value; 66,000,000 shares authorized,
66,000,000 shares issued and outstanding at June 30, 2003 and
September 30, 2002 66 66
Treasury Stock - cost of 1,366,579 shares at June 30, 2003 (1,312)
Additional paid-in capital 133,124 131,350
Retained earnings 58,579 65,737
------------ ------------
Total stockholders' equity 190,505 197,196
------------ ------------
TOTAL $ 200,785 $ 205,061
============ ============
1
OPTICAL COMMUNICATION PRODUCTS, INC.
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------------------- -----------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
REVENUE $ 9,481 $ 9,837 $ 28,449 $ 28,298
COST OF REVENUE 6,120 7,145 18,564 20,594
--------- --------- --------- ---------
GROSS PROFIT 3,361 2,692 9,885 7,704
--------- --------- --------- ---------
EXPENSES:
Research and development 4,489 1,424 11,732 3,652
Selling and marketing 1,270 1,024 3,332 2,904
General and administrative 1,512 1,499 4,175 3,883
--------- --------- --------- ---------
Total expenses 7,271 3,947 19,239 10,439
--------- --------- --------- ---------
LOSS FROM OPERATIONS (3,910) (1,255) (9,354) (2,735)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 373 758 1,331 2,527
Interest expense (13) (20) (42) (65)
Other income 51 75 206 241
--------- --------- --------- ---------
OTHER INCOME, Net 411 813 1,495 2,703
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (3,499) (442) (7,859) (32)
INCOME TAXES 784 (177) (701) (13)
--------- --------- --------- ---------
NET LOSS $ (4,283) $ (265) $ (7,158) $ (19)
========= ========= ========= =========
BASIC LOSS PER SHARE $ (.04) $ .00 $ (.06) $ .00
========= ========= ========= =========
DILUTED LOSS PER SHARE $ (.04) $ .00 $ (.06) $ .00
========= ========= ========= =========
BASIC SHARES OUTSTANDING 111,766 108,460 110,665 108,195
========= ========= ========= =========
DILUTED SHARES
OUTSTANDING 111,766 108,460 110,665 108,195
========= ========= ========= =========
2
OPTICAL COMMUNICATION PRODUCTS, INC.
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended June 30,
------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Operating Activities:
Net loss $ (7,158) $ (19)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 5,268 3,341
Tax benefit from exercise of non-qualified stock options 1,658 398
Deferred income taxes 2,162
Stock option compensation expense for non employee 44
Changes in operating assets and liabilities--net of effects of business acquisitions:
Accounts receivable, net (1,318) 5,034
Income taxes receivable (3,840) (509)
Inventories 1,707 6,502
Prepaid expense and other current assets (384) (30)
Accounts payable 119 (568)
Accounts payable to related parties 1,792 (1,171)
Accrued bonus 876 472
Other accrued expenses 267 (242)
Income taxes payable (118) (428)
Other long-term liabilities (150) .
---------- ----------
Net cash provided by operating activities 925 12,780
---------- ----------
Investing Activities:
Purchase of marketable securities (51,218) (46,326)
Maturities of marketable securities 45,000 45,000
Purchase of property, plant and equipment (1,710) (2,095)
Cash paid for acquisitions (10,005) .
---------- ----------
Net cash used in investing activities (17,933) (3,421)
---------- ----------
Financing Activities:
Principal payments on long-term debt (353) (354)
Issuance of common stock 77 148
Purchase of treasury stock (1,312) .
---------- ----------
Net cash used in financing activities (1,588) (206)
---------- ----------
Increase (decrease) in cash and cash equivalents (18,596) 9,153
Cash and cash equivalents, beginning of year 85,426 62,529
---------- ----------
Cash and cash equivalents end of period $ 66,830 $ 71,682
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 42 $ 65
Income taxes $ 130 $ 549
3
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Optical
Communication Products, Inc., a Delaware Corporation (the "Company"),
have been prepared in accordance with accounting principles generally
accepted in the United States of America and Article 10 of the
Securities and Exchange Commission's Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. In management's opinion, the
unaudited financial statements contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial statements as of June 30, 2003 and for all interim periods
presented. The financial statements should be read in conjunction with
the audited financial statements included in the Annual Report of the
Company filed on Form 10-K with the Securities and Exchange Commission
for the year ended September 30, 2002. The results of operations for
the period ended June 30, 2003 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30,
2003. The Company's operations are primarily located in Chatsworth,
California. The Company is a majority-owned subsidiary of The Furukawa
Electric Company, Ltd. of Japan ("Furukawa"). Furukawa beneficially
owned 58.8% of the Company's common stock at June 30, 2003, which
accounts for 93.4% of the combined voting power of all of our
outstanding stock.
In April 2003, the Financial Accounting Standards Board or ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends SFAS 133 to clarify the financial
accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be
accounted for on a comparable basis. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The Company
does not expect the adoption of SFAS No. 149 to have a material effect
on its financial condition, results of operations or liquidity.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. The statement establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities
and equity. SFAS No. 150 must be applied immediately to instruments
created or modified after May 31, 2003. The adoption of SFAS No. 150 in
the third quarter of fiscal 2003 did not have a material effect on the
Company's financial condition, results of operations or liquidity.
2. ACQUISITIONS
On October 9, 2002, we acquired certain assets of Cielo Communications,
Inc., a research and design company located in Broomfield, Colorado,
focused on creating VCSEL technology for fiber optic communication
networks for a cash purchase price and direct costs of $6.6 million.
The purchase price includes the acquisition of capital equipment and
intellectual property.
On January 31, 2003, we acquired parallel optical module assets and
intellectual property from Gore Photonics, an industry leader in the
research and development of VCSEL parallel optical modules for fiber
optic communication networks located in Elkton, Maryland, for a cash
purchase price of $3.4 million. The purchase price includes the
acquisition of capital equipment and inventory.
4
The allocation of the purchase price is based on studies and valuations
that are currently being finalized.
3. INVENTORIES
Inventories consist of the following:
June 30, September 30,
-----------------------------------------
2003 2002
(Unaudited)
(in thousands)
---------------------------------------------------------------------
Raw materials $ 2,371 $ 6,217
Work-in-process 3,054 486
Finished goods 583 712
------------------- ------------------
Total inventories $ 6,008 $ 7,415
=================== ==================
4. DEFERRED INCOME TAXES
The Company incurred a charge of $2,162,000 in the quarter ended June 30,
2003 to establish a valuation allowance to reduce deferred income tax
assets to the amount expected to be realized.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, September 30,
---------------------- -- ---------------------
2003 2002
(Unaudited)
(in thousands) Useful Lives
-----------------------------------------------------------------------------------------------------------------
Land $ 8,074 $ 8,074
Buildings and improvements 16,224 16,227 39 years
Machinery and equipment 18,357 10,647 5 years
Computer hardware and software 1,418 716 5 years
Furniture and fixtures 368 233 3 years
Leasehold improvements 12 6 9 years
Construction in progress 698
---------------------- ---------------------
45,151 35,903
Less accumulated depreciation 8,817 5,384
---------------------- ---------------------
$ 36,334 $ 30,519
====================== =====================
6. EARNINGS (LOSS) PER SHARE
The following is a calculation of basic and diluted earnings (loss) per
share ("EPS"):
5
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------- ------------------------------------
2003 2002 2003 2002
(Unaudited)
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------
BASIC EPS COMPUTATION:
Net income (loss) applicable to common stock $ (4,283) $ (265) $ (7,158) $ (19)
--------------- --------------- --------------- ---------------
Weighted average common shares outstanding 111,766 108,460 110,665 108,195
--------------- --------------- --------------- ---------------
Basic earnings (loss) per share $ (0.04) $ 0.00 $ (0.06) $ 0.00
=============== =============== =============== ===============
DILUTED EPS COMPUTATION:
Net income (loss) applicable to common stock $ (4,283) $ (265) $ (7,158) $ (19)
--------------- --------------- --------------- ---------------
Weighted average common shares outstanding 111,766 108,460 110,665 108,195
Effect of diluted securities
Common stock options
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding 111,766 108,460 110,665 108,195
--------------- --------------- --------------- ---------------
Diluted earnings (loss) per share $ (0.04) $ 0.00 $ (0.06) $ 0.00
=============== =============== =============== ===============
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating leases for certain facilities. Lease payments
are made monthly. The Company's leases are renewable monthly,
semiannually, annually or for five years. Rent expense for these leases
for the nine months ended June 30, 2003 and 2002 was $360,900 and
$52,000, respectively.
Legal Proceedings
On April 12, 2002, the Company resolved its patent infringement
litigation with Stratos Lightwave, Inc. ("Stratos"). As part of the
settlement, the Company entered into a five-year license agreement with
Stratos covering Stratos' portfolio of optoelectronic transceiver
patents. In consideration of the license agreement, the Company is
required to pay a total of $2 million over the license term. At the end
of the five-year term, the Company has the option to renegotiate with
Stratos for an extension of the license. We are not currently involved
in any other material legal proceedings.
8. STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan under the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company has a stock-based compensation plan. The
Company's operating results do not include a compensation charge
related to this plan, as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on the operating
results and per share amounts if the fair value recognition provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, had been
applied to stock-based employee compensation:
6
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
(in thousands, except per share amounts)
Net loss:
As reported $ (4,283) $ (265) $ (7,158) $ (19)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 1,353 1,349 4,030 3,967
------------ ------------ ------------ ------------
Pro forma $ (5,636) $ (1,614) $ (11,188) $ (3,986)
============ ============ ============ ============
Basic loss per share
As reported $ (0.04) $ 0.00 $ (0.06) $ 0.00
Pro forma $ (0.05) $ (0.01) $ (0.10) $ (0.04)
Diluted loss per share
As reported $ (0.04) $ 0.00 $ (0.06) $ 0.00
Pro forma $ (0.05) $ (0.01) $ (0.10) $ (0.04)
The fair value of each option grant estimated on the date of grant used
to compute pro forma income per share is estimated using the
Black-Scholes option pricing model. The following assumptions were used
in completing the model:
Nine months ended June 30,
--------------------------
2003 2002
---- ----
Dividend yield 0% 0%
Expected volatility 170% 157%
Risk-free rate of return 3.58% 5.21%
Expected life (years) 7.2 7.2
During the three and nine months ended June 30, 2003, the Company
granted 92,500 and 894,504 stock options, respectively, with exercise
prices equal to the fair value of the underlying Common Stock on the
date of grant. The fair market values of the underlying Common Stock on
the dates of the grant were $1.48 and $0.95, respectively for the three
and nine months ended June 30, 2003.
9. RELATED PARTY TRANSACTIONS
On May 1, 2003, the Company purchased in a private sale 829,746 shares
of its Class A common stock from Muoi Van Tran, the Company's Chief
Executive Officer and President and 536,833 shares of its Class A
common stock from Mohammad Ghorbanali, the Company's Chief Operating
Officer and Vice President of Technical Operations. In each case, the
purchase price was $0.96 per share, representing a 12% discount
relative to the closing price of the Company's stock on May 1, 2003,
resulting in an aggregate cash payment of approximately $1,312,000.
During the nine months ended June 30, 2003, the Company paid Furukawa
Electric Company $45,000 in development costs. No fees were paid in the
nine months ended June 30, 2002.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to such financial statements included elsewhere in this Report.
The following discussion contains forward-looking statements that involve risks
and uncertainties. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will" or similar expressions are intended to identify
forward-looking statements. The statements are based on current expectations and
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to the differences are discussed below in this Report
under "Risk Factors" and elsewhere in this Report, and in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year
ended September 30, 2002.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial Statements and accompanying notes. Note 2 to
the Financial Statements in the Annual Report on Form 10-K for the fiscal year
ended September 30, 2002 describes the significant accounting policies and
methods used in the preparation of the Financial Statements. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
inventory write-downs, and accrued expenses. Actual results could differ from
these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
the Financial Statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden or significant decrease in demand for our
products or there is a higher risk of inventory obsolescence because of rapidly
changing technology and customer requirements, we may be required to write down
our inventory and our gross margin could be adversely affected.
We use estimates in the determination of the required accrual for warranty
costs. This estimate is based upon a detailed examination of past experience and
current information. The information available to us may change in the future
and may require us to revise this accrual.
We have evaluated the available evidence about future taxable income and
other possible sources of realization of deferred tax assets. We have
established a valuation allowance to reduce deferred tax assets to an amount
that represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized. This estimate involves, in
part, the implementation of a tax planning strategy that will enable the company
to utilize its federal net operating loss.
We continually reassess our assumptions and judgments and make adjustments
when significant facts and circumstances dictate.
Overview
We design, manufacture and sell a comprehensive line of high performance,
highly reliable fiber optic subsystems and modules for fiber optic transmission
systems that are used to address the bandwidth limitations in metropolitan area
networks, or MANs, local area networks, or LANs, and storage area
8
networks, or SANs, markets. Our subsystems and modules include optical
transmitters, receivers, transceivers and transponders that convert electronic
signals into optical signals and back to electronic signals, enabling high-speed
communication of voice and data traffic over public and private networks. We
began our operations and shipped our first products in November of 1991.
Furukawa beneficially owns all of our outstanding Class B common stock,
representing 58.8% of our outstanding shares of common stock and 93.4% of the
combined voting power of all of our outstanding common stock as of the quarter
ended June 30, 2003. Since our inception, we have purchased substantially all of
our lasers and the majority of our other fiber optic components from Furukawa.
We have relied on Furukawa's research and development capabilities to provide us
with technologically advanced lasers and fiber optic components that we purchase
from Furukawa for inclusion in our products. We currently purchase the majority
of lasers from Furukawa using short-term purchase orders.
We operate in one industry segment, the design and manufacture of fiber
optic subsystems and modules. We sell our products to original equipment
manufacturers or OEMs, their contract manufacturers or CMs, who incorporate them
into systems they assemble for OEMs and to distributors. We define our customers
as OEMs who have purchased our products directly or indirectly through CMs and
distributors. We recognize revenue upon product shipment, and sales returns and
allowances have been insignificant. Historically, a relatively small number of
customers have accounted for a significant percentage of our revenue. Our 10
largest customers accounted for approximately 62.9% and 61.4% of our total
revenue for the quarters ended June 30, 2003 and 2002, respectively. Cisco
Systems Inc., Huawei and Alcatel, (including sales to each of their CMs or
distributors) accounted for approximately 13.1%, 11.1% and 10.8%, respectively,
of our total revenue for the quarter ended June 30, 2003. Nortel Networks and
Cisco Systems Inc. (including sales to each of their CMs or distributors)
accounted for approximately 14.0%, and 11.4%, respectively, of our total revenue
for the quarter ended June 30, 2002. No other customer accounted for more than
10.0% of our total revenue for the quarters ended June 30, 2003 and 2002.
For financial reporting purposes, we consider our customers to be the OEMs, CMs
and distributors who place purchase orders with us directly. For the quarter
ended June 30, 2003, Comstar Communications accounted for 11.9% of our total
revenue. No other direct sales customer accounted for more than 10.0% of our
total revenue for the quarters ended June 30, 2003 and 2002. Although our
revenue from sales to our other customers continues to increase, we expect that
significant customer concentration will continue for the foreseeable future. Our
sales are made on a purchase order basis rather than by long-term purchase
commitments. Our customers may cancel or defer purchase orders without penalty
on short notice.
Since early 2001, the telecommunications sector, and in particular the
fiber optic networking sector, has suffered a severe downturn. System providers
have scaled back on deployment and have dramatically reduced their purchases of
systems from equipment manufacturers. As a result, equipment manufacturers have
also reduced purchases of components and modules from our competitors and from
us. The slowdown continues to have a negative impact on our business and our
revenue as a result of our customers' declining business.
On October 9, 2002, we acquired certain assets of Cielo Communications,
Inc., ("Cielo Communications") a research and design company located in
Broomfield, Colorado, focused on creating VCSEL technology for fiber optic
communication networks for a cash purchase price and direct costs of $6.6
million. The purchase price includes the acquisition of capital equipment and
intellectual property.
On January 31, 2003, we acquired parallel optical module assets and
intellectual property from Gore Photonics, an industry leader in the research
and development of VCSEL parallel optical modules for fiber optic communication
networks located in Elkton, Maryland, for a cash purchase price of $3.4 million.
The purchase price includes the acquisition of capital equipment and inventory.
9
The average selling prices of our products generally decrease as the
products mature from factors such as increased competition, the introduction of
new products, increased unit volumes, and price concessions required by our
customers. We anticipate that average selling prices of our existing products
will continue to decline in future periods although the timing and degree of the
declines cannot be predicted with any certainty. We must continue to develop and
introduce new products that incorporate features that can be sold at higher
average selling prices on a timely basis.
Our cost of revenue consists principally of direct labor for production of
products, materials, as well as salaries and related expenses for manufacturing
personnel and other manufacturing costs.
Our research and development expenses consist primarily of salaries and
related expenses for design engineers and other technical personnel, cost of
developing prototypes, and depreciation of test and prototyping equipment. Our
research and development expenses also consist of materials and overhead costs
related to major product development projects. We charge all research and
development expenses to operations as incurred. We believe that continued
investment in research and development is critical to our future success.
Accordingly, we may continue to expand our internal research and development
capabilities in the future to develop new products. As a result, we expect that
our research and development expenses in absolute dollar amounts will increase
in future periods.
Sales and marketing expenses consist primarily of salaries and related
expenses for sales and marketing personnel, commissions paid to sales personnel
and independent manufacturers' representatives, marketing and promotion costs.
We intend to expand our sales and marketing operations and efforts in order to
increase sales and market awareness of our products. In July 2000 we opened
sales offices in Bury St. Edmunds, England and Richardson, Texas; in May 2001 we
opened a sales office in Ottawa, Canada; in May 2002 we opened a sales office in
Santa Clara, California; and in March 2003 we opened a sales office in Nashua,
New Hampshire. We believe that investment in sales and marketing is critical to
our success and expect these expenses to increase in the future.
General and administrative expenses consist primarily of salaries and
related expenses for our administrative, finance and human resources personnel,
professional fees and other corporate expenses. We expect that general and
administrative expenses will increase particularly due to the increase in our
directors and officers' insurance premiums as a result of market changes for
such insurance coverage, and increases in our legal and consulting fees
associated with analysis of strategic alternatives, including future market
opportunities that have been undertaken by our management and board of
directors.
Results of Operations - Comparison of Three Months Ended June 30, 2003 and 2002
Revenue - Revenue was approximately $9.5 million and $9.8 million in the
quarters ended June 30, 2003 and 2002, respectively. Sales of our products for
metropolitan area networks were approximately 81% of revenue for the quarter
ended June 30, 2003 compared to approximately 84% of revenue for the quarter
ended June 30, 2002. Sales of our products for local area and storage area
networks were approximately 13% of revenue for the quarter ended June 30, 2003
compared to approximately 12% of revenue for the quarter ended June 30, 2002. We
expect our revenue to continue to be affected by the sluggish economic
environment and its impact on the overall market growth in the foreseeable
future. In addition, the average selling prices for existing products may
decline in response to product introductions by competitors or us, and pressure
from significant customers for price concessions. Furthermore, in May 2003,
Acterna, one of our significant customers, filed for Chapter 11 bankruptcy with
respect to itself and its domestic subsidiaries. We do not believe that
Acterna's bankruptcy filing will impact its operating subsidiaries in Europe,
Latin America and the Asia-Pacific region. We have experienced lower revenue
from Acterna in the quarter ended June 30, 2003 compared to the quarter ended
March 31, 2003, however this was primarily offset by an increase in sales to
other customers. If
10
Acterna's bankruptcy filing causes it to continue to reduce its orders to us, it
could negatively affect our revenue in future quarters.
Cost of Revenue - Cost of revenue decreased 14.3% to $6.1 million in the
quarter ended June 30, 2003 from $7.1 million in the quarter ended June 30,
2002. Gross margin increased to 35.4% from 27.4% during this period. The
increase in gross margin was primarily due to approximately $1.1 million of
inventory used in production in the quarter ended June 30, 2003 that was
previously written down as excess inventory, which was partially offset by an
increase of $272,000 in material costs used in production. Additionally, we
incurred no inventory write downs in the quarter ended June 30, 2003 compared to
inventory write downs of $450,000 incurred in the quarter ended June 30, 2002.
The net decrease in material costs and excess inventory write downs was
partially offset by an increase in licensing fees as a result of the licensing
agreement with Stratos Lightwave, Inc.
Research and Development - Research and development expenses increased
215.2% to $4.5 million in the quarter ended June 30, 2003 from $1.4 million in
the quarter ended June 30, 2002. This increase was primarily due to an increase
in salaries and other operating costs associated with the addition of
engineering personnel hired in Chatsworth, California and the addition of
engineering personnel hired in conjunction, and other operating costs associated
with our October 9, 2002 acquisition of certain assets of Cielo Communications,
a research and design company located in Broomfield, Colorado and our January
31, 2003 acquisition of certain assets of Gore Photonics, a research and
development company in Elkton, Maryland.
Sales and Marketing - Sales and marketing expenses increased 24.0% to $1.3
million in the quarter ended June 30, 2003 from $1.0 million in the quarter
ended June 30, 2002. This increase was primarily due to an increase in salaries
and related expenses associated with the addition of sales and marketing
personnel hired since June 30, 2002. The increase was partially offset by a
decrease of $117,000 in licensing fees associated with the licensing agreement
entered into with Stratos Lightwave, Inc. in March 2002, due to licensing fees
being included in cost of revenue for the quarter ended June 30, 2003. We
believe that investment in sales and marketing is critical to our success and
expect these expenses to increase in absolute dollars in the future.
General and Administrative - General and administrative expenses were $1.5
million in the quarters ended June 30, 2003 and 2002. Professional services
decreased by $375,000 primarily because of a decrease in legal fees associated
with the Stratos Lightwave, Inc. patent infringement litigation and a decrease
in consulting fees associated with the analysis of strategic alternatives. In
addition, bad debt decreased by $100,000 due to a decrease in delinquent
accounts. These decreases were primarily offset by an increase of $239,000 in
salaries and benefits resulting from the addition of personnel hired and an
increase of $170,000 in insurance expense primarily related to an increase in
directors' and officers' insurance premiums.
Other Income, net - Other income, net decreased 49.4% to $411,000 in the
quarter ended June 30, 2003 from $813,000 in the quarter ended June 30, 2002.
This decrease was due to a decrease in investment income, which was primarily
the result of a decrease in interest rates.
Income Taxes - The income tax provision was $784,000 for the quarter ended
June 30, 2003, compared to a benefit for income taxes of $177,000 in the quarter
ended June 30, 2002. The income tax provision for the quarter ended June 30,
2003 includes a charge of $2.2 million related to the valuation allowance of
certain deferred tax assets.
Results of Operations - Comparison of Nine Months Ended June 30, 2003 and 2002
Revenue - Revenue increased 0.5% to $28.4 million in the nine months ended
June 30, 2003 from $28.3 million in the nine months ended June 30, 2002. Sales
of our products for metropolitan area
11
networks were approximately 81% of revenue for the nine months ended June 30,
2003 compared to approximately 88% of revenue for the nine months ended June 30,
2002. Sales of our products for local area and storage area networks were
approximately 13% of revenue for the nine months ended June 30, 2003 compared to
approximately 9% of revenue for the nine months ended June 30, 2002. We expect
that our year-to-year revenue will continue to be affected by the economic
downturn. In addition, the selling prices for our existing products may decline
in response to new product introductions by our competitors or us, and pressure
from our significant customers for price concessions. Also, in May 2003,
Acterna, one of our significant customers, filed for Chapter 11 bankruptcy with
respect to itself and its domestic subsidiaries. We do not believe that
Acterna's bankruptcy filing will impact its operating subsidiaries in Europe,
Latin America and the Asia-Pacific region. Although we have experienced lower
revenue from Acterna in the quarter ended June 30, 2003 compared to the quarter
ended March 31, 2003, this was primarily offset by an increase in sales to other
customers. If Acterna's bankruptcy filing causes it to continue to reduce its
orders to us, it could negatively affect our revenue in future quarters.
Cost of Revenue - Cost of revenue decreased 9.9% to $18.6 million in the
nine months ended June 30, 2003 from $20.6 million in the nine months ended June
30, 2002. Gross margin increased to 34.7% in the nine months ended June 30, 2003
from 27.2% in the same period last year. The increase in gross margin was
primarily due to approximately $2.4 million of inventory used in production in
the nine months ended June 30, 2003 that was previously written down as excess
inventory, and a decrease of $357,000 in salaries and benefits. The decrease in
salaries and benefits was primarily the result of the April 2002 workforce
reduction eliminating 45 jobs, which primarily related to manufacturing. The
increase in gross margin was partially offset by $1.3 million in inventory write
downs in the nine months ended June 30, 2003 compared to inventory write downs
of $870,000 in the nine months ended June 30, 2002 and an increase in licensing
fees as a result of the licensing agreement entered into with Stratos Lightwave,
Inc.
Research and Development - Research and development expenses increased
221.2% to $11.7 million in the nine months ended June 30, 2003 from $3.7 million
in the nine months ended June 30, 2002. This increase was due to an increase in
salaries and other operating costs resulting from the addition of engineering
personnel hired in Chatsworth, California and the increase in personnel
associated with the acquisitions of certain business assets of Cielo
Communications and Gore Photonics.
Sales and Marketing - Sales and marketing expenses increased 14.7% to $3.3
million in the nine months ended June 30, 2003 from $2.9 million in the nine
months ended June 30, 2002. The increase was primarily due to an increase of
$714,000 in salaries and benefits from the addition of sales and marketing
personnel hired and an increase of $128,000 in commissions paid primarily to
independent manufacturers' representatives. This increase was partially offset
by a decrease in licensing fees for the license agreement entered into with
Stratos Lightwave, Inc. due to licensing fees being included in cost of revenue
for the nine months ended June 30, 2003.
General and Administrative - General and administrative expenses increased
7.5% to $4.2 million in the nine months ended June 30, 2003 from $3.9 million in
the nine months ended June 30, 2002. This increase was primarily due to an
increase of $500,000 in insurance expense primarily related to an increase in
directors' and officers' insurance premiums and a $274,000 increase in salary
and benefits related to the addition of personnel hired. These increases were
partially offset by a decrease of $250,000 in bad debt expense due to a decrease
in delinquent accounts and a decrease of $333,000 in legal and consulting fees
due to a decrease in legal fees associated with the Stratos Lightwave, Inc.
patent infringement litigation and a decrease in consulting fees associated with
the analysis of strategic alternatives.
Other Income, net - Other income, net decreased 44.7% to $1.5 million in
the nine months ended June 30, 2003 from $2.7 million in the nine months ended
June 30, 2002. This decrease was due to a decrease in investment income, which
was primarily the result of a decrease in interest rates.
12
Income Taxes - The income tax benefit was $701,000 for the nine months
ended June 30, 2003, compared to a income tax benefit of $13,000 for the nine
months ended June 30, 2002. The income tax benefit for the nine months ended
June 30, 2003 includes a charge of $2.2 million related to the valuation
allowance of certain deferred tax assets.
Liquidity and Capital Resources
As of June 30, 2003, our primary source of liquidity was our cash and cash
equivalents balance of $66.8 million and our marketable securities balance of
$70.8 million, which consists primarily of United States treasury notes and
bonds. At September 30, 2002, we had $85.4 million in cash and cash equivalents
balance and $65.8 million in marketable securities. Our cash and cash
equivalents balance and marketable securities balance decreased during the nine
months ended June 30, 2003 primarily due to the $6.6 million cash purchase price
and direct costs associated with the acquisition of certain assets of Cielo
Communications, the $3.4 million cash purchase price associated with the
acquisition of certain assets of Gore Photonics, the $1.7 million in property,
plant and equipment purchases and the $1.3 million of treasury stock purchased.
The purchase prices for Cielo Communications and Gore Photonics include the
acquisition of inventory, capital equipment and intellectual property.
Since inception, we have financed our operations primarily with cash
generated from operations. Additional financing has been generated through term
loans and through our initial public offering of our Class A common stock, which
we completed on November 3, 2000. As of June 30, 2003, our working capital was
$153.3 million with a current ratio of 19:1 compared to our working capital of
$167.9 million with a current ratio of 30:1 as of September 30, 2002. Our
working capital decreased during the nine months ended June 30, 2003 primarily
due to the $10.2 million cash purchase price and direct costs associated with
the acquisition of certain assets of Cielo Communications and Gore Photonics in
addition to the purchases of property, plant and equipment and treasury stock.
Because of our low debt balances, we believe that additional cash could be
borrowed if necessary; however, cash flow from operations, cash and cash
equivalents, marketable securities and existing loan facilities are expected to
be sufficient to fund operations for the next twelve months.
As of June 30, 2003, we had a $1.5 million balance outstanding under our
term loan. The term loan bears interest on amounts outstanding at various time
intervals and the market rates based on our election at a per annum rate equal
to either (a) the prime rate or (b) LIBOR plus 1.8%. The term loan matures in
July 2006, and the proceeds of the term loan were used to purchase our primary
corporate and manufacturing facility in Chatsworth, California.
The term loan contains customary covenants, including covenants limiting
indebtedness and the disposition of assets. To secure our payment and
performance obligations under the term loan we have pledged all of our assets as
collateral. The term loan also requires that we comply with financial covenants,
which require us to maintain our tangible net worth, cash position and revenue
at specified levels. Our need to comply with these covenants does not materially
affect the operation of our business.
During the nine months ended June 30, 2003, cash provided by operations
was $925,000 compared to cash provided by operations of $12.8 million in the
nine months ended June 30, 2002. The cash provided by operating activities
during the nine months ended June 30, 2003 was the result of a decrease in
inventories and increases in accounts payable to related parties. These were
partially offset by increases in accounts receivable and income taxes
receivable. The cash generated from operating activities during the nine months
ended June 30, 2002 was the result of a decrease in accounts receivable and
inventories.
During the nine months ended June 30, 2003, cash used in investing
activities was $17.9 million compared to cash used in investing activities of
$3.4 million in the nine months ended June 30, 2002.
13
The cash used in investing activities during the nine months ended June 30, 2003
was due to $10.0 million cash purchase price and direct costs associated with
the October 2002 and January 2003 acquisition of certain assets of Cielo
Communications and of Gore Photonics, respectively, $6.2 million in marketable
securities purchases net of maturities and $1.7 million in property, plant and
equipment purchases. The cash used in investing activities in the nine months
ended June 30, 2002 was primarily the result of $1.3 million in marketable
securities purchases net of maturities and $2.1 million in property, plant and
equipment purchases. During the next three months, we expect to make capital
expenditures and incur operating costs totaling approximately $2.5 million as a
result of moving our headquarters and manufacturing operations to our larger
facility in Woodland Hills, California.
During the nine months ended June 30, 2003 and 2002, cash used in
financing activities was $1.6 million and $206,000, respectively. The majority
of cash used in financing activities in the nine months ended June 30, 2003 was
due to $1.3 million for the purchase of 1,366,579 of Class A common stock as
treasury stock and $353,000 for the principal payments on the long-term debt.
The majority of cash used in financing activities in the nine months ended June
30, 2002 was for principal payments on the long-term debt.
On April 12, 2002, we resolved our patent infringement litigation with
Stratos Lightwave, Inc. As part of the settlement, we entered into a five-year
license agreement with Stratos covering Stratos' portfolio of optoelectronic
transceiver patents. In consideration of the license agreement, we are required
to pay a total of $2 million over the five-year license term.
We believe that our existing cash, cash equivalents and investments on
hand, together with cash that we expect to generate from our operations, will be
sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need or elect to raise additional funds to
fund our activities beyond the next year or to consummate acquisitions of other
businesses, products or technologies. We believe we could raise such funds by
selling more stock to the public or to selected investors, or by borrowing
money. In addition, even though we may not need additional funds, we may still
elect to sell additional equity securities or obtain credit facilities for other
reasons. We cannot assure you that we will be able to obtain additional funds on
commercially favorable terms, or at all. If we raise additional funds by issuing
additional equity or convertible debt securities, the ownership percentages of
existing stockholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock.
Although we believe we have sufficient capital to fund our activities for at
least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:
o the market acceptance of our products;
o the levels of promotion and advertising that will be required to launch our
new products and achieve and maintain a competitive position in the
marketplace;
o price discounts on our products to our customers;
o our business, product, capital expenditure and research and development
plans and product and technology roadmaps;
o the levels of inventory and accounts receivable that we maintain;
o capital improvements to new and existing facilities;
o technological advances;
o our competitors' response to our products;
o our pursuit of strategic alternatives, including future market
opportunities; and
o our relationships with suppliers and customers.
14
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
Inflation
Inflation has not had a material adverse effect on our results of
operations, however, our results of operations may be materially and adversely
affected by inflation in the future.
RISK FACTORS
This Report contains forward-looking statements based on the current
expectations, assumptions, estimates and projections about us and our industry.
Our actual results could differ materially from those discussed in these
forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this Report. These forward-looking
statements involve risks and uncertainties. You should carefully consider the
following risks before you decide to buy shares of our Class A common stock. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties, including those risks set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Report, may also adversely impact and impair
our business. If any of the following risks actually occur, our business,
results of operations or financial condition would likely suffer. In such case,
the trading price of our Class A common stock could decline, and you may lose
all or part of the money you paid to buy our stock. We do not undertake to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
Our continued success in generating revenue depends on growth in construction of
fiber optic MAN, LAN, and SAN.
Our fiber optic subsystems and modules are used primarily in MAN, LAN, and
SAN. These markets are rapidly evolving, and it is difficult to predict their
potential size or future growth rate. In addition, we are uncertain as to the
extent to which fiber optic technologies will be used in these markets. Our
success in generating revenue will depend on the growth of these markets and
their adoption of fiber optic technologies. A substantial portion of our revenue
is derived from sales of our product in the MAN market. Sales of our products
for the MAN market represented approximately 81% and 88% of our revenue for the
nine months ended June 30, 2003 and 2002, respectively.
The continuing downturn in our industry have caused communications service
providers to reduce their capital spending on fiber optic equipment and delayed
the deployment of new and build-out of existing fiber optic networks. As the
result of currently unfavorable economic and market conditions, (a) our revenue
may continue to decline, (b) we are unable to predict future revenue accurately,
and (c) we are currently unable to provide long-term guidance for future
financial performance. The conditions contributing to this difficulty include:
o uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon whom our customers and, ultimately we,
depend for revenue;
o the telecommunications carriers' current limited access to the capital
required for expansion;
o lower near term revenue visibility; and
o general market and economic uncertainty.
Based on these and other factors, many of our major customers have reduced
orders for our products and have expressed uncertainty as to their future
requirements. As a result, our revenue in future
15
periods may continue to decline. In addition, our ability to meet financial
expectations for future periods may be harmed.
We derive a significant portion of our total revenue from a few significant
customers, and our total revenue may decline significantly if any of these
customers cancels, reduces or delays purchases of our products or extracts price
concessions from us. One of our significant customers recently filed for Chapter
11 bankruptcy, which could affect sales of our products to this customer.
Our success depends on our continued ability to develop and maintain
relationships with a limited number of significant customers. We sell our
products into markets dominated by a relatively small number of systems
manufacturers, a fact that limits the number of our potential customers. Our
dependence on orders from a relatively small number of customers makes our
relationship with each customer critical to our business.
We do not have long-term sales contracts with our customers. Instead,
sales to our customers are made on the basis of individual purchase orders that
our customers may cancel or defer on short notice without significant penalty.
In the past, some of our major customers canceled, delayed or significantly
accelerated orders in response to changes in the manufacturing schedules for
their systems, and they are likely to do so in the future. In addition, Acterna,
which, including sales to its contract manufacturers, accounted for
approximately 12.4% of our sales in the quarter ended March 31, 2003, filed for
Chapter 11 bankruptcy on May 6, 2003. This could cause Acterna to reduce its
future orders from us. We have already experienced a reduction in orders and
revenue from Acterna since the bankruptcy filing. The reduction, cancellation or
delay of individual customer purchase orders would cause our revenue to decline.
Moreover, these uncertainties complicate our ability to accurately plan our
manufacturing schedule. Additionally, if any of our customers cancel or defer
orders, our operating expenses may increase as a percentage of revenue.
In the past, our customers have sought price concessions from us, and they
are likely to continue to do so in the future. In addition, some of our
customers may shift their purchases of products from us to our competitors. The
loss of one or more of our significant customers, our inability to successfully
develop relationships with additional customers or future price concessions
could cause our revenue to decline significantly.
We are dependent on a limited number of suppliers for most of our key
components. If these suppliers are unable to meet our manufacturing
requirements, we may experience production delays leading to delays in
shipments, increased costs and cancellation of orders for our products.
We purchase several key components that we incorporate into our products
from a limited number of suppliers. We also purchase the majority of our lasers
from Furukawa. We do not have long-term supply contracts with any of our key
suppliers. Our dependence on a small number of suppliers and our lack of
long-term supply contracts exposes us to several risks, including our potential
inability to obtain an adequate supply of quality components, price increases
and late deliveries. We have experienced shortages and delays in obtaining key
components in the past and expect to experience shortages and delays in the
future.
In the past, industry capacity has been constrained and some of our
component suppliers placed limits on the number of components sold to us. If
industry capacity becomes constrained in the future, our component suppliers may
place similar limits on us. We do not have any control over these limits, and
our suppliers may choose to allocate more of their production to our
competitors. In addition, our suppliers could discontinue the manufacture or
supply of these components at any time.
16
A disruption in, or termination of, our supply relationship with Furukawa
or any of our other key suppliers, or our inability to develop relationships
with new suppliers would interrupt and delay the manufacturing of our products,
which could result in delays in our revenue, or the cancellation of orders for
our products. We may not be able to identify and integrate alternative suppliers
in a timely fashion, or at all. Any transition to alternative suppliers would
likely result in delays in shipment, quality control issues and increased
expenses, any of which would limit our ability to deliver products to our
customers. Furthermore, if we are unable to identify an alternative source of
supply, we may have to redesign or modify our products, which would cause delays
in shipments, increase design and manufacturing costs and require us to increase
the prices of our products.
Our future operating results are likely to fluctuate from quarter to quarter,
and if we fail to meet the expectations of securities analysts or investors, our
stock price could decline significantly.
Our historical quarterly operating results have varied significantly, and
our future quarterly operating results are likely to continue to vary
significantly from period to period. As a result, we believe that
period-to-period comparisons of our operating results should not be relied upon
as an indicator of our future performance. Some of the factors that could cause
our operating results to vary include:
o fluctuations in demand for, and sales of, our products, which is
dependent on the implementation of fiber optic networks;
o the timing of customer orders, particularly from our significant
customers;
o competitive factors, including introductions of new products, product
enhancements and the introduction of new technologies by our
competitors, the entry of new competitors into the fiber optic
subsystems and modules market and pricing pressures;
o our ability to control expenses;
o the mix of our products sold; and
o economic conditions specific to the communications and related
industries.
We incur expenses from time to time that may not generate revenue until
subsequent quarters. In addition, in connection with new product introductions,
we incur research and development expenses and sales and marketing expenses that
are not matched with revenue until a subsequent quarter when the new product is
introduced. We cannot assure you that our expenditures on manufacturing capacity
will generate increased revenue in subsequent quarters. If growth in our revenue
does not outpace the increase in our expenses, our quarterly operating results
may fall below expectations and cause our stock price to decline significantly.
Due to these and other factors, we believe that our quarterly operating
results are not an indicator of our future performance. If our operating results
are below the expectations of public market analysts or investors in future
quarters, the trading price of our Class A common stock would be likely to
decrease significantly.
General economic factors could negatively impact our growth plan.
Since early 2001, unfavorable economic conditions in the United States
detrimentally affected the U.S. manufacturing industry, particularly sales of
fiber optics equipment to service providers and communication equipment
companies. Announcements by fiber optics equipment manufacturers and their
customers during this period indicate that there is a reduction in spending for
fiber optic equipment as a result of the economic slowdown and efforts to reduce
existing inventories. Based on these and other factors, some of our customers
have reduced, modified, cancelled or rescheduled orders for our products and
have expressed uncertainty as to their future requirements. In addition, the
economic slowdown has required us to aggressively manage our costs and expenses,
including our July 2001 and April 2002 announcements of the elimination of
approximately 110 jobs and 45 jobs, respectively, primarily in the manufacturing
area, and may require us to implement further cost management procedures in the
future.
17
Our business, operating results and financial condition will suffer if economic
conditions in the United States worsen, the fiber optics equipment market
continues to slowdown, or if a wider or global economic slowdown occurs.
If we do not develop and introduce new products with higher average selling
prices in a timely manner, the overall average selling prices of our products
will decrease.
The market for fiber optic subsystems and modules is characterized by
declining average selling prices for existing products due to increased
competition, the introduction of new products, product obsolescence and
increased unit volumes as manufacturers deploy new network equipment. We have in
the past experienced, and in the future may experience, period-to-period
fluctuations in operating results due to declines in our overall average selling
prices. We anticipate that the selling prices for our existing products will
decrease in the future in response to product introductions by competitors or
us, or other factors, including pressure from significant customers for price
concessions. Therefore, we must continue to develop and introduce new products
that can be sold at higher prices on a timely basis to maintain our overall
average selling prices. Failure to do so could cause our revenue and gross
margins to decline.
If our customers do not approve our manufacturing process and qualify our
products, we will lose significant customer sales and opportunities.
Customers generally will not purchase any of our products before they
qualify them and approve our manufacturing process and quality control system.
Our customers may require us to register under international quality standards,
such as ISO 9001. Delays in product qualification or loss of ISO 9001
certification may cause a product to be dropped from a long-term supply program
and result in a significant lost revenue opportunity. If particular customers do
not approve of our manufacturing process, we will lose the sales opportunities
with those customers.
If we fail to predict our manufacturing requirements accurately, we could incur
additional carrying costs and have excess and obsolete inventory or experience
manufacturing delays, which could cause us to lose orders or customers.
We currently use historical data, a backlog of orders and estimates of
future requirements to determine our demand for components and materials. We
must accurately predict both the demand for our products and the lead-time
required to obtain the necessary components and materials. Lead times for
components and materials vary significantly depending on factors such as the
specific supplier, the size of the order, contract terms and demand for each
component at a given time. We generally maintain excess inventory of parts that
increases our inventory carrying costs and periodically causes us to have excess
and obsolete inventory. However, if we were to underestimate our purchasing
requirements, manufacturing could be interrupted, resulting in delays in
shipments.
Our markets are highly competitive, some of our customers are also our
competitors, and our other customers may choose to purchase our competitors'
products rather than our products or develop internal capabilities to produce
their own fiber optic subsystems and modules.
The market for fiber optic subsystems and modules is highly competitive
and we expect competition to intensify in the future. Our primary competitors
include Agilent Technologies, ExceLight Communications, Finisar, Infineon
Technologies, JDS Uniphase, Molex Fiber Optics, MRV Communications, Picolight,
and Stratos Lightwave. We also face indirect competition from public and private
companies providing products that address the same fiber optic network problems
that our products address. The development of alternative solutions to fiber
optic transmission problems by our competitors, particularly systems companies
that also manufacture modules, such as Alcatel (via Alcatel Optronics) and
Fujitsu, could significantly limit our growth and harm our competitive position.
18
Many of our current competitors and potential competitors have longer
operating histories and significantly greater financial, technical, sales and
marketing resources than we do. As a result, these competitors are able to
devote greater resources to the development, promotion, sale and support of
their products. In addition, our competitors that have large market
capitalization or cash reserves are in a much better position to acquire other
companies in order to gain new technologies or products that may displace our
products. Any of these potential acquisitions could give our competitors a
strategic advantage. In addition, many of our competitors have much greater
brand name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we do. These companies
can use their broader customer bases and product offerings and adopt aggressive
pricing policies to gain market share.
In addition, existing and potential customers, especially in Japan, China
and other international markets, may also become competitors. These customers
have the internal capabilities to integrate their operations by producing their
own optical subsystems and modules or by acquiring our competitors or the rights
to produce competitive products or technologies, which may allow them to reduce
their purchases or cease purchasing from us.
We expect our competitors to introduce new and improved products with
lower prices, and we will need to do the same to remain competitive. We may not
be able to compete successfully against either current or future competitors
with respect to new products. We believe that competitive pressures may result
in price reductions, reduced margins and our loss of market share.
Our sales cycle runs from our customers' initial design to production for
commercial sale. This cycle is long and unpredictable and may cause our revenue
and operating results to vary from our forecasts.
The period of time between our initial contact with a customer and the
receipt of a purchase order from that customer may span to more than a year and
varies by product and customer. During this time, customers may perform, or
require us to perform, extensive evaluation and qualification testing of our
products. Generally, they consider a wide range of issues before purchasing our
products, including interoperation with other subsystems and components, product
performance and reliability. We may incur substantial sales and marketing
expenses and expend significant management effort while potential customers are
qualifying our products. Even after incurring these costs, we ultimately may not
sell any or sell only small amounts of our products to a potential customer. If
sales forecasts to specific customers are not realized, our revenue and results
of operations may be negatively impacted.
If we do not achieve acceptable manufacturing yields in a cost-effective manner,
or we are required to develop new manufacturing processes to improve our yields,
our operating results would be impaired.
The manufacture of our products involves complex and precise processes. As
a result, it may be difficult to cost-effectively meet our production goals. In
addition, changes in our manufacturing processes or those of our suppliers, or
our suppliers' inadvertent use of defective materials, could significantly
reduce our manufacturing yields, increase our costs and reduce our product
shipments. To increase our gross margin, while offering products at prices
acceptable to customers, we will need to develop new manufacturing processes and
techniques that will involve higher levels of automation.
We could be subjected to litigation regarding intellectual property rights,
which may divert management attention, cause us to incur significant costs or
prevent us from selling our products.
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights in the
networking technologies industry. Many companies aggressively use their patent
portfolios to bring infringement claims against competitors. As a result, we may
be a
19
party to litigation or be involved in disputes over our alleged infringement of
others' intellectual property in the future. These claims and any resulting
lawsuit, if successful, could subject us to significant liability for damages
and prevent us from making or selling some of our products. These lawsuits,
regardless of their merit, would likely be time-consuming and expensive to
resolve and would divert management's time and attention. Any potential
intellectual property litigation also could force us to do one or more of the
following:
o stop selling, incorporating or using our products that use the
infringed intellectual property;
o obtain a license to make, sell or use the relevant technology from the
owner of the infringed intellectual property, which license may not be
available on commercially reasonable terms, if at all; or
o redesign the products to not use the infringed intellectual property,
which may not be technically or commercially feasible.
If we are forced to take any of these actions, we may be limited in our
ability to execute our business plan.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights. These claims could result in costly
litigation and the diversion of our technical and management personnel. In the
process of asserting our intellectual property rights, these rights could be
found to be invalid, unenforceable or not infringed. Failure to successfully
assert our intellectual property rights could result in our inability to prevent
our competitors from utilizing our proprietary rights.
If we are unable to protect our proprietary technology, this technology could be
misappropriated, which would make it difficult for us to compete in our
industry.
Our success and ability to compete is dependent in part on our proprietary
technology. We rely primarily on patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and other methods, to establish and
protect our proprietary rights. Existing patent, copyright, trademark and trade
secret laws afford only limited protection. While we are pursuing foreign patent
protections, the laws of some foreign countries do not protect the unauthorized
use of our proprietary technology and processes to the same extent as do the
laws of the United States, and policing the unauthorized use of our products is
difficult. Many U.S. companies have encountered substantial infringement
problems in some foreign countries. Because we sell some of our products
overseas, we have exposure to foreign intellectual property risks. Any
infringement of our proprietary rights could result in costly litigation, and
any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenue.
If we are unable to generate adequate additional revenue as a result of the
planned expansion of our sales operations, our competitive position may be
harmed and our revenue or margins may decline.
Historically, we have relied primarily on a limited direct sales force,
supported by third party manufacturers' representatives and distributors, to
sell our products. Our sales strategy focuses primarily on developing and
expanding our direct sales force, manufacturers' representatives and
distributors. We will incur significant costs related to the expansion of our
sales operations. If the expansion of our sales operations does not generate
adequate additional revenue, the cost of any expansion may exceed the revenue
generated, and our margins may decline. To the extent we are unsuccessful in
expanding our direct sales force, we will likely be unable to compete
successfully against the significantly larger and well-funded sales and
marketing operations of many of our current or potential competitors. In
addition, if we fail to develop relationships with significant manufacturers'
representatives or distributors, or if these representatives or distributors are
not successful in their sales or marketing efforts, sales of our
20
products may decrease and our competitive position would be harmed. Our
representatives or distributors may not market our products effectively or may
not continue to devote the resources necessary to provide us with effective
sales, marketing and technical support. Our inability to effectively manage the
expansion of our domestic and foreign sales and support staff or maintain
existing or establish new relationships with manufacturer representatives and
distributors would harm our revenue and result in declining margins.
The market for our products is new and is characterized by rapid technological
changes and evolving industry standards. If we do not respond to the changes in
a timely manner, our products likely will not achieve market acceptance.
The market for our products is characterized by rapid technological
change, new and improved product introductions, changes in customer requirements
and evolving industry standards. Our future success will depend to a substantial
extent on our ability to develop, introduce and support cost-effective new
products and technology on a successful and timely basis. We may continue to
increase our budget for research and development of new products and technology.
Since these costs are expensed as incurred, we expect a negative impact on our
reported net income. If we fail to develop and deploy new cost-effective
products and technologies or enhancements of existing products on a timely
basis, or if we experience delays in the development, introduction or
enhancement of our products and technologies, our products will no longer be
competitive and our revenue will decline.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products on a
timely basis, if at all. Furthermore, we cannot assure you that our new products
will gain market acceptance or that we will be able to respond effectively to
product announcements by competitors, technological changes or emerging industry
standards. Our failure to respond to product announcements, technological
changes or industry changes in standards would likely prevent our products from
gaining market acceptance and harm our competitive position.
Terrorist activities and resulting military and other actions and the recent
outbreak of severe acute respiratory syndrome ("SARS") could adversely affect
our business.
The September 11, 2001 terrorist attacks in the United States and recent
terrorist attacks in other parts of the world, as well as continued threats of
global terrorism and recent outbreak of SARS have created many economic and
political uncertainties that make it extremely difficult for us, our customers
and our suppliers to accurately forecast and plan future business activities.
The recent outbreak of SARS, especially in China where we have significant
customer and supply relationships, could also disrupt our operations, sales and
supply chain or those of our customers, which has made it more difficult to
predict and plan for future business activities. This reduced predictability
challenges our ability to operate profitably or to grow our business. In
particular, it is difficult to develop and implement strategies, sustainable
business models and efficient operations, and effectively manage contract
manufacturing and supply chain relationships. In addition, the continued threats
of terrorism, the heightened security measures in response to such threats and
the recent outbreak of SARS have and may continue to cause significant
disruption to commerce throughout the world. Disruption in air transportation in
response to these threats, future attacks or SARS may result in transportation
and supply-chain disruptions, increase our costs for both receipt of inventory
and shipment of products to our customers, and cause customers to defer their
purchasing decisions. Disruptions in commerce could also cause consumer
confidence and spending to decrease or result in increased volatility in the
U.S. and worldwide financial markets and economy. They also could result in
economic recession in the U.S. or abroad. Any of these occurrences could have a
significant impact on our operating results, revenue and
21
costs and may result in the volatility of the market price for our Class A
common stock and on the future price of our Class A common stock.
Our success depends on our key personnel, including our executive officers, the
loss of any of whom could harm our business.
Our success depends on the continued contributions of our senior
management and other key research and development, sales and marketing and
operations personnel, including Muoi Van Tran, our Chief Executive Officer and
President, Susie Nemeti, our Chief Financial Officer and Vice President of
Finance and Administration, and Mohammad Ghorbanali, our Chief Operating Officer
and Vice President of Technical Operations. Competition for employees in our
industry is intense. We do not have life insurance policies covering any of our
executives. There can be no assurance that we will be successful in retaining
such key personnel, or that we will be successful in hiring replacements or
additional key personnel. Our loss of any key employee, the failure of any key
employee to perform in his or her current position, or the inability of our
officers and key employees to expand, train and manage our employee base would
prevent us from executing our growth strategy.
We will need to attract and retain highly qualified managers, sales and
marketing and technical support personnel. We have had difficulty hiring the
necessary engineering, sales and marketing and management personnel in the past.
If we fail to hire and retain qualified personnel when needed, our product
development efforts and customer relations will suffer. Our key management
personnel have limited experience in managing the growth of technologically
complex businesses in a rapidly evolving environment. If we are unable to manage
our growth effectively, we will incur additional expenses that will negatively
impact our operating results.
Our products may have defects that are not detected until full deployment of a
customer's system. Any of these defects could result in a loss of customers,
damage to our reputation and substantial costs.
We design our products for large and complex fiber optic networks, and our
products must be compatible with other components of the network system, both
current and future. We have experienced in the past, and may continue to
experience in the future, defects in our products. Defects in our products or
incompatibilities in our products may appear only when deployed in networks for
an extended period of time. In addition, our products may fail to meet our
customers' design specifications, or our customers may change their design
specifications after the production of our product. A failure to meet our
customers' design specification often results in a loss of the sale due to the
length of time required to redesign the product. We may also experience defects
in third party components that we incorporate into our products. We have
experienced the following due to our inability to detect or fix errors in the
past:
o increased costs associated with the replacement of defective products,
redesign of products to meet customer design specification and/or
refund of the purchase price;
o diversion of development resources; and
o increased service and warranty costs.
Our products and the systems into which our products are incorporated must
comply with domestic and international governmental regulations, and if our
products do not meet these regulations, our ability to sell our products will be
restricted.
Our products are subject to various regulations of U.S. and foreign
governmental authorities principally in the areas of radio frequency emission
standards and eye safety. Radio frequency emission standards govern allowable
radio interference with other services. Eye safety standards govern the labeling
and certification of laser products to ensure that they are used in a way that
does not create a hazard to the human eye. Our products and the systems into
which they are incorporated must also
22
comply with international standards and governmental standards of the foreign
countries where our products are used. Our inability, or the inability of our
customers, to comply with existing or evolving standards established by
regulatory authorities, or to obtain timely domestic or foreign regulatory
approvals or certificates will restrict our ability to sell our products.
We are subject to environmental laws and other legal requirements that have the
potential to subject us to substantial liability and increase our cost of doing
business.
Our properties and business operations are subject to a wide variety of
federal, state and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances. We may be
required to incur substantial costs to comply with current or future legal
requirements. In addition, if we fail to obtain required permits or otherwise
fail to operate within these or future legal requirements, we may be required to
pay substantial penalties, suspend our operations or make costly changes to our
manufacturing processes or facilities. We believe our properties and business
operations are in compliance with applicable environmental laws. We do not
anticipate any material capital expenditures for environmental control
facilities for the 2003 fiscal year.
We face risks associated with our international operations that could prevent us
from marketing and distributing our products internationally.
Although a significant portion of our sales has historically been in North
America, a growing percentage of our revenue is generated from sales outside
North America. Sales of our products outside North America accounted for
approximately 37.8% and 21.9% of our revenue for the nine months ended June 30,
2003 and 2002, respectively. We expect that our sales outside of North America
will continue to contribute materially to our revenue. We have limited
experience in marketing and distributing our products internationally. We intend
to expand our international operations in the future. Significant management
attention and financial resources are needed to develop our international sales,
support and distribution channels and manufacturing. We may not be able to
establish or maintain international market demand for our products.
In addition, international operations are subject to other risks,
including:
o greater difficulty in accounts receivable collection and longer
collection periods;
o difficulties and costs of staffing and managing foreign operations with
personnel who have expertise in fiber optic technology;
o unexpected changes in regulatory or certification requirements for
optical networks; and
o political or economic instability.
A portion of our international revenue and expenses may be denominated in
foreign currencies in the future. Accordingly, we could experience the risks of
fluctuating currencies and may choose to engage in currency hedging activities.
These factors could adversely impact our international sales or increase our
costs of doing business abroad or impair our ability to expand into
international markets, and therefore could significantly harm our business.
Disruption of our operations at our California manufacturing facility could
require us to lease alternative manufacturing facilities or limit our
manufacturing operations.
All of our manufacturing operations are currently conducted in our
Chatsworth, California headquarters. In August 2003 or shortly thereafter, we
intend to relocate our headquarters and all other operations from our current
headquarters to our larger facility in Woodland Hills, California. A disruption
of our manufacturing operations resulting from this move could delay or limit
our manufacturing operations in the near future. In addition, due to the
geographic concentration, sustained
23
process abnormalities, human error, government intervention or natural
disasters, such as earthquakes, fires or floods, or other causes, could require
us to cease or limit our manufacturing operations.
Our limited experience in acquiring other businesses, product lines and
technologies may make it difficult for us to overcome problems encountered in
connection with any acquisition we may undertake.
We expect to review opportunities to buy other businesses, products or
technologies that would enhance our technical capabilities, complement our
current products or expand the breadth of our markets or which may otherwise
offer growth opportunities. Our acquisition of businesses or technologies will
require significant commitment of resources. We may be required to pay for any
acquisition with cash, but we cannot be certain that additional capital will be
available to us on favorable terms, if at all. In lieu of paying cash, we could
issue stock as consideration for an acquisition that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. We have little experience in acquiring other businesses and
technologies. Potential acquisitions also involve numerous risks, including:
o problems assimilating the purchased operations, technologies or
products;
o unanticipated costs associated with the acquisition;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers and
customers;
o risks associated with entering markets in which we have no or limited
prior experience; and
o potential loss of key employees of purchased organizations.
On October 9, 2002 and January 31, 2003, we acquired certain assets of
Cielo Communications and Gore Photonics, respectively. We may encounter problems
integrating the acquired operations, technologies or products into our own and
could lose the services of certain key employees associated with the acquired
assets.
Our stock price is likely to be volatile and could drop unexpectedly.
Our Class A common stock has been publicly traded since November 3, 2000.
The market price of our Class A common stock has been subject to significant
fluctuations since the date of our initial public offering. The stock market has
from time to time experienced significant price and volume fluctuations that
have affected the market prices of securities, particularly securities of
telecommunications and fiber optic companies. As a result, the market price of
our Class A common stock may materially decline, regardless of our operating
performance. In the past, following periods of volatility in the market price of
a particular company's securities, securities class action litigation has often
been brought against that company. We may become involved in this type of
litigation in the future. Litigation of this type is often expensive and diverts
management's attention and resources.
We may not be able to maintain our listing on the Nasdaq National Market and if
we fail to do so, the price and liquidity of our Class A common stock may
decline.
The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of securities on the Nasdaq National Market. The current
requirements affecting us include maintaining a minimum bid price per share of
$1. Our bid price has been below $1 in the past. If the bid price of our Class A
common stock drops below $1 per share and remains at that level for more than 30
consecutive trading days, we will be in violation of Nasdaq's listing standards.
If within 180 calendar days thereafter, our Class A common stock does not have a
minimum bid price of $1 per share for at least 10 consecutive trading days,
Nasdaq will commence proceedings to delist our Class A common stock from the
Nasdaq National Market. If we fail to maintain continued listing on the Nasdaq
National Market and must move to a market with less liquidity, our stock price
would likely decline. If we are delisted, it could have a
24
material adverse effect on the market price of, and the liquidity of the trading
market for, our Class A common stock.
We have business conflicts of interest with Furukawa, the resolution of which
may not be as favorable to us as if we were dealing with an unaffiliated third
party.
We have historically relied on Furukawa's research and development
capabilities to provide us with technologically advanced lasers and fiber optic
components that we purchase from Furukawa for inclusion in our products, and we
expect to continue to rely on Furukawa in the future. We currently purchase the
majority of lasers from Furukawa. We currently have no written agreements with
Furukawa with respect to our research and development and supply relationship.
We cannot assure you that Furukawa will continue to provide services and
components to us, and if not, whether or on what terms we could find adequate
alternative sources for these services and components. We believe that our past
business dealings with Furukawa and its subsidiaries and affiliates were on
terms that were no less favorable than terms that would be available from third
parties for similar transactions. We intend to continue to maintain our
relationship with Furukawa and Furukawa will continue to control us. The terms
of future transactions with Furukawa may or may not be comparable to those that
would be available from unaffiliated third parties.
Conflicts of interest may arise between Furukawa and us in a number of
areas, including the nature and quality of services rendered by Furukawa to us,
potential competitive business activities, sales or distributions by Furukawa of
all or any portion of its ownership interest in us, or Furukawa's ability to
control our management and affairs. It is possible that business decisions made
by management that are in the best interest of our stockholders may conflict
with Furukawa's interests. For example, we may decide to enter into or acquire a
line of business competitive with Furukawa, or Furukawa may decide to enter into
or acquire a line of business competitive with us. Any of these events may alter
or eliminate our ability to rely on Furukawa to supply key components to us in
the future, increase our costs of producing our products and result in increased
competition in our markets. We cannot assure you that we will be able to resolve
any conflicts we may have with Furukawa or, if we are able to do so, that the
resolution will be favorable to us.
Furukawa will control the outcome of stockholder voting and there may be an
adverse effect on the price of our Class A common stock due to disparate voting
rights of our Class A common stock and our Class B common stock.
Furukawa beneficially owns all of our outstanding shares of Class B common
stock, which as of June 30, 2003 represented 58.8% of our outstanding shares of
common stock and 93.4% voting control over all stockholder issues. The holders
of our Class A common stock and Class B common stock have identical rights
except that holders of our Class A common stock are entitled to one vote per
share while holders of our Class B common stock are entitled to ten votes per
share on matters to be voted on by stockholders. The differential in the voting
rights of our Class A common stock and Class B common stock could adversely
affect the price of our Class A common stock to the extent that investors or any
potential future purchaser of our shares of Class A common stock give greater
value to the superior voting rights of our Class B common stock. Each share of
our Class B common stock will automatically convert into one share of Class A
common stock if it is transferred to any entity, other than an entity
controlling, controlled by or under common control with Furukawa. In addition,
our Class B common stock will automatically convert into shares of our Class A
common stock if the total number of outstanding shares of Class B common stock
falls below 20% of total number of outstanding shares of our common stock. As
long as Furukawa has a controlling interest, it will continue to be able to
elect our entire board of directors and generally be able to determine the
outcome of all corporate actions requiring stockholder approval. As a result,
Furukawa will be in a position to continue to control all matters affecting us,
including:
25
o a change of control, including a merger;
o our acquisition or disposition of assets;
o our future issuances of common stock or other securities;
o our incurrence of debt; and
o our payment of dividends on our common stock.
Two members of our board of directors are also executives of Furukawa.
These individuals have obligations to both our company and Furukawa and may have
conflicts of interest with respect to matters potentially or actually involving
or affecting us, such as acquisitions and other corporate opportunities that may
be suitable for both Furukawa and us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are currently exposed to interest rate risk on our existing term loan
and on our investment portfolio. Our variable rate debt consists of term loan
borrowing of $1.5 million. The primary objective of our investment activities is
to preserve capital. We have not used derivative financial instruments in our
investment portfolio. Our cash and cash equivalents includes $66.8 million the
majority of which is invested in money market and other interest bearing
accounts. In addition, we have $70.8 million invested in marketable securities,
which represents investments in United States treasury notes and treasury bonds.
As of June 30, 2003, our investment in marketable securities had a
weighted-average time to maturity of approximately 200 days. Marketable
securities represent United States treasury notes and treasury bonds with
maturity on the date purchased of greater than three months. These securities
are classified as held to maturity because we have the intention and ability to
hold the securities to maturity. Gross unrealized gains and losses on
held-to-maturity marketable securities have historically not been material.
Maturities on the date purchased of held-to-maturity marketable debt securities
range from three months to two years.
If interest rates were to increase or decrease 1%, the result would be an
annual increase or decrease of interest expense of approximately $15,000 on our
term loan and an annual increase or decrease of interest income of $1.4 million
on our investment portfolio. However, due to the uncertainty of the actions that
would be taken and their possible effects, this analysis assumes no such action.
Further, this analysis does not consider the effect of the change in the level
of overall economic activity that could exist in such an environment. Sales to
foreign customers are denominated in U.S. dollars and as such we have no foreign
currency fluctuation risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation, as of the end of the period covered by this quarterly report, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")) are
effective based on their evaluation of these controls and procedures required by
paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There were no
changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rules 13a-15 or
15d-15 under the Exchange Act that occurred during our last fiscal quarter that
has
26
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
27
PART II.
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. We are
not aware of any other material legal proceedings threatened or pending against
us. From time to time, however, we may become subject to additional legal
proceedings, claims, and litigation arising in the ordinary course of business.
In addition, in the past we have received, and we may continue to receive in the
future, letters alleging infringement of patent or other intellectual property
rights. Our management believes that these letters generally are without merit
and intend to contest them vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
- -------------- ------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Report on Form 8-K filed during the quarter ended June 30,
2003:
Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 5, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL COMMUNICATION PRODUCTS, INC.,
a Delaware corporation
Date: August 14, 2003 By: /s/ Muoi Van Tran
--------------- ------------------
Name: Muoi Van Tran
Title: Chairman of the Board,
Chief Executive Officer and President
Date: August 14, 2003 BY: /s/ Susie Nemeti
--------------- ------------------
Name: Susie Nemeti
Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
29
EXHIBIT INDEX
Exhibit Number Description
31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
30