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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
- ----
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended September 30, 2004
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.)
6101 Variel Avenue
Woodland Hills, California 91367
(Address of principal executive offices, including zip code)
Registrant's Telephone Number, Including Area Code: (818) 251-7100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
--------------------------------------- --------------------------------
Class A Common Stock, $0.001 par value The Nasdaq National Market
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X|No |_|
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of March 31, 2004, the last business day of the registrant's most
recently completed second fiscal quarter, the approximate aggregate market value
of voting and non-voting common stock held by non-affiliates of the registrant
was $61,211,983 (based upon the last closing price for shares of the
registrant's common stock as reported by The National Market System of the
National Association of Securities Dealers Automated Quotation System as of that
date). Shares of common stock held by each officer, director, and holder of 10%
or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
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 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 December 27, 2004, there were approximately 46,839,305
shares of Class A Common Stock outstanding and 66,000,000 shares of Class B
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III hereto is incorporated by
reference to the Proxy Statement for the Registrant's 2005 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
OPTICAL COMMUNICATION PRODUCTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
PART I.........................................................................1
ITEM 1. BUSINESS...................................................1
ITEM 2. PROPERTIES................................................27
ITEM 3. LEGAL PROCEEDINGS.........................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...................................................28
PART II.......................................................................29
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...............................29
ITEM 6. SELECTED FINANCIAL DATA...................................30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.........................................43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES......................44
ITEM 9A. CONTROLS AND PROCEDURES...................................44
PART III......................................................................45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................45
ITEM 11. EXECUTIVE COMPENSATION....................................45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.......................................45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............45
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES....................45
PART IV.......................................................................46
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.......................................46
This Annual Report on Form 10-K, including information incorporated herein by
reference, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to expectations concerning matters that are not
historical facts. Words such as "projects," "believes," "anticipates," "will,"
"estimate," "plans," "expects," "intends," and similar words and expressions are
intended to identify forward-looking statements. Although we believe that such
forward-looking statements are reasonable, we cannot assure you that such
expectations will prove to be correct. Important language regarding factors
which could cause actual results to differ materially from such expectations are
disclosed in this Report, including without limitation under the caption "Risk
Factors" beginning on page 16 of this Report, and the other documents we file
with the Securities and Exchange Commission ("SEC"), including our most recent
reports on Form 8-K and Form 10-Q, and amendments thereto. All forward-looking
statements attributable to Optical Communication Products are expressly
qualified in their entirety by such language. We do not undertake any obligation
to update any forward-looking statements.
PART I.
ITEM 1. BUSINESS
We design, manufacture and sell a comprehensive line of high
performance, highly reliable fiber optic subsystems and modules for the
metropolitan area, local area and storage area markets. Subsystems and modules
are preassembled components that are used to build network equipment. Our
subsystems and modules are integrated into systems that address the bandwidth
limitations in metropolitan area networks, ("MANs"), local area networks,
("LANs") and storage area networks, ("SANs"). Our products include optical
transmitters, receivers, transceivers and transponders that convert electronic
signals into optical signals and back to electronic signals, enabling high-speed
communication of voice and data traffic over public and private fiber optic
networks. Our products support a wide range of network applications,
transmission speeds, distances and standards, including international
transmission standards.
The Company was founded in October 1991 with initial funding from The
Furukawa Electric Company, Ltd. of Japan ("Furukawa"). We offer a comprehensive
line of high performance, cost-effective solutions to our customers supported by
volume production capabilities. We believe that our close working relationship
with leading fiber optic communication equipment manufacturers allows us to
quickly design and build advanced fiber optic subsystems and modules, enabling
our customers to focus on their core competencies in designing and building
overall systems. Our customers include communication equipment manufacturers,
such as Acterna Corporation, Alcatel, Ciena, Cisco Systems, ECI Telecom Ltd.,
Extreme Networks, Fujitsu Network Communications, Huawei Technologies, Nortel
Networks, and Telrad Telecommunication and Electronic Industries, Ltd. some of
whom purchase through contract manufacturers such as Celestica, Jabil Circuits,
Plexus, Sanmina-SCI, and Solectron.
Industry Background
Increased network traffic
During the past several years, the amount of voice and data transmitted
over communication networks has increased significantly. This growth is
primarily attributed to the rapid growth and popularity of data intensive
applications, such as Internet access, distance learning, web hosting, real-time
data backup, e-mail, video conferencing, multimedia file transfers and the
movement of large blocks of stored data across networks. To meet this demand,
communication service providers upgraded their
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communication networks to expand capacity, which greatly reduced transmission
costs per bit. This cost reduction has, in turn, further increased the demand
for and usage of communication networks. This cycle, increased demand fueling
increased capacity at reduced costs and increasing demand further, has enabled
the growth in voice and data traffic across networks.
Evolution of network infrastructure
Communication networks were originally designed to handle voice traffic.
The infrastructure of existing prior generation, or legacy, networks consists of
copper cabling along which voice communications are transmitted in the form of
electronic signals. While copper cabling is generally a reliable transmission
medium, its ability to transmit large volumes of data at high speed is limited,
and it is prone to electromagnetic interference, or EMI, from nearby electronic
equipment and other sources. EMI interferes with the transmission of a signal
and degrades signal quality.
To overcome the limitations of the legacy copper cable infrastructure
and meet increasing demand for high capacity and high-speed voice and data
transmission, communication service providers have adopted fiber optic
technology in their networks. Fiber optic technology involves the transmission
of data over fiber optic cable via digital pulses of light, which allows for
greater bandwidth over longer distances than copper cable and higher quality
transmissions that are not subject to EMI.
Widespread deployment of fiber optic technology initially occurred in
the long-haul network. Long-haul networks connect the communications networks of
metropolitan areas around the world and facilitate the transport of large
amounts of voice and data traffic over long distances, up to thousands of miles.
Companies designing equipment for this segment have typically focused on
providing as much bandwidth as possible between any two locations. The long-haul
market was the first to face increasing network congestion as data, aggregated
from expanding MAN, LAN, and SAN infrastructures, began to overload long-haul
networks. Long-haul network managers, focused on maintaining network
performance, were the first to adopt advanced subsystems and modules to increase
the capacity of existing fiber. Long-haul network managers have typically been
concerned more about network performance than transmission equipment cost
because the cost of increasing the capacity of long-haul networks through adding
fiber is expensive relative to upgrading the transmission equipment to higher
data transmission rates.
The build-out of optical long-haul networks through the adoption of
advanced subsystems and modules to increase capacity represents an important
step in improving network infrastructure to support increased demand for new
services and greater traffic volumes. While optical fiber continues to be
deployed, and its transmission capacity is expanded in long-haul networks, fiber
optic technologies are increasingly being adopted to support high data rate
connections to link end-users to the long-haul networks.
Metropolitan area networks, local area networks, storage area networks
Metropolitan area networks consist of metro core and access networks.
Metro core networks are the distribution points between long-haul networks and
metro access networks. In a typical system, a long-haul network connects to a
city-wide MAN through which long-haul data is aggregated by network managers,
such as Internet service providers, or ISP, and distributed to local users via
an access network. Metro core networks enable enterprises and service providers
to interconnect network systems over areas from as small as a city block or
corporate campus to a wider geographic area.
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Metro access networks connect business and residential end-users to
metro core networks. These end-users have increasingly demanded higher-speed
connections to take advantage of new data-intensive, multimedia-centric
applications. Access networks traditionally have used relatively slow copper
cable based connections. A number of high-speed transmission technologies have
been developed to improve the speed of access networks, including digital
technologies such as digital subscriber line, or DSL, and cable modem
technologies. DSL technology utilizes the legacy copper-based infrastructure to
provide users with increased bandwidth at low cost. Cable modems, which connect
computers to local cable TV lines, also provide users with access to high
bandwidth at low cost. As these high data rates and new services become more
widely available to end-users, legacy copper cable connections are expected to
become increasingly insufficient to meet demand. Consequently, service providers
are beginning to deploy fiber optic cable directly to end-users or to
neighborhood distribution points, enabling the business or residential end-user
to obtain a wide range of current and future services.
Local area networks connect users within a building or groups of
buildings. Storage area networks connect computers and data storage sites within
buildings or groups of buildings. These networks were originally developed as
copper cable networks using standards such as Ethernet and Fast Ethernet. As
performance requirements surpassed the limitations of copper-based deployments,
these networks were upgraded to support multimode fiber optic solutions to
address the expanding application needs of the end-user. As the data rate and
transmission distance requirements of these networks increase further, they are
being upgraded with single mode fiber optics technology to support the
next-generation of high-speed networking standards, such as Fibre Channel
(single, double and quad speed), Gigabit Ethernet, and 10 Gigabit Ethernet.
Market Opportunity
With increasing volumes of digitally-based data being transmitted across
long-haul networking infrastructures, the MAN topology is often viewed as the
limiting factor in overall network performance. In addition, LAN and SAN
segments are also requiring greater bandwidth and performance capabilities to
address data traffic congestion. As a result, network managers have been
upgrading their LAN and SAN infrastructures to higher speeds using optical
transmission technologies and high-speed networking standards such as Gigabit
Ethernet, SONET/SDH, Fibre Channel (single, double and quad speed) Fast Ethernet
and 10 Gigabit Ethernet.
As demand for bandwidth grows, service providers will require
increasingly sophisticated systems to support metro, local and storage networks
applications. Systems must meet the unique requirements of these networks, such
as cost-effectiveness and reliability in harsh environmental conditions.
Historically, the MAN, LAN and SAN optical infrastructures have been supplied by
large vertically integrated fiber optic communication equipment manufacturers,
which manufactured their own components such as lasers and photodiodes. The
demand for optical networking equipment has led to the expansion of production
by existing optical component manufacturers, as well as the creation of new
companies offering cost-effective fiber optic systems. These new companies are
typically not vertically integrated and do not employ system design teams to
create mixed analog/digital circuits required for laser and photodiode
interfaces.
The market demands on fiber optic communication equipment manufacturers
to produce optical networking solutions for the MAN, LAN and SAN markets have
given rise to a number of significant technical challenges, including the
following:
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o Providing solutions that balance performance and cost. The metropolitan
market requires optical subsystems and modules that are designed
specifically to meet the unique performance and cost requirements of this
market.
o Providing long distance operation in MAN applications where interconnection
distances can range from a few kilometers (km) up to 120km. Systems that are
unable to transmit over long distances require expensive repeaters to boost
and regenerate signals, raising the overall cost of the solution to the
end-customer.
o Providing wide operating temperature range in metro networks where equipment
is located in remote locations with no environmental control. Products that
operate from -40 to 85 degrees Celsius are a necessity in this market. This
is in contrast to the long-haul network and local area networks where
equipment is deployed within temperature controlled buildings.
o Delivering products that address the demand for increasingly smaller
packages to provide higher port density requires greater component
miniaturization, thermal and EMI engineering design expertise.
o Supporting a wide range of data rates, transmission distance requirements,
network standards, optical interfaces and packaging options requires that
fiber optic communication equipment manufacturers offer a broad range of
products.
o Producing increasingly integrated products requires cross-disciplinary
expertise in optics, circuit design, packaging, software, microwave and
radio frequency engineering.
o Responding to demands for shorter lead times requires manufacturers to
design products and scale production rapidly.
o Producing systems to handle increasingly higher data rates in compliance
with Federal Communications Commission standards for EMI emissions requires
advanced fiber optic subsystem and module design.
o Responding to customer requirements for "customized" standard products
requires scalable base-line designs.
Current Industry Environment
The fiber optic communication industry continues to face challenging
market conditions. Capital spending by service providers on network
infrastructure has remained substantially below pre-2001 levels, increasing only
slightly - if at all - during the last year. As a result, equipment
manufacturers have also dramatically reduced their quarterly purchases of
components and modules from our competitors and from us. While several service
providers, including BellSouth, SBC and Verizon, have recently announced current
and planned investments in Fiber-to-the-Premises (FTTP) applications, which we
believe could increase traffic demand on the metropolitan area networks (MANs)
into which such FTTP infrastructure would feed, it is too early to predict the
outcome of these potential FTTP roll-outs. Because visibility in the industry
remains extremely limited, we cannot provide any assurance as to the timing or
extent of any increased business that we may receive as a result of these or
other industry developments.
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Our Solution
We design, manufacture and sell a comprehensive line of high
performance, reliable fiber optic subsystems and modules that are used in fiber
optic transmission systems. Our subsystems and modules are integrated into
systems, which address the bandwidth limitations in MAN, LAN, and SAN
infrastructures. We provide communication equipment manufacturers with
high-value, cost-effective optical solutions to meet the market requirements of
the MAN, LAN, and SAN industry segments, allowing them to focus on their core
competencies of designing and building overall systems.
We provide our customers with the following key benefits:
o High-performance, high reliability, cost-effective products - Our portfolio of
high performance subsystems and modules enables optical networks to operate at
high data transmission rates, transmit signals over a variety of distances up to
120km and operate in wide temperature ranges of between -40 to 85 degrees
Celsius. Our products are engineered using advanced packaging technologies and
feature low levels of radiated EMI. Our products are qualified under
requirements established by Telcordia (Bellcore), an engineering and
administrative services consortium that establishes industry standards and
specifications for the telecommunications, wireless and fiber optic industries.
The Telcordia requirements relate to the environmental, electrical and optical
testing for fiber optic transmitters and receivers, to ensure that they offer
the high reliability required for critical applications. Our products are
engineered to meet the specific distance, temperature and other performance
requirements of the MAN, LAN, and SAN markets.
o Comprehensive product line - Our comprehensive fiber optic product line
provides communication equipment manufacturers with a broad range of solutions
for MAN, LAN, and SAN applications. Our subsystems and modules are available
with all the common fiber optic interfaces, and are available in a wide variety
of thru-hole and pluggable package styles. They support a wide range of data
rates, standards, wavelengths and transmission distances.
o Innovative design capabilities - We believe that our expertise in high-speed
electronic circuit design and packaging of fiber optic devices, enhanced by our
close working relationships with customers, enables us to provide innovative
subsystems and modules for the MAN, LAN, and SAN markets. Our engineers work
closely with Furukawa and other suppliers to integrate advanced semiconductor
lasers and custom fiber optic packaging techniques. We also have expertise in
designing the complex transmitter circuitry that converts a digital logic signal
into the proper signal for the laser or light emitting diode. We design and
manufacture our own fiber optic receiver subassemblies using our proprietary
automated processes. As a result of our fiber optic device design expertise and
our close customer relationships, we are able to quickly adapt our products to
respond to new standards and our customers' requirements for subsystems and
modules.
o Reduced time to market - Our subsystems and modules allow communication
equipment manufacturers to design and assemble fiber optic interfaces as easily
as standard electronic components by eliminating the need for complex setup of
individual lasers or receivers. By working closely with our customer design
teams, we are able to provide optimized solutions that are cost-effective and
meet time to market objectives.
o Scalable manufacturing capabilities - Our broad portfolio of products use
modular designs which enable us to rapidly configure and manufacture subsystems
and modules to meet each customer's
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specifications and to rapidly scale our production to deliver these products in
volume. We can easily customize our products for example by implementing
different electrical connections, or pin configurations, voltages and package
sizes as requested by our customers, without impairing the functionality of our
products.
Products
We offer a comprehensive line of high-performance fiber optic subsystems
and modules, including fiber optic transmitters, receivers, transceivers, and
transponders, primarily for use in MAN, LAN, and SAN. Fiber optic subsystems and
modules are pre-assembled components that are used to build network equipment.
Our products convert electronic signals into optical signals and back into
electronic signals, thereby facilitating the transmission of information over
fiber optic communication networks. We believe our products' technical
specifications meet or exceed industry standards for fiber optic subsystems and
modules.
Our fiber optic products integrate advanced optical devices with mixed
analog/digital integrated circuits. These circuits allow continuously varying
signals and digital data to be designed in the same circuit rather than separate
circuits. Our products provide subsystem/module functionality over a wide
variety of connectivity speeds, distances, standards and operating temperature
ranges.
Our products are engineered with varying levels of integration to suit
our customers. The lowest level of integration involves separate transmitter and
receiver modules, which provides our customers the greatest flexibility in
product design by allowing them to place the transmitters and the receivers
according to their design specifications. Transceivers provide the next level of
integration. Transceivers place both the transmitter and receiver in the same
package with a dual fiber or connector interface. Transponders provide the
highest level of integration by combining the functionality of a transceiver
with the addition of multiplexer and demultiplexer circuits in the same package.
Current products
Transmitters and Receivers - Transmitters convert an electronic digital
input signal into an optical output signal for transmission over a fiber optic
network. Receivers detect optical signals from a fiber optic network and convert
them into an electronic signal in standard digital/logic format for further
signal processing. We offer separate transmitter and receiver modules that
provide our customers with the greatest flexibility in product design by
allowing them to place transmitters and receivers separately according to design
specifications.
Our optical transmitter and receiver products support the SONET/SDH,
Fast Ethernet, Gigabit Ethernet and Fibre Channel transmission standards and are
offered in a wide range of data rates, transmission distances and packaging
options.
DWDM Transmitter - Dense wavelength division multiplexing, or DWDM,
transmitters allow the mixing of optical signals using different standards such
as SONET/SDH, asynchronous transfer mode, or ATM, and Gigabit Ethernet, by
utilizing different wavelengths. Our DWDM transmitters are available in a
compact, low-profile 24-pin package along with two supply voltage options. Also,
the transmitters are provided with additional functions such as disable inputs,
LD degradation alarm, and wavelength deviation alarm signals.
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Transceivers - Optical transceivers are products that contain both a
transmitter and a receiver in a single device and serve as high data rate
interconnects between network devices, such as routers, switches, servers and
storage elements. Our optical transceivers are available in a wide variety of
fiber optic interfaces, or form factors, and support a wide range of data rates,
wavelengths, modes and transmission distances. Our transceivers support the
SONET/SDH, ATM, Fast Ethernet, Gigabit Ethernet and Fibre Channel transmission
standards.
SFP Transceivers - Small form-factor pluggable, or SFP, transceivers are
"hot-pluggable" optical transceivers that can be removed or inserted into the
equipment without turning off the power of the system. This feature allows our
customers to readily reconfigure their systems without interrupting their
network services, thereby, eliminating system downtime during upgrades and
maintenance. Our cam latches are color coded to provide the end-user with an
easy way to identify module types in an installed system.
Our SFP transceiver is available in a variety of distances and speeds
and uses the popular small form factor LC fiber optic connector interface,
allowing fiber optic equipment makers to increase their port density. They are
also offered in speeds from 155 Mb/s up to 2.5Gb/s including multimode LED and
850nm VCSEL as well as single mode 1310 and 1550nm lasers. We provide commercial
and industrial temperature ranges of many SFP transceiver models.
CWDM Transceivers - Coarse wavelength division multiplexing, or CWDM,
transceivers, allow the mixing of optical signals by utilizing different
wavelengths. The CWDM transceivers use lasers with wide channel wavelength
spacing, typically 20 nm, which allows the equipment to achieve a lower overall
system cost. This lower cost is the result of a lower transmitter cost since no
temperature and wavelength control is needed, as well as a lower optical
MUX/DMUX cost due to wider tolerance on the wavelength stability and bandwidth.
Our CWDM transceivers are available in all the common industry standard
transceiver footprints of 1x9, 2x9, GBIC, SFF and SFP, and provide eight
wavelength channels at nominally 1470 nm, 1490 nm, 1510 nm, 1530 nm, 1550 nm,
1570 nm, 1590 nm, and 1610 nm. They are available in a multi-rate format that
allows operation at all speeds from 100 Mb/s Ethernet up to 2.5Gb/s. SONET/SDH.
Bi-Directional Transceivers- Bi-Directional transceivers allow full
duplex transmission utilizing a single fiber. These transceivers incorporate
lasers, receivers and optical filters, allowing simultaneous transmission and
reception from a single port or a single fiber. The advantage of Bi-Directional
transceiver modules is lower material cost, lower installation cost and lower
operational cost for fiber installations, as a result of having to purchase,
install, maintain, and administer fewer fibers.
Our Bi-Directional transceivers are available in industry standard
pluggable modules (SFP) and are compliant to industry standard of EFM (Ethernet
for First Mile). The data transmission is 1250 Mb/s which is Gigabit Ethernet
standard rate. Samples of these products are available to customers for
evaluations.
Transponders - Our optical transponders combine the functionality of a
transceiver with integrated circuits for electronic multiplexing and
demultiplexing in the same package. Multiplexers are paired with transmitters
and allow the system designer to combine multiple low-speed electronic data
streams onto a single optical wavelength, while demultiplexers and receivers
reverse this process. The transmitter portion of the transponder accepts sixteen
155 Mb/s electronic signals, multiplexes them together and provides at the
output a single 2,488 Mb/s optical signal. The receiver portion of the
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transponder performs the reverse function, namely accepting a single optical
signal and providing back sixteen 155 Mb/s electronic signals. The advantage of
this product is the compact overall design that minimizes the equipment size and
the low speed electronic interface that simplifies our customers' printed
circuit design.
Products under development
Our product development efforts have, and will continue to be, focused
on developing new products and technologies to support increased transmission
speeds, distances and capacities. We have been developing products to support
future generations of fiber optic MAN, LAN, and SAN by utilizing CWDM, DWDM,
850nm VCSEL-based optical modules, the integration of 1310nm VCSELs into optical
modules and to address 10 Gb/s transmission standards.
Wavelength division multiplexing is a technology that allows multiple
signals to be sent along the same optical fiber by using different colors of
light for each signal. We have expanded efforts in this area to cover SONET/SDH
and Gigabit Ethernet applications for multiple operating temperature ranges.
We plan to introduce optical transceivers using DWDM as well as CWDM
technologies. These are being designed to allow the mixing of optical signals
using different standards, such as SONET/SDH, asynchronous transfer mode, or
ATM, and Gigabit Ethernet, by utilizing different wavelengths.
In October 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. The purchase
price was $5 million and includes the acquisition of capital equipment,
inventory and intellectual property. We believe the Cielo Communications'
technology will enhance our ability to accelerate the integration of 1300 nm
VCSEL sources into the next generation of optical modules. Due to the potential
low cost to produce 1300 nm VCSELs, we believe the cost of our new generation of
optical modules employing these 1300 nm VCSEL sources will be lower than modules
employing other types of optical sources. We also expect that these optical
modules will offer the advantage of lower power consumption.
We believe that some of our competitors are developing products similar
to those that we have under development. While we are currently developing
products in all of the areas described above, we may choose to prioritize or
redirect our development efforts in response to market demands. Therefore, it is
not certain that we will introduce products for any or all of the categories
listed above.
Customers
We sell our products to communication equipment manufacturers, or CEMs,
directly and through contract manufacturers, or CMs, who incorporate them into
systems they assemble for CEMs. Contract manufacturers assemble specific
products for CEMs. We define our customers as CEMs who have purchased our
products directly or ordered our products for incorporation into systems
produced by contract manufacturers, such as Celestica, Jabil Circuits, Plexus,
Sanmina-SCI, and Solectron.
A small number of customers have historically accounted for a
significant portion of our total revenue. For the fiscal year ended September
30, 2004, our 10 largest customers accounted for 68.0% of our total revenue,
with Alcatel and Cisco Systems (including sales to each of their contract
manufacturers) accounting for approximately 16.7% and 11.2% of our total
revenue, respectively. No
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other customer accounted for more than 10.0% of our revenue during the fiscal
year ended September 30, 2004.
For financial reporting purposes, we consider our customers to be the
CEMs, CMs and distributors who place purchase orders with us directly. Comstar
Communications accounted for approximately 11.1% of our total revenue for the
fiscal year ended September 30, 2004. No other customer accounted for more than
10.0% of our revenue during the fiscal year ended September 30, 2004.
Technology
The development and manufacture of high-performance fiber optic
subsystems and modules for MAN, LAN, and SAN require diverse technical skills
and expertise. We believe that our understanding of fundamental optical devices,
their packaging and high speed circuit design allows us to extend the
performance of low cost packaging and technology, which we originally designed
for smaller local area networks, to provide the high-performance required for
fiber optic MAN, LAN, and SAN. Key elements of our technological capabilities
include:
o Optical device technology - With the purchase of certain assets of
Cielo Communications, Inc., a research and design company located in
Broomfield, Colorado, we have acquired the technology of designing,
fabricating and packaging long wave VCSEL devices. We believe that
this long wave VSCEL device technology is a key building block for
next generation optical modules.
In addition, we understand the performance requirements for many
optical devices for use in fiber optic systems. There is a wide range
of optical source and detector technologies available, and these must
be optimized for each application.
o Optical packaging/subassembly design - We work closely with Furukawa
and other suppliers to combine advanced semiconductor laser designs
and custom optical packaging techniques to produce advanced optical
subassemblies. Less than one micron tolerances, or variability in the
alignment of components, are required in these laser packages and
reliability specifications require us to hold these mechanical
tolerances over a wide range of temperatures and the specified life
of our products. A micron is one thousandth of a millimeter. We
believe these designs and technologies improve the performance of our
products as well as enhance yields and reduce material costs. We also
design our receiver packages for automated assembly, and we design
and manufacture our own optical subassemblies for our receivers. This
allows us to provide design flexibility, high-performance, and the
ability to manufacture in volume.
o Links with Furukawa - We have worked closely with Furukawa to develop
new optical devices for our products using technology that they have
developed. Furukawa supplies us with the majority of the optical
devices, such as lasers, needed for some of the optical subassemblies
used in our products.
o Electronic circuit design - We have the expertise to design complex
transmitter circuitry that converts a digital logic signal into the
proper signal for the laser or light emitting diode. This circuit has
compensation and feedback control loops that change the current to
maintain constant optical power output. This electronic signal must
also be modulated
9
and the waveform of the modulation must be carefully controlled to
ensure that the optical output meets the fiber optic communications
equipment manufacturer's defined specifications. We also have
considerable expertise in designing receivers to minimize the effects
of external noise that can significantly affect the performance of a
receiver. Our products operate at speeds up to 2.5 Gb/s and we are
working to develop future products to work at 10 Gb/s. At these
speeds, microwave and radio frequency design techniques must be used
to ensure that the waveforms do not degrade and meet the parameters
defined in standards. We believe our technical competencies in these
areas enable us to produce fiber optic subsystems and modules with
low electromagnetic interference emission levels.
o Fast product development cycle time - Our products are designed using
a building block approach that allows us to combine different
subassemblies in different ways to provide a wide range of products.
Our integrated subassemblies allow us to quickly adapt our products
to respond to new standards and our customers' requirements for
special subsystems and modules. This ability, in combination with our
market knowledge, allows us to select the commercial opportunities we
believe to be the best and provide samples and production volumes in
very short time frames.
Manufacturing
We assemble, burn in and test all of our products in our facility in
Woodland Hills, California. We also conduct all of our manufacturing,
engineering, quality assurance and documentation control at this facility.
We use a number of subcontractors and suppliers, including Furukawa, to
supply subassemblies. We rely upon domestic and international contract
manufacturers for most of our printed circuit board assembly. Our manufacturing
supply chain management team manages these relationships supported by our
research and development group. We do not have any long-term contracts with any
of our contract manufacturers and none of them are obligated to perform assembly
services for us for any specific period or at any specific price, except as may
be provided in a particular purchase order.
We provide quality assurance through internal testing procedures
throughout the entire manufacturing process. Our quality control procedures
include vendor inspection, incoming material inspection, in-process testing and
outgoing inspection. We provide specialized training to assure the competency of
our manufacturing personnel.
We purchase several key components for our products from a limited
number of suppliers. The components that we purchase include integrated
circuits, lasers, light emitting diodes, vertical cavity surface-emitting
lasers, photodiode devices and other passive electronic components. We have
periodically experienced shortages and delivery delays for these materials.
Because we operate in an industry where material supplies are constrained, we
maintain an inventory of some limited source components to decrease the risk of
shortage. As a result, we have excess inventory of these components that have
led to write downs of excess inventory.
Research and Development
In fiscal 2002, 2003, and 2004, our research and development expenses
were $5.3 million, $16.2 million and $17.0 million, respectively. Our research
and development activities are focused on
10
enhancing our existing products, developing new products to meet the evolving
needs of our customers within our existing markets and supporting emerging
standards that are consistent with our product strategies.
We plan to continue to collaborate with universities or research
institutes in our product development effort. In addition, Furukawa has
developed a number of innovative components that we have integrated into our
products. We plan to continue to collaborate with Furukawa to take advantage of
their optical component technology wherever appropriate.
Sales, Marketing and Technical Support
We sell our products primarily through our worldwide direct sales force
supported by independent manufacturers' representatives and distributors. Our
direct sales force and field applications engineering team maintains close
contact with our customers and provides technical support to our manufacturers'
representatives and distributors. We maintain regional sales offices in Northern
and Southern California, Texas, New Hampshire, Canada and the United Kingdom. In
addition, we have direct sales personnel located on the East Coast of the United
States, working from home offices. Our corporate customer service department in
Woodland Hills, California provides day-to-day updates on orders and deliveries
to our customers world-wide, excluding Europe. We also have a satellite customer
service operation in our United Kingdom facility to better address our growing
European customer base.
We have established contractual relationships with manufacturers'
representatives and distributors in North America, Europe, Israel, and Asia.
Manufacturers' representatives and distributors are third parties who provide
commercial and technical support in selling our products to customers.
Manufacturers' representatives represent us with customers, but customers place
orders directly with us. We pay the manufacturers' representatives a fee for
this service. Distributors perform the same function, but differ in that the
distributor buys products from us and resells them at a profit to the end
customer. We have short-term contracts with our manufacturers' representatives
and distributors, which can be cancelled by either party upon 30 days notice. We
intend to expand our indirect sales activity by establishing relationships with
additional independent manufacturers' representatives and distributors. Please
refer to Note 14 to our Notes to Financial Statements for further information
about our sales to particular geographic areas.
We focus our marketing on CEMs in the fiber optic MAN, LAN, and SAN
markets. Our intent is to become a market driven supplier that provides
cost-effective, value-add solutions to our customer base. Our efforts in the
development of an effective branding campaign are to better position our
strengths as customer-focused suppliers of a broad product portfolio that
addresses optical applications. Key elements of our marketing initiatives are as
follows:
o Expansion of the overall marketing resources to provide more focus on
industry segments, to identify and drive new product efforts, to
position our company strengths with our customers as well as the
technical community, and to introduce new revenue opportunities into the
company product portfolio.
o The development of key marketing relationships at our identified
strategic accounts with high-level decision makers to better position us
for current and next-generation opportunities during the product
development and specification defining phases.
11
o The expansion of our applications engineering group to provide our
customers with complete pre- and post-sales technical support on our
products, including design and troubleshooting assistance.
We have added geographically-based field applications engineers to
service key regional design centers to support the sales efforts.
o The implementation of a marketing communications plan to focus efforts
on strategic corporate branding and positioning initiatives in
advertising, press relations, tradeshow events, web site, speaking
engagements, and publication opportunities. The new web site launched in
September 2003 includes a part number search engine and provides
customers with a comprehensive listing of our broad product portfolio.
We also interact with our customers in industry associations, standards
committees and participation in multi-source agreements, to promote and further
enhance our position within the technical community.
We provide extensive technical support to our customers during their
design and qualification process through direct contact with our application and
design engineering teams. In addition, our web site provides product
documentation and application notes. Our account managers and customer service
personnel provide ongoing post-sales support.
Backlog
Backlog consists of orders for shipments with release dates from our
customers. As of September 30, 2004 and September 30, 2003, our backlog was
approximately $6.6 million and $5.3 million, respectively. Orders in backlog are
firm, but are subject to cancellation or rescheduling by the customer. Backlog
comparisons on a year to year or quarter to quarter basis may not be meaningful
as our backlog is unpredictable and fluctuates monthly.
Competition
The MAN, LAN, and SAN markets for optical subsystems and modules for CEM
applications are highly competitive and subject to rapidly changing technology.
We believe the primary competitive factors impacting our business are as
follows:
o Breadth of product portfolio;
o Competitive with market-level pricing;
o Time to market of new product introductions;
o Established relationships with key customers;
o Capability to scale production requirements;
o Quality and reliability of products;
o Complete technical documentation for product lines;
o Financially stable suppliers;
o Ability to provide technical design support;
o Scope and responsiveness of service and technical support;
o Compliance to industry standard specifications; and
o Meeting the customer design phase timelines for product qualification.
12
We believe that we have established a favorable position in the MAN,
LAN, and SAN markets by identifying and focusing on fiber optic subsystems and
modules specifically for these segments. We believe that we are focused on these
markets with a combination of comprehensive product portfolios, management and
design expertise, market understanding and manufacturing capabilities. We
compete primarily with Agilent Technologies, ExceLight Communications, Finisar,
Infineon Technologies, JDS Uniphase, MRV Communications, OpNext, Picolight, and
Stratos Lightwave. Many of our current and potential competitors have
significantly greater financial, technical, marketing, purchasing and other
resources than we do. In addition, several low-cost Asian competitors are
entering into our market segment. We have competitors for all of our current
products.
Our products may also compete with technologies that provide
alternatives to optical networking, including fixed and mobile radio, free space
point-to-point optical transmission and copper-based technologies such as
digital subscriber line, or DSL, and cable modems. Most of these technologies
provide lower speed and shorter distance capabilities than optical networking
technologies, but may provide certain advantages such as lower costs and mobile
capabilities.
Intellectual Property
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 technologies and processes. However, these
measures afford only limited protection of our proprietary technology. Including
patent properties acquired from Cielo Communications in October 2002, our patent
portfolio now counts more than 53 issued United States patents and more that 37
pending United States patent applications. In addition, there is one issued
Canadian patent, 5 pending Canadian patent applications, one pending European
patent, and one pending PCT international patent applications. There can be no
assurance that we will continue to seek the issuance of patents from our pending
patent applications filed in the United States and other foreign governmental
authorities. Furthermore, there can be no assurance that any of our patent
applications will result in the issuance of any patents or that any patents
issued will provide competitive advantages for our products or protect us
against claims asserting that our products infringe or may infringe the
proprietary rights of third parties.
On April 12, 2002, the Company entered into a five-year license
agreement with Stratos Lightwave, Inc. covering Stratos' portfolio of
optoelectronic transceiver patents. In addition, we acquired two licenses
related to VCSEL technology resulting from our acquisition of certain assets of
Cielo Communications. With the exception of these three licenses, we currently
do not license to or from any other third parties the technology used in the
manufacture of our fiber optic subsystems and modules. In addition, no
technology is transferred or licensed in connection with our supply relationship
with Furukawa. Accordingly, Furukawa owns the technology relating to the
manufacture of its laser and other products we purchase for incorporation into
our products and may license or sell this technology to other parties. We own
the technology relating to the manufacture of our fiber optic subsystems and
modules. We have not transferred to Furukawa any intellectual property rights
that would allow it to compete with us in the MAN, LAN, and SAN markets.
However, there can be no assurance that Furukawa would not develop in the future
internal capabilities to manufacture fiber optic subsystems and modules similar
to and competitive with our products.
Litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of the proprietary rights
of others. This litigation could result in substantial costs and diversion of
resources and could significantly harm our business. From time-to-
13
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies and in various jurisdictions that
are important to our business. Any claims asserting that our products infringe
or may infringe proprietary rights of third parties, if determined adversely to
us, could significantly harm our business. Any claims, with or without merit,
could be time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, cause product shipment delays or require us
to enter into royalty or licensing agreements, any of which could significantly
harm our business. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. In addition, our agreements with
our customers typically require us to indemnify our customers from any expense
or liability resulting from claimed infringement of third party intellectual
property rights. In the event a claim against us is successful, we could be
liable for significant monetary damages. If we cannot obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign our products to avoid infringement, our business would be significantly
harmed.
Employees
As of September 30, 2004, we had 324 full-time employees and no
part-time employees. Our employees are not represented by any collective
bargaining agreements and we have never experienced a work stoppage.
Notwithstanding the current economic downturn, we consider our employee
relations to be generally good.
Our Relationship with Furukawa
We were incorporated as a California corporation in October 1991 and we
subsequently reincorporated as a Delaware corporation in October 2000 in
connection with our initial public offering. In November 1991, a wholly owned
subsidiary of The Furukawa Electric Co., Ltd. provided our initial capital
investment. Furukawa, a publicly held company incorporated under the laws of
Japan, is one of the world's leading manufacturers of electric wire and cable,
nonferrous metals and related products. It also provides engineering services,
including the installation of power and telecommunications cables, and is a
major manufacturer of fiber optic cable. Furukawa's stock is publicly traded on
the Tokyo Exchange Nikkei in Japan. Furukawa beneficially owns all of our
outstanding Class B common stock, which as of October 31, 2004 represented 58.5%
of our outstanding shares of common stock and 93.4% of the combined voting power
of all of our outstanding common stock.
Our relationship with Furukawa has allowed us to benefit from the
optical device and packaging technologies developed at its laboratories in
Japan, which are incorporated into laser products, that we purchase from
Furukawa for inclusion in our products. We have also established a close working
relationship with Furukawa's research and development team through periodic
meetings and discussions to understand our product and manufacturing
requirements. Under these arrangements, Furukawa customizes to our
specifications the components that it supplies to us. For example, Furukawa has
developed laser products with customized features in the areas of package design
and power output. We have not licensed from Furukawa any of its optical devices
or other technologies.
We currently purchase the majority of lasers from Furukawa under a
Master Purchase Agreement which we entered into with Furukawa on October 1, 2003
which was automatically renewed on October 1, 2004. We have enjoyed a reliable
supply of these critical components from Furukawa in the past. Under this Master
Purchase Agreement, we agreed to purchase from Furukawa, and Furukawa agreed to
manufacture and sell to us, specific types of lasers which are critical parts in
the manufacture of our subsystems and modules. This Agreement continues until
September 30, 2004, and renews automatically
14
each year thereafter unless it is terminated upon written notice by either
Furukawa or us prior to renewal. Under this agreement, OCP and Furukawa must
maintain a minimum quantity of certain products. The product and its related
quantities, or safety stock level, shall be specified by OCP on a quarterly
basis. OCP will be obligated to purchase any unused safety stock at the close of
the quarter or at the termination of the agreement. The pricing for these
products are set out in the Agreement, although we have agreed to negotiate with
Furukawa on a quarterly basis to determine whether the pricing needs to be
revised. Either Furukawa or we may terminate the Agreement upon written notice
to the other for material breach, bankruptcy, or force majeure.
From time to time our research and development team works closely with
Furukawa's team to assist in the development of our design and manufacturing
process. We may enter into similar development agreements with Furukawa in the
future. However we have no current commitments and currently have no development
agreements under negotiation with Furukawa.
Disposition of Chatsworth Facility
In June 2004, we sold the building located in Chatsworth, California
which was our former corporate headquarters. Net proceeds from this transaction
were approximately $5.7 million.
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 applications. 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 87%, 84%, and
86% of our revenue for the years ended September 30, 2004, 2003 and 2002,
respectively.
As the result of currently uncertain economic and market conditions, (a)
our revenue may 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:
15
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 periods may decline. In
addition, our ability to meet financial expectations for future periods may be
harmed.
We derive a significant portion of our total revenue from a few significant
customers, and our total revenue may decline significantly if any of these
customers cancels, reduces or delays purchases of our products or extracts price
concessions from us.
Our success depends on our continued ability to develop and maintain
relationships with a limited number of significant customers. We sell our
products into markets dominated by a relatively small number of systems
manufacturers, a fact that limits the number of our potential customers. Our
dependence on orders from a relatively small number of customers makes our
relationship with each customer critical to our business.
We do not have long-term sales contracts with our customers. Instead,
sales to our customers are made on the basis of individual purchase orders that
our customers may cancel or defer on short notice without significant penalty.
In the past, some of our major customers canceled, delayed or significantly
accelerated orders in response to changes in the manufacturing schedules for
their systems, and they are likely to do so in the future. The reduction,
cancellation or delay of individual customer purchase orders would cause our
revenue to decline. Moreover, these uncertainties complicate our ability to
accurately plan our manufacturing schedule. Additionally, if any of our
customers cancel or defer orders, our operating expenses may increase as a
percentage of revenue.
In the past, our customers have sought price concessions from us, and
they are likely to continue to do so in the future. In addition, some of our
customers may shift their purchases of products from us to our competitors. The
loss of one or more of our significant customers, our inability to successfully
develop relationships with additional customers or future price concessions
could cause our revenue to decline significantly.
We are dependent on a limited number of suppliers for most of our key
components. If these suppliers are unable to meet our manufacturing
requirements, we may experience production delays leading to delays in
shipments, increased costs and cancellation of orders for our products.
We purchase several key components that we incorporate into our products
from a limited number of suppliers. We also purchase the majority of our lasers
from Furukawa under a Master Purchase Agreement. We do not have long-term supply
contracts with any of our other key suppliers and our agreement with Furukawa is
only for one year. Our dependence on a small number of suppliers and our lack of
longer term supply contracts exposes us to several risks, including our
potential inability to obtain an adequate supply of quality components, the
discontinuance of key components from our suppliers, price increases and late
deliveries. We have experienced shortages and delays in obtaining, and the
discontinuation of key components in the past and expect to experience
shortages, delays, and the discontinuation of key components in the future.
16
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.
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 or that new product
introductions will generate sufficient revenue in subsequent quarters to recover
our research and development expenditures. 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.
17
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. Our business, operating results and financial condition may continue to
suffer if the global economy, or economic conditions in the United States fiber
optics equipment market do not improve .
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 processes 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 processes 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 processes, we will lose the sales opportunities
with those customers.
We are currently registered under ISO 9001:2000.
If we fail to predict our manufacturing requirements accurately, we could incur
additional carrying costs and have excess and obsolete inventory or we could
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 levels
18
of inventories that increase our inventory carrying costs and periodically cause
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, MRV Communications, OpNext, 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 Fujitsu, could significantly limit our growth
and harm our competitive position.
Many of our current competitors and potential competitors have longer
operating histories and significantly greater financial, technical, sales and
marketing resources than we do. As a result, these competitors are able to
devote greater resources to the development, promotion, sale and support of
their products. In addition, our competitors that have large market
capitalization or cash reserves are in a much better position to acquire other
companies in order to gain new technologies or products that may displace our
products. Any of these potential acquisitions could give our competitors a
strategic advantage. In addition, many of our competitors have much greater
brand name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we do. These companies
can use their broader customer bases and product offerings and adopt aggressive
pricing policies to gain market share.
In addition, existing and potential customers, especially in Japan and
other international markets, may also become competitors. These customers have
the internal capabilities to integrate their operations by producing their own
optical subsystems and modules or by acquiring our competitors or the rights to
produce competitive products or technologies, which may allow them to reduce
their purchases or cease purchasing from us.
We expect our competitors to introduce new and improved products with
lower prices, and we will need to do the same to remain competitive. We may not
be able to compete successfully against either current or future competitors
with respect to new products. We believe that competitive pressures may result
in price reductions, reduced margins and our loss of market share.
Our sales cycle runs from our customers' initial design to production for
commercial sale. This cycle is long and unpredictable and may cause our revenue
and operating results to vary from our forecasts.
The period of time between our initial contact with a customer and the
receipt of a purchase order from that customer may span to more than a year and
varies by product and customer. During this time, customers may perform or
require us to perform extensive evaluation and qualification testing of our
products. Generally, they consider a wide range of issues before purchasing our
products, including interoperation with other subsystems and components, product
performance and reliability. We may incur substantial sales and marketing
expenses and expend significant management effort while potential
19
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 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
20
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
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 have incurred and will continue to incur significant costs
related to the expansion of our sales operations. If the expansion of our sales
operations does not generate adequate additional revenue, our operating margins
may decline. To the extent we are unsuccessful in developing our direct sales
force, we will likely be unable to compete successfully against the
significantly larger and well-funded sales and marketing operations of many of
our current or potential competitors. In addition, if we fail to develop
relationships with significant manufacturers' representatives or distributors,
or if these representatives or distributors are not successful in their sales or
marketing efforts, sales of our products may decrease and our competitive
position would be harmed. Our representatives or distributors may not market our
products effectively or may not continue to devote the resources necessary to
provide us with effective sales, marketing and technical support. Our inability
to effectively manage 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. Because the costs for
research and development of new products and technology are expensed as
incurred, we expect a negative impact on our reported net operating results. 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
21
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 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, current and future military response to them and the United
States military action in Iraq have created many economic and political
uncertainties that make it extremely difficult for us, our customers and our
suppliers to accurately forecast and plan future business activities. This
reduced predictability challenges our ability to operate profitably or to grow
our business. In particular, it is difficult to develop and implement
strategies, sustainable business models and efficient operations, and
effectively manage contract manufacturing and supply chain relationships. In
addition, the continued threats of terrorism and the heightened security
measures in response to such threats have and may continue to cause significant
disruption to commerce throughout the world. Disruption in air transportation in
response to these threats or future attacks may result in transportation and
supply-chain disruptions, increase our costs for both receipt of inventory and
shipment of products to our customers, and cause customers to defer their
purchasing decisions. Disruptions in commerce could also cause consumer
confidence and spending to decrease or result in increased volatility in the
U.S. and worldwide financial markets and economy. They also could result in
economic recession in the U.S. or abroad. Any of these occurrences could have a
significant impact on our operating results, revenue and costs and may result in
the volatility of the market price for our Class A common stock and on the
future price of our Class A common stock.
Our success depends on our key personnel, including our executive officers, the
loss of any of whom could harm our business.
Our success depends on the continued contributions of our senior
management and other key research and development, sales and marketing and
operations personnel, including Muoi Van Tran, our Chief Executive Officer and
President, Susie Nemeti, our Chief Financial Officer and Vice President of
Finance and Administration, Mohammad Ghorbanali, our Chief Operating Officer and
Vice President of Technical Operations, and Masato Sakamoto, our Executive Vice
President of Corporate Development. Competition for employees in our industry is
intense. We do not have life insurance policies covering any of our executives.
There can be no assurance that we will be successful in retaining such key
personnel, or that we will be successful in hiring replacements or additional
key personnel. 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 may 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.
22
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 and may
continue to experience the following due to our inability to detect or fix
errors:
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 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 2004 fiscal year.
23
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 43.4%, 39.5%, and 24.3% of our revenue for the periods ended
September 30, 2004, 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 Woodland Hills, California manufacturing
facility could require us to lease alternative manufacturing facilities or limit
our manufacturing operations.
In August 2003, we relocated our headquarters from Chatsworth,
California to Woodland Hills, California. All of our manufacturing operations
are conducted in our Woodland Hills, California headquarters. Due to this
geographic concentration, a disruption of our manufacturing operations,
resulting from sustained process abnormalities, human error, government
intervention or natural disasters, such as earthquakes, fires or floods, or
other causes, could require us to cease or limit our manufacturing operations.
See "Business - Manufacturing" and "Properties."
Our limited experience in acquiring other businesses, product lines and
technologies may make it difficult for us to overcome problems encountered in
connection with any acquisition we may undertake.
We expect to review opportunities to buy other businesses, products or
technologies that would enhance our technical capabilities, complement our
current products or expand the breadth of our markets or which may otherwise
offer growth opportunities. Our acquisition of businesses or technologies will
require significant commitment of resources. We may be required to pay for any
acquisition with cash, 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
24
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, we acquired certain assets of privately-held Cielo
Communications, Inc and on January 31, 2003 we acquired certain assets of Gore
Photonics, the fiber optics business unit of W.L. Gore & Associates. 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 these acquired entities.
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 90 days thereafter, our Class A common stock does not have a minimum
bid price of $1 per share for 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 material adverse effect on the market price of,
and the liquidity of the trading market for, our Class A common stock.
We have potential 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
25
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 under a
Master Purchase Agreement. We cannot assure you that Furukawa will renew the
Agreement upon its expiration on September 30, 2005 or whether it 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
intend to continue to maintain our relationship with Furukawa and Furukawa can
control the outcome of any stockholder votes, as discussed below. The terms of
future transactions with Furukawa may or may not be comparable to those that
would be available from unaffiliated third parties.
Potential conflicts of interest exist 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 October 31, 2004 represented 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:
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.
26
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.
Our exploration of strategic alternatives may not be successful.
On September 29, 2003, we announced that a special committee of our
board of directors is evaluating strategic alternatives. The special committee,
which is comprised of our three independent directors, has retained Bear,
Stearns & Co. Inc. to advise it in evaluating strategic alternatives, including
a special dividend, share repurchase, strategic merger or sale of the Company.
We are uncertain as to what strategic alternatives may be available to
us or what impact any particular strategic alternative will have on our stock
price if accomplished. Uncertainties and risks relating to our exploration of
strategic alternatives include:
o the exploration of strategic alternatives may disrupt operations and
distract management, which could have a material adverse effect on our
operating results;
o the process of exploring strategic alternatives may be more time
consuming and expensive than we currently anticipate;
o we may not be able to successfully achieve the benefits of the strategic
alternative undertaken by us; and
o perceived uncertainties as to the future direction of the Company may
result in the loss of employees or business partners.
ITEM 2. PROPERTIES
In August 2003, we relocated our corporate headquarters, manufacturing,
research and development and sales operations to a building in Woodland Hills,
California with approximately 149,000 square feet. We acquired the building in
June 2001 for $18,750,000. The purchase price was paid from our existing cash
on-hand. We are occupying an aggregate of approximately 89,000 square feet and
are currently leasing an aggregate of 59,550 square feet of this building to two
unrelated parties.
In June 2004, we sold the building located in Chatsworth, California
which was our former corporate headquarters. Net proceeds from this transaction
were approximately $5.7 million. In November 2002, we leased a 21,660 square
foot building in Broomfield, Colorado, which serves as a research and design
facility. This lease expires in October 2005 and the base rent is approximately
$21,700 per month. In December 2003, we leased a 6,800 square foot building in
Elkton, Maryland, which will also serve as a research and design facility. This
lease expires in November 2006 and the base rent is approximately $5,700 per
month In addition, we lease small sales facilities in Nashua, New Hampshire;
Richardson, Texas; Santa Clara, California; Ottawa, Canada; and Bury St.
Edmunds, England. Our leases for the facilities in Ottawa, Canada and Santa
Clara, California are on a month-to-month basis. Our leases for the facilities
in Nashua, New Hampshire, Richardson, Texas, and Bury St. Edmunds, England
expire in February 2005, June 2005, and July 2006, respectively.
27
We believe that our existing space is adequate for our current
operations. We believe that suitable replacement and additional spaces, if
needed, will be available in the future on commercially reasonable terms.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our Class A common stock has traded on The Nasdaq National Market under
the symbol "OCPI". The following table sets forth the range of high and low
intra-day sales prices (rounded to the nearest cent) reported on The Nasdaq
National Market for our Class A common stock for the periods indicated.
Price range of
Common Stock
-------------------------
High Low
----------- -----------
Fiscal Year Ended September 30, 2003:
- -------------------------------------
First Quarter ............................... $ 1.22 $ 0.66
Second Quarter............................... $ 1.28 $ 0.85
Third Quarter................................ $ 2.02 $ 0.86
Fourth Quarter............................... $ 2.88 $ 1.70
Fiscal Year Ended September 30, 2004:
- -------------------------------------
First Quarter ............................... $ 4.30 $ 2.31
Second Quarter............................... $ 4.80 $ 2.37
Third Quarter................................ $ 3.83 $ 1.87
Fourth Quarter............................... $ 2.44 $ 1.66
Our Class B common stock is not publicly traded and is held entirely by
Furukawa. 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.
Recent Share Prices
The following table sets forth the closing sales prices per share of our
Class A common stock on The Nasdaq National Market on (i) September 30, 2004 and
(ii) December 27, 2004. Because the market price of our Class A common stock is
subject to fluctuation, the market value of the shares of our Class A common
stock may increase or decrease.
Closing
Price
-------------
September 30, 2004.............................. $2.09
December 27, 2004............................... $2.49
29
Holders
As of December 20, 2004 there were 94 record holders of our Class A
common stock and 1 record holder of our Class B common stock.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock
since our inception and we intend to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying regular
or periodic cash dividends in the foreseeable future. However, on September 29,
2003, we announced that a special committee of our board of directors is
evaluating strategic alternatives to enhance shareholder value and liquidity,
including a special dividend to our shareholders.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table summarizes the number of shares issuable under our
equity compensation plans, the weighted-average exercise price and the number of
shares available for issuance, as of September 30, 2004.
- ---------------------------------------------------------------------------------------------
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
- ---------------------------------------------------------------------------------------------
Equity compensation 4,447,101 $7.13 6,103,369
plans approved by
security holders
- ---------------------------------------------------------------------------------------------
Equity compensation 3,301,680 $11.00 0
plans not approved by
security holders (1)
- ---------------------------------------------------------------------------------------------
Total 7,748,781 $8.78 6,103,369
- ---------------------------------------------------------------------------------------------
(1) These were shares granted on August 29, 2000 to certain executive officers
prior to our initial public offering.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected
30
income statement data for the three fiscal years ended September 30, 2004, 2003
and 2002 and the selected balance sheet data as of September 30, 2004 and 2003
are derived from, and qualified by reference to, the audited consolidated
financial statements included elsewhere in this Form 10-K. The selected income
statement data for the fiscal years ended September 30, 2000 and 1999 and the
selected balance sheet data as of September 30, 2001, 2000 and 1999 are derived
from audited financial statements not included in this Form 10-K.
Fiscal years ended September 30,
-----------------------------------------------------------------
Income statement data 2000 2001 2002 2003 2004
(In thousands, except per share data)
---------------------------------------------------------------------------------------------------
Revenue $ 101,867 $ 144,012 $ 37,207 $ 38,880 $ 57,143
Cost of revenue 50,326 94,684 26,375 25,048 32,648
--------- --------- -------- -------- --------
Gross profit 51,541 49,328 10,832 13,832 24,495
--------- --------- -------- -------- --------
Operating Expenses:
Research and development 2,527 2,958 5,261 16,246 17,022
Sales and marketing 2,943 3,799 3,717 4,562 5,021
General and administrative 3,877 4,553 4,671 7,011 5,849
--------- --------- -------- -------- --------
Total operating expenses 9,347 11,310 13,649 27,819 27,892
--------- --------- -------- -------- --------
Gain from sale of real property - - - - 942
Income (loss) from operations 42,194 38,018 (2,817) (13,987) (2,455)
Other income, net 305 6,081 3,391 1,834 1,517
--------- --------- -------- -------- --------
Income (loss) before income taxes 42,499 44,099 574 (12,153) (938)
Income taxes provision (benefit) 17,319 17,655 (265) (1,952) 369
--------- --------- -------- -------- --------
Net income (loss) $ 25,180 $ 26,444 $ 839 $ (10,201) $ (1,307)
========= ========= ======== ========== =========
Earnings (loss) per share:
Basic $ 0.91 $ 0.26 $ 0.01 $ (0.09) $ (0.01)
Diluted $ 0.25 $ 0.24 $ 0.01 $ (0.09) $ (0.01)
Shares outstanding:
Basic 27,547 100,263 108,391 111,074 112,553
Diluted 102,500 111,430 112,578 111,074 112,553
September 30,
-----------------------------------------------------------------
2000 2001 2002 2003 2004
-----------------------------------------------------------------
Balance sheet data (In thousands)
Cash and cash equivalents $ 3,202 $ 62,529 $ 85,426 $ 64,895 $ 75,423
Working capital 34,078 166,416 167,865 145,353 156,580
Total assets 50,426 204,268 205,061 200,143 199,967
Long-term portion of debt 2,296 1,825 1,353 864 -
Stockholders' equity 40,373 194,713 197,196 188,360 187,260
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to such financial statements included elsewhere in this Report
beginning on page F-1. The following discussion contains forward-looking
statements that involve risks and uncertainties. The statements are based on
current expectations and actual results could differ materially from those
discussed herein. Factors that could cause or contribute to the differences are
discussed in Item 1 "Business - Risk Factors" and elsewhere in this Report.
Overview
We design, manufacture and sell a comprehensive line of high
performance, highly reliable fiber optic subsystems and modules for fiber optic
transmission systems that are used to address the bandwidth limitations in
metropolitan area networks, or MANs, local area networks, or LANs, and storage
area 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 58.5% 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 fiscal
year ended September 30, 2004. 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 under a Master Purchase
Agreement which we entered into with Furukawa on October 1, 2003. This Agreement
continues until September 30, 2004, and renews automatically each year
thereafter unless it is terminated upon written notice by either Furukawa or us
prior to renewal. This agreement was automatically renewed on October 1, 2004.
We operate in one industry segment, the design and manufacture of fiber
optic subsystems and modules. We sell our products to communication equipment
manufacturers or CEMs, their contract manufacturers or CMs, who incorporate them
into systems they assemble for CEMs and to distributors. We define our customers
as CEMs 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 68.0% and 61.2% of our total
revenue for the fiscal years ended September 30, 2004 and 2003, respectively.
Alcatel and Cisco Systems (including sales to each of their contract
manufacturers) accounted for approximately 16.7%, and 11.2%, respectively, of
our total revenue for the fiscal year ended September 30, 2004. Cisco Systems,
Alcatel, and Huawei (including sales to each of their contract manufacturers)
accounted for approximately 12.2%, 11.8% and 10.0%, respectively, of our total
revenue for the fiscal year ended September 30, 2003. No other customer
accounted for more than 10.0% of our total revenue for the fiscal years ended
September 30, 2004 and 2003.
32
For financial reporting purposes, we consider our customers to be the
CEMs, CMs and distributors who place purchase orders with us directly. For the
fiscal year ended September 30, 2004 and 2003, Comstar Communications accounted
for approximately 11.1% and 11.0%, of our total revenue, respectively. No other
direct sales customer accounted for more than 10.0% of our total revenue for the
fiscal years ended September 30, 2004 and 2003. Although our revenue from sales
to our other customers continues to increase, we expect that significant
customer concentration will continue for the foreseeable future. Our sales are
made on a purchase order basis rather than by long-term purchase commitments.
Our customers may cancel or defer purchase orders without penalty on short
notice.
In October 1999, Methode Electronics, Inc. filed a lawsuit against
Infineon Technologies Corporation and us seeking unspecified damages, including
monetary damages, injunctive relief, attorneys' fees and costs arising from our
alleged infringement of some of the claims contained in patents assigned to
Methode, including patents relating to our 1x9 pin configuration products. After
Methode initiated the lawsuit, it assigned to Stratos Lightwave, Inc., a Methode
spin-off, all of Methode's rights, title and interest in the patent at issue.
The court subsequently added Stratos as a plaintiff to the lawsuit. On April 12,
2002, we resolved our patent infringement litigation with Stratos. The
settlement resolves all claims in the lawsuit among us and Stratos. As part of
the settlement, we entered into a five-year license agreement with Stratos
covering Stratos' portfolio of optoelectronic transceiver patents. In
consideration of the license agreement, we are required to pay a total of $2
million over the license term. As of September 30, 2004, $600,000 remained
outstanding and is expected to be paid by fiscal year 2007. Our optoelectronic
products covered by this license include our 1x9, GBIC, small form factor (SFF)
and small form-factor pluggable (SFP) product families. At the end of the
five-year term, we have the option to renegotiate with Stratos for an extension
of the license.
Since early 2001, the telecommunications sector, and in particular the
fiber optic networking sector, has suffered a severe downturn. Service providers
have scaled back on deployment, within their networks, of new equipment
associated with network upgrades that enable them to provide new types of
services to their customers, and they have also scaled back network capacity
expansion programs; and therefore, have dramatically reduced their quarterly
purchases of equipment from equipment manufacturers. As a result, equipment
manufacturers have also dramatically reduced their quarterly purchases of
components and modules from our competitors and from us. Moreover, as equipment
manufacturers' sales declined, they have moved to reduce their overall component
and module inventory levels. Consequently, the slowdown continues to have a
negative impact on our business as we face declining sales 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.
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
33
will continue to decline in future periods although the timing and degree of the
declines cannot be predicted with any certainty. We must continue to develop and
introduce new products that incorporate features that can be sold at higher
average selling prices on a timely basis.
Our cost of revenue consists principally of materials, as well as
salaries and related expenses for manufacturing personnel, manufacturing
overhead and provisions for excess and obsolete inventory. We purchase several
key components for our products from a limited number of suppliers.
Our research and development expenses consist primarily of salaries and
related expenses for design engineers and other technical personnel, 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, our research
and development expenses in absolute dollar amounts may 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 that these expenses may increase in the future.
General and administrative expenses consist primarily of salaries, stock
compensation and related expenses for our administrative, finance and human
resources personnel, professional fees and other corporate expenses. We expect
that our legal and consulting fees will increase as a result of our analysis of
strategic alternatives, including future market opportunities that may be
pursued by our management and board of directors. As a result, our general and
administrative expenses in absolute dollars may increase in future periods.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Consolidated Financial Statements and accompanying
notes. Note 2 to our Financial Statements describe the significant accounting
policies and methods used in the preparation of our Financial Statements.
Estimates are used for, but not limited to, the accounting for the allowance for
doubtful accounts and sales returns, the allowance for inventory obsolescence,
warranty accruals, long-lived assets and income taxes. 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 our Financial Statements.
Allowance for Doubtful Accounts and Sales Returns
Our accounts receivable balance, net of allowance for doubtful accounts
and sales returns, was $8.6 million as of September 30, 2004, compared with $6.7
million as of September 30, 2003. The
34
allowance for doubtful accounts and sales returns as of September 30, 2004 was
$362,000, compared with $459,000 as of September 30, 2003. The allowance is
based on our assessment of the collectibility of customer accounts and potential
returns.. We regularly review the allowance by considering factors such as
historical experience, credit quality, age of the accounts receivable balances,
current economic conditions that may affect a customer's ability to pay and
historical customer returns. If a major customer's creditworthiness
deteriorates, or if actual defaults are higher than our historical experience,
or if actual future customer returns were to deviate from our expectations, our
estimates of the recoverability of amounts due to us could be overstated, and
additional allowances could be required, which could have an adverse impact on
our operations.
Inventory Write-downs
Our inventory balance was $8.7 million as of September 30, 2004,
compared with $5.6 million as of September 30, 2003. At September 30, 2004 and
2003 inventory with a historical cost of $10.5 million, and $15.6 has been
written down as excess and obsolete inventory. We estimate our excess and
obsolete inventory primarily through reference to historical usage and future
demand forecasts. At the point of write down, a new, lower-cost basis for that
inventory is established, and subsequent changes in facts and circumstances do
not result in the restoration or increase in that newly established cost basis.
Our write-down for excess and obsolete inventory was $759,000, $1.6 million, and
$3.2 million for fiscal 2004, 2003, and 2002, respectively. If there were to be
a sudden and significant decrease in demand for our products, or if there were a
higher incidence of inventory obsolescence because of rapidly changing
technology and customer requirements, we could be required to increase inventory
write-downs , and our gross margin could be adversely affected.
Warranty Accruals
The liability for product warranties, included in other accrued
liabilities, was $31,000 as of September 30, 2004, compared with $46,000 as of
September 30, 2003. See Note 9 to the Consolidated Financial Statements. Our
products sold are generally covered by a warranty for periods ranging from one
to five years. We accrue for warranty costs as part of our cost of sales based
on associated material costs, and labor costs. The provision for product
warranties issued during fiscal 2004, 2003 and 2002 was $19,000, $11,000 and $0,
respectively. If we experience an increase in warranty claims compared with our
historical experience, or if the cost of servicing warranty claims is greater
than the expectations on which the accrual has been based, our gross margin
could be adversely affected.
Long-Lived Assets
We monitor and evaluate the recoverability of our long-lived assets. If
the carrying amount of a long-lived asset exceeds the expected future cash flows
(undiscounted and without interest charges) from the use of the asset, we
recognize an impairment loss in the amount of the difference between the
carrying amount and the fair value of the asset. Our long-lived assets subject
to impairment are our property, plant and equipment and our intangible assets
which had net carrying values of $29.2 million and $1.8 million, respectively at
September 30, 2004. We currently estimate that undiscounted future cash flows
will be sufficient to recover the value of our long-lived assets. However, our
estimates of future cash flows are subject to change. Should our estimates of
future undiscounted cash flows indicate that the carrying value of our
long-lived assets may not be recoverable, we would be required to determine the
fair value of those assets and record a loss for the difference, if any, between
the carrying value and the fair value of those assets.
35
Income Taxes
At September 30, 2004, the unadjusted net book value of our deferred
income tax assets totaled approximately $4.5 million, which was principally
comprised of federal and state net operating loss carry-forwards and differences
between the book and tax bases or our inventories. The provisions of SFAS No.
109 "Accounting for Income Taxes," require a valuation allowance when, based
upon currently available information and other factors, it is more likely than
not that all or a portion of the deferred income tax asset will not be realized.
Our valuation allowance was increased by $1,028,000 during the year ended
September 30, 2004. We intend to maintain a valuation allowance until sufficient
evidence exists to support its reversal. Also, until an appropriate level of
profitability is reached, we do not expect to recognize any domestic income tax
benefits in future results of operations.
Results of Operations
The following table sets forth income statement data for the periods
indicated as a percentage of revenue:
Fiscal years ended September
30,
-----------------------------------------------------------------------
2002 2003 2004
-----------------------------------------------------------------------
Revenue................................... 100.0% 100.0% 100.0%
Cost of revenue........................... 70.9 64.4 57.1
Gross Profit.............................. 29.1 35.6 42.9
Operating Expenses:
Research and development........... 14.1 41.8 29.8
Sales and marketing................ 10.0 11.8 8.8
General and administrative......... 12.6 18.0 10.2
Total operating expenses.................. 36.7 71.6 48.8
Income (loss) from operations............. (7.6) (36.0) (4.3)
Other income, net ........................ 9.1 4.7 2.7
Income (Loss) before income taxes......... 1.5 (31.3) (1.6)
Income taxes.............................. (0.7) (5.1) (0.6)
Net income (Loss) 2.2% (26.2)% (2.3)%
Fiscal years ended September 30, 2004 and 2003
Revenue - Revenue increased 47.0% to $57.1 million in the fiscal year
ended September 30, 2004 from $38.9 million in the fiscal year ended September
30, 2003. This increase was due substantially to an increase in demand from our
existing customers. Revenue from our largest ten customers increased to $39.0
million in fiscal year ended September 30, 2004 from $23.8 million in fiscal
year September 30, 2003, or approximately 63.9% of the increase in absolute
dollars. Sales of our products for metropolitan area networks were approximately
86.7% of revenue for the fiscal year ended September 30, 2004 compared to
approximately 84.1% of revenue for the fiscal year ended September 30, 2003.
Sales of our products for local area and storage area networks were
approximately 12.5% of revenue for the fiscal year ended September 30, 2004 and
for the fiscal year ended September 30, 2003. We do not expect that our rate of
year-over-year growth in revenue will be sustainable in future periods, as the
average selling prices for existing products may decline in response to product
introductions by competitors or us, or
36
other factors, including the reduction of customer demand for our products or
pressure from customers for price concessions.
Cost of Revenue - Cost of revenue increased 30.3% to $32.6 million in
the fiscal year ended September 30, 2004 from $25.0 million in the fiscal year
ended September 30, 2003. The increase in cost of revenue is mainly due to the
increase in sales volume. Gross margin increased to 42.9% in the fiscal year
ended September 30, 2004 from 35.6% in the same period last year. The increase
in gross margin was primarily due to a $1.5 million increase of inventory used
in production in the fiscal year ended September 30, 2004 that was previously
written down as excess inventory compared to the fiscal year ended September 30,
2003 and a decrease in overhead costs as a percentage of revenue in the fiscal
year ended September 30, 2004 compared to the fiscal year ended September 30,
2003. The Company utilized approximately $5.2 million of inventory in production
during fiscal 2004 that had previously been written down to zero, compared to
$3.7 million during fiscal 2003.
Research and Development - Research and development expenses increased
4.8% to $17.0 million in the fiscal year ended September 30, 2004 from $16.2
million in the fiscal year ended September 30, 2003. This increase was primarily
due to an increase in engineering supplies resulting from an increase in
research and development activities.
Sales and Marketing - Sales and marketing expenses increased 10.0% to
$5.0 million in the fiscal year ended September 30, 2004 from $4.6 million in
the fiscal year ended September 30, 2003. The increase was primarily due to an
increase of $325,000 in salaries and benefits resulting from additional sales
and marketing personnel and an increase of $154,000 in commissions paid to our
direct sales force and independent manufacturers' representatives as a result of
increase revenue.
General and Administrative - General and administrative expenses
decreased 16.6% to $5.8 million in the fiscal year ended September 30, 2004 from
$7.0 million in the fiscal year ended September 30, 2003. During the third
quarter of 2003, the Company repurchased stock from two executives and recorded
a $1.3 million expense associated with this stock repurchase as stock
compensation expense. No stock compensation expense was recorded in fiscal year
ended September 30, 2004. In addition, the decrease was due to a decrease in
insurance expense primarily related to a decrease in directors' and officers'
insurance premiums and bad debt expense. These decreases were partially offset
by an increase of $300,000 in salaries and benefits resulting from additional
personnel hired.
Gain from sale of real property - On June 30, 2004, the Company sold the
building located in Chatsworth, California which was its former corporate
headquarters and recognized a gain of $942,000. The net proceeds from this
transaction were approximately $5.7 million.
Other Income, net - Other income, net decreased 17.3% to $1.5 million in
the fiscal year ended September 30, 2004 from $1.8 million in the fiscal year
ended September 30, 2003. This decrease was due to a decrease in investment
income, which was primarily the result of a decrease in interest rates.
Income Taxes - Income tax expense was $369,000 for the fiscal year ended
September 30, 2004 compared to an income tax benefit of $2.0 million for the
fiscal year ended September 30, 2003. Income tax expense for the fiscal year
ended September 30, 2004 is comprised of foreign taxes in the amount of $44,000,
state income taxes in the amount of $133,000, and $192,000 resulting from an
adjustment to prior year's net deferred tax assets. The income tax benefit for
the fiscal year ended September 30, 2003
37
includes a charge of $3.5 million related to the valuation allowance of certain
deferred tax assets and state net operating loss and credit carry-forwards.
Fiscal years ended September 30, 2003 and 2002
Revenue - Revenue increased 4.5% to $38.9 million in the fiscal year
ended September 30, 2003 from $37.2 million in the fiscal year ended September
30, 2002. Sales of our products for metropolitan area networks were
approximately 84% of revenue for the fiscal year ended September 30, 2003
compared to approximately 86% of revenue for the fiscal year ended September 30,
2002. Sales of our products for local area and storage area networks were
approximately 13% of revenue for the fiscal year ended September 30, 2003
compared to approximately 10% of revenue for the fiscal year ended September 30,
2002. 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. We
experienced lower revenue from Acterna in the last six months of the fiscal year
ended September 30, 2003 compared to the first six months of that fiscal year.
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 5.0% to $25.0 million in the
fiscal year ended September 30, 2003 from $26.4 million in the fiscal year ended
September 30, 2002. Gross margin increased to 35.6% in the fiscal year ended
September 30, 2003 from 29.1% in the same period the prior year. The increase in
gross margin was primarily due to a $1.7 million increase of inventory used in
production in the fiscal year ended September 30, 2003 that was previously
written down as excess inventory compared to the fiscal year ended September 30,
2002, and a $1.6 million decrease in inventory write downs in the fiscal year
ended September 30, 2003 compared to the fiscal year ended September 30, 2002.
These were partially offset by a $644,000 increase in material cost as a result
of the increase in revenues, an increase in licensing fees as a result of the
licensing agreement entered into with Stratos Lightwave, Inc being included in
cost of revenue in 2003 and higher warranty expense when compared to the prior
year.
Research and Development - Research and development expenses increased
208.8% to $16.2 million in the fiscal year ended September 30, 2003 from $5.3
million in the fiscal year ended September 30, 2002. This increase was due to an
increase in salaries and other operating costs resulting from the increase of
personnel and operation costs associated with the acquisitions of certain
business assets of Cielo Communications and Gore Photonics and the addition of
engineering personnel hired in Woodland Hills, California and Bury St. Edmunds,
England.
Sales and Marketing - Sales and marketing expenses increased 22.7% to
$4.6 million in the fiscal year ended September 30, 2003 from $3.7 million in
the fiscal year ended September 30, 2002. The increase was primarily due to an
increase of $1.1 million in salaries and benefits from the addition of sales and
marketing personnel hired and an increase of $242,000 in commissions paid to our
direct sales force and 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 fiscal year ended September 30, 2003.
General and Administrative - General and administrative expenses
increased 50.1% to $7.0 million in the fiscal year ended September 30, 2003 from
$4.7 million in the fiscal year ended September 30, 2002. During the third
quarter of 2003, the Company repurchased stock from two executives. The
38
stock repurchased by the Company had been recently acquired by the executives
through the exercise of stock options. The Company recorded a $1.3 million
expense associated with this stock repurchase as stock compensation expense. In
addition, the increase was due to an increase of $700,000 in insurance expense
primarily related to an increase in directors' and officers' insurance premiums
and an increase of $590,000 in salaries and benefits related to the addition of
personnel hired. These increases were partially offset by a decrease 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 45.9% to $1.8 million in
the fiscal year ended September 30, 2003 from $3.4 million in the fiscal year
ended September 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 benefit was $2.0 million for the fiscal
year ended September 30, 2003, based on an effective tax rate of 16.1% compared
to an income tax benefit of $265,000 for the fiscal year ended September 30,
2002. The income tax benefit for the fiscal year ended September 30, 2003
includes a charge of $3.5 million related to the valuation allowance of certain
deferred tax assets and state net operating loss and credit carry-forwards.
Supplementary Data - Quarterly Results
The following table sets forth some of our selected financial
information for our eight most recently completed fiscal quarters. In the
opinion of our management, this unaudited financial information has been
prepared on the same basis as the audited financial information, and includes
all adjustments, consisting only of normal recurring adjustments, necessary to
present this information fairly when read in conjunction with our financial
statements and the related notes contained elsewhere in this Report. These
operating results are not necessarily indicative of results of any future
period.
Three-Month Period Ended
----------------------------------------------------------------------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30,
2002 2003 2003 2003 2003 2004 2004 2004
(In thousands, except per share data)
-------------------------------------
Revenue $ 9,400 $ 9,568 $ 9,481 $ 10,431 $ 13,769 $ 15,909 $ 14,299 $ 13,166
Cost of revenue 6,439 6,005 6,120 6,484 8,185 8,777 7,770 7,916
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 2,961 3,563 3,361 3,947 5,584 7,132 6,529 5,250
--------- --------- --------- --------- --------- --------- --------- ---------
Operating Expenses:
Research and development 3,011 4,232 4,489 4,514 4,253 4,565 4,152 4,052
Sales and marketing 959 1,103 1,270 1,230 1,348 1,330 1,153 1,190
General and administrative 1,309 1,354 2,823 1,525 1,596 1,628 1,504 1,121
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses 5,279 6,689 8,582 7,269 7,197 7,523 6,809 6,363
Gain from sale of real property
0 0 0 0 0 0 942 0
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) from operations (2,318) (3,126) (5,221) (3,322) (1,613) (391) 662 (1,113)
Other income, net 592 492 411 339 262 294 344 617
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (1,726) (2,634) (4,810) (2,983) (1,351) (97) 1,006 (496)
39
Income tax (benefit) provision (587) (899) 325 (791) 192 0 0 177
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (1,139) $ (1,735) $ (5,135) $ (2,192) $ (1,543) $ (97) $ 1,006 $ (673)
========= ========= ========= ========= ========= ========= ========= =========
Earnings (loss) per share:
Basic $ (0.01) $ (0.02) $ (0.05) $ (0.02) $ (0.01) $ (0.00) $ 0.01 $ (0.01)
Diluted $ (0.01) $ (0.02) $ (0.05) $ (0.02) $ (0.01) $ (0.00) $ 0.01 $ (0.01)
Shares outstanding:
Basic 109,523 110,720 111,766 112,287 112,338 112,458 112,655 112,769
Diluted 109,523 110,720 111,766 112,287 112,338 112,458 113,938 112,769
Our historical operating results have varied significantly, and our
future quarterly operating results are likely to continue to vary significantly
from period-to-period. We believe that period-to-period comparisons of operating
results should not be relied upon as an indicator of our future performance.
Some of the factors which could cause our operating results to vary include
fluctuations in the demand for and sales of our products, the timing of customer
orders, the cancellation of existing orders, competitive factors such as
introductions of new products, our ability to develop, introduce and manufacture
new products in a timely manner, our ability to control expenses, the
availability of components for our products, the mix of our products sold,
changes in industry standards and general economic conditions in the
communications and related industries.
The following table sets forth revenue attributable to each of our
product groups as a percentage of revenue for the periods presented.
Fiscal years ended September 30,
---------------------------------
2002 2003 2004
---------------------------------
Receivers 10.7% 10.8% 7.2%
Transceivers 71.4 72.7 83.0
Transmitters 14.1 13.5 9.0
Other 3.8 3.0 0.8
---------------------------------
Revenue 100.0% 100.0% 100.0%
Liquidity and Capital Resources
As of September 30, 2004, our primary source of liquidity was our cash
and cash equivalents balance of $75.4 million and $75.1 million of marketable
securities, which consist primarily of United States treasury notes and treasury
bonds. At September 30, 2003, we had $64.9 million in cash and cash equivalents
balance and $65.6 million in marketable securities. The total of our cash and
cash equivalents balance and our marketable securities balance increased during
the fiscal year primarily due to the $5.7 million received from the sale of the
Chatsworth building that occurred at the end of the third quarter and the $11.6
million federal income tax refund.
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 September 30, 2004, our working capital
was $157.0 million with a current ratio of 14:1 compared to our working capital
of
40
$145.8 million with a current ratio of 15:1 as of September 30, 2003. Our
working capital increased during the fiscal year primarily due to the $5.7
million cash received from the sale of the Chatsworth property and $5.0 million
of marketable securities that was transferred from long term to current assets
due to maturity date. We believe that additional cash could be borrowed if
necessary; however, our current cash flow from operations, cash and cash
equivalents, and marketable securities, are expected to be sufficient to fund
operations for the next 12 months.
On June 30, 2004, we sold the building located in Chatsworth, California
which was our former corporate headquarters. Net proceeds from this transaction
were approximately $5.7 million.
In August 2004, we fully repaid our long-term debt. As of September 30,
2004, there is no balance outstanding under our term loan agreement.
During the fiscal year ended September 30, 2004, our cash provided by
operating activities was $13.2 million compared to a use of cash in operating
activities of $253,000 during fiscal 2003. The increase in cash generated by
operating activities during the period was primarily caused by a decrease in our
net loss from $10.2 million to $1.3 million and the receipt of an income tax
refund of $11.7 million in fiscal 2004 compared taxes paid for income taxes of
$10.7 million in 2003. We do not expect to receive significant income tax
refunds in the foreseeable future.
During the fiscal year ended September 30, 2004, cash used in investing
activities was $1.5 million compared to cash used by investing activities of
$19.9 million for the fiscal year ended September 30, 2003. The cash used in
investing activities for the fiscal year ended September 30, 2004 was due to
$5.4 million increase in marketable securities resulting from our purchases
being greater than the maturities and $1.8 million in capital expenditures.
These were partially offset by $5.7 million net proceeds from the sale of the
building located in Chatsworth, California in the third quarter. The cash used
in investing activities during the fiscal year ended September 30, 2003 was due
to the $10.0 million cash purchase price and direct costs associated with the
acquisition of certain assets of Cielo Communications and Gore Photonics, a $6.4
million increase in marketable securities resulting from our purchases being
greater than the maturities, and a $3.4 million increase in capital expenditures
for the purchase of property, plant and equipment to upgrade, expand and
automate our manufacturing and research and development operations and to
relocate our headquarters, manufacturing, research and development and sales
operations from Chatsworth, California to our larger facility in Woodland Hills,
California.
During the fiscal year ended September 30, 2004, cash used by financing
activities was $1.1 million compared to cash used of $408,000 during the fiscal
year ended September 30, 2003. The increase in cash used from financing
activities for the fiscal year ended September 30, 2004 was due to $1.3 million
payout of the long-term loan, partially offset by $207,000 provided by the
issuance of common stock for the exercise of employee stock options and stock
plan purchases. The cash used by financing activities during the fiscal year
ended September 30, 2003 was due to a $489,000 reduction in long-term debt,
partially offset by $81,000 provided by the issuance of common stock for the
exercise of employee stock options and stock plan purchases.
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.
41
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.
We believe that our existing cash, cash equivalents and investments on
hand, together with cash that we expect to generate from our operations, will be
sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need or elect to raise additional funds to
fund our activities beyond the next year or to consummate acquisitions of other
businesses, products or technologies. We could raise such funds by selling more
stock to the public or to selected investors, or by borrowing money. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We cannot assure you that we will be able to obtain additional funds on
commercially favorable terms, or at all. If we raise additional funds by issuing
additional equity or convertible debt securities, the ownership percentages of
existing stockholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock.
Although we believe we have sufficient capital to fund our activities
for at least the next twelve months, our future capital requirements may vary
materially from our historical expenditures. 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.
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.
42
Contractual Obligations
The following is a summary of future minimum payments due under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year at September 30, 2004:
Operating Other
Fiscal Year Leases Liabilities Total
------------- ------------- ----------
2005 $ 523 200 $ 723
2006 189 200 389
2007 12 200 212
------------- ------------- ----------
Total $ 725 $ 600 $ 1,325
============= ============= ==========
We also have purchase commitments for materials, supplies, equipment and
outside services in aggregate of approximately $3.6 million of which $3.5
million and $100,000 is for fiscal year ending September 30, 2005 and 2006,
respectively. Total purchase commitments to related party for the next two years
is $804,000. Based on our current operations, we believe that our current cash
flow from operations, cash and cash equivalents, and marketable securities, are
expected to be sufficient to meet all of the known requirements.
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.
Other Events
On September 29, 2003, we announced that a special committee of our
board of directors is evaluating strategic alternatives to enhance shareholder
value and liquidity. The special committee, which is comprised of our three
independent directors, has retained Bear Stearns & Co. Inc., which is advising
the committee in evaluating strategic alternatives, including a special
dividend, share repurchase, strategic merger or sale of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We are currently exposed to interest rate risk on our investment
portfolio.
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 $75.4 million invested in
money market and other interest bearing accounts. In addition, we have $75.1
43
million invested in marketable securities, which represents investments in
United States treasury notes and treasury bonds.
As of September 30, 2004, our investment in marketable securities had a
weighted-average time to maturity of approximately 210 days. Marketable
securities represent United States treasury notes and treasury bonds with a
maturity of greater than three months. These securities are classified as held
to maturity because 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 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 income of $1.5 million on our
investment portfolio. However, due to the uncertainty of the actions that would
be taken and their possible effects, this analysis assumes no such action.
Further, this analysis does not consider the effect of the change in the level
of overall economic activity that could exist in such an environment.
Foreign Currency Risk
Sales to foreign customers are denominated in U.S. dollars and as such
we have no foreign currency fluctuation risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are included in Part IV,
Item 15 of this Report and the supplementary data required by this item are
included in Part II, Item 7 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation, as of the end of the period covered by this
annual 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.
Changes in Internal Control
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 materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
44
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in "Proposal 1:
Elections of Directors", "Management", and "Section 16(a) Beneficial Ownership
Reporting Compliance" sections of our Proxy Statement to be filed in connection
with our 2005 Annual Meeting of Stockholders and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the "Executive
Compensation and Related Information" section of the our Proxy Statement to be
filed in connection with our 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is included in the "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" sections of our Proxy Statement to be filed in connection with
the our 2005 Annual Meeting of Stockholders and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the "Compensation
Committee Interlocks and Insider Participation" and "Certain Transactions"
sections of our Proxy Statement to be filed in connection with the our 2005
Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is included in the "Ratification
of Appointment of Independent Auditors" section of the our Proxy Statement to be
filed in connection with our 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
45
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements of
Optical Communication Products, Inc. are included in a separate section of this
Annual Report on Form 10-K commencing on the pages referenced below:
Page
----
Optical Communication Products Financial Statements
- ---------------------------------------------------
Independent Auditors' Report............................................................................. F-2
Balance Sheets at September 30, 2003 and 2004............................................................ F-3
Statements of Operations for each of the three years in the period ended September 30, 2004.............. F-4
Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2004.... F-5
Statements of Cash Flows for each of the three years in the period ended September 30, 2004.............. F-6
Notes to Financial Statements............................................................................ F-7
2. Financial Statement Schedule. The financial statement schedule
of Optical Communication Products, Inc. is included below. All other schedules
have been omitted because they are not applicable, not required, or the
information is included in the financial statements or notes thereto.
Schedule II- Valuation and Qualifying Accounts
For the Year Ended September 30, 2002, 2003 and 2004
Balance at Additions (Deductions) Balance at
beginning of charged to recoveries end of period
Description Period period ($) expense ($) ($) ($)
Allowance for Doubtful Accounts 2002 1,156,000 450,000 (1,479,000) 127,000
2003 127,000 200,000 132,000 459,000
2004 459,000 80,000 177,000 362,000
46
3. Exhibits. The following Exhibits are attached hereto and
incorporated herein by reference:
Exhibit
Number Exhibit Description
- --------------------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
3.2.1*** Amendment Number One to Bylaws
4.1 See Exhibits 3.1, 3.2 and 3.2.1 for provisions of the Certificate
of Incorporation and Bylaws for the Registrant defining the rights
of holders of common stock of the Registrant
4.2* Specimen Stock Certificate
4.3* Standstill and Registration Rights Agreement, dated as of October
26, 2000, by and between the Registrant and The Furukawa Electric
Co., Ltd.
10.1*+ 2000 Stock Incentive Plan
10.2*+ Employee Stock Purchase Plan
10.3* Form of Indemnification Agreement
10.5*+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Muoi Van Tran, as currently in effect
10.6*+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Mohammad Ghorbanali, as currently in effect
10.7*+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Susie L. Nemeti, as currently in effect
10.8*+ Form of Stock Option Agreement, dated August 29, 2000, by and
between the Registrant and each of Muoi Van Tran, Mohammad
Ghorbanali and Susie L. Nemeti (including a schedule of
substantially identical terms)
10.9*+ Form of Stock Option Agreement, dated June 28, 1993, by and between
the Registrant and each of Muoi Van Tran, Mohammad Ghorbanali and
Susie L. Nemeti (including a schedule of substantially identical
terms)
10.10** Master Purchase Agreement, dated October 1, 2003, by and between
the Registrant and The Furukawa Electric Co., Ltd.
21.1* List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
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.
* This exhibit was previously filed as an exhibit to the Company's
Registration Statement on Form S-1 declared effective November 2, 2000
(File No. 333-44862) under the same exhibit number, and is incorporated by
reference herein.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(c) of Form 10-K.
** Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed with the Securities and Exchange Commission.
*** Filed as an exhibit to the Annual Report on Form 10-K for the year ended
September 30, 2002 on December 27, 2002 and incorporated herein by
reference.
47
(b) Exhibit Index:
See Exhibit index.
(c) Financial Statement Schedule:
See Financial statement schedule set forth in (a)(2) above
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Woodland Hills, State of California, on the 28th day of
December, 2004.
Optical Communication Products, Inc.
By: /s/ Muoi Van Tran
-------------------------------
Name: Muoi Van Tran
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- --------- ----- ----
- ----------------------------
/s/ Muoi Van Tran Chairman of the Board of Directors, Chief December 28, 2004
- ---------------------------- Executive Officer and President (principal
Muoi Van Tran executive officer)
- ----------------------------
/s/ Susie L. Nemeti Chief Financial Officer (principal December 28, 2004
- ---------------------------- financial and accounting officer)
Susie L. Nemeti
- ----------------------------
/s/ Masato Sakamoto Director December 27, 2004
- ----------------------------
Masato Sakamoto
- ----------------------------
/s/ Yukimasa Shiga Director December 27, 2004
- ----------------------------
Yukimasa Shiga
- ----------------------------
/s/ Naoomi Tachikawa Director December 27, 2004
- ----------------------------
Naoomi Tachikawa
- ----------------------------
/s/ Stewart D. Personick Director December 26, 2004
- ----------------------------
Stewart D. Personick
- ----------------------------
/s/ Hobart Birmingham Director December 27, 2004
- ----------------------------
Hobart Birmingham
- ----------------------------
/s/ David Warnes Director December 27, 2004
- ----------------------------
David Warnes
49
OPTICAL COMMUNICATION PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................................................. F-2
Balance Sheets at September 30, 2003 and 2004................................................................. F-3
Statements of Operations for each of the three years in the period ended September 30, 2004................... F-4
Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2004......... F-5
Statements of Cash Flows for each of the three years in the period ended September 30, 2004................... F-6
Notes to Financial Statements................................................................................. F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Optical Communication Products, Inc.:
We have audited the accompanying balance sheets of Optical Communication
Products, Inc. (the "Company") as of September 30, 2003 and 2004, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2003 and 2004, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
December 28, 2004
F-2
OPTICAL COMMUNICATION PRODUCTS, INC.
OPTICAL COMMUNICATION PRODUCTS, INC.
BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2004 (in thousands, except share and per share amounts)
September 30,
2003 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 64,895 $ 75,423
Marketable securities 65,607 75,131
Accounts receivable less allowance for doubtful accounts of
$459 and $362 in 2003 and 2004, respectively 6,960 8,566
Income taxes receivable 11,743 0
Inventories 5,592 8,649
Prepaid expenses and other current assets 875 1,118
----------- -----------
Total current assets 155,672 168,887
Property, plant and equipment, net 36,721 29,278
Marketable securities 5,048 0
Intangible assets, net 2,702 1,802
----------- -----------
TOTAL $ 200,143 $ 199,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 471 $ 0
Accounts payable 1,169 1,136
Accounts payable to related parties 1,061 3,325
Accrued bonus 4,433 4,451
Other accrued expenses 3,159 3,237
Income taxes payable 26 158
----------- -----------
Total current liabilities 10,319 12,307
----------- -----------
LONG-TERM DEBT, net of current portion 864 0
OTHER LONG-TERM LIABILITIES 600 400
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, $0.001 par value; 200,000,000 shares authorized,
46,297,285 and 46,771,927 shares outstanding at September 30, 2003
and 2004, respectively 46 47
Class B common stock $0.001 par value; 66,000,000 shares
authorized, 66,000,000 shares issued and outstanding at
September 30, 2003 and 2004, respectively 66 66
Additional paid-in capital 132,712 132,917
Retained earnings 55,536 54,230
----------- -----------
Total stockholders' equity 188,360 187,260
----------- -----------
TOTAL $ 200,143 $ 199,967
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
OPTICAL COMMUNICATION PRODUCTS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2002, 2003, AND 2004 (In thousands,
except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
2002 2003 2004
REVENUE $ 37,207 $ 38,880 $ 57,143
COST OF REVENUE 26,375 25,048 32,648
---------- --------- ----------
GROSS PROFIT 10,832 13,832 24,495
---------- --------- ----------
EXPENSES:
Research and development 5,261 16,246 17,022
Selling and marketing 3,717 4,562 5,021
General and administrative (including stock compensation expense
of $86 and $1,292 for years ended September 30, 2002 and 2003,
respectively) 4,671 7,011 5,849
---------- --------- ----------
Total expenses 13,649 27,819 27,892
---------- --------- ----------
Gain from sale of real property 0 0 942
---------- --------- ----------
LOSS FROM OPERATIONS (2,817) (13,987) (2,455)
OTHER INCOME, Net 3,391 1,834 1,517
---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 574 (12,153) (938)
INCOME TAX (BENEFIT) PROVISION (265) (1,952) 369
---------- --------- ----------
NET INCOME (LOSS) $ 839 $ (10,201) $ (1,307)
========== ========= ==========
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.09) $ (0.01)
DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.09) $ (0.01)
BASIC SHARES OUTSTANDING 108,391 111,074 112,553
DILUTED SHARES OUTSTANDING 112,578 111,074 112,553
The accompanying notes are an integral part of the financial statements.
F-4
OPTICAL COMMUNICATION PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2003, AND 2004 (In thousands, except share data)
Preferred Stock Common Stock
------------------- ------------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
BALANCE, OCTOBER 1, 2001 $ - 108,006,602 $ 108 $ 129,707 $ 64,898 $194,713
Net income 839 839
Issuance of common stock for exercise
of stock options and employee stock
purchase plan 1,028,508 1 151 152
Tax benefit from exercise of
non-qualified stock options 1,406 1,406
Stock option compensation expense 86 86
-------- ------- ----------- ----- --------- -------- --------
BALANCE, SEPTEMBER 30, 2002 109,035,110 109 131,350 65,737 197,196
Net loss (10,201) (10,201)
Issuance of common stock for exercise
of stock options and employee stock
purchase plan 3,262,175 3 78 81
Tax benefit from exercise of
non-qualified stock options 1,303 1,303
Stock option compensation expense (19) (19)
-------- ------- ----------- ----- --------- -------- --------
BALANCE, SEPTEMBER 30, 2003 112,297,285 112 132,712 55,536 188,360
Net loss (1,307) (1,307)
Issuance of common stock for exercise
of stock options and employee stock
purchase plan 474,642 1 205 206
-------- ------- ----------- ----- --------- -------- --------
BALANCE, SEPTEMBER 30, 2004 - $ - 112,771,927 $ 113 $ 132,917 $ 54,230 $187,260
======== ======= =========== ===== ========= ======== ========
The accompanying notes are an integral part of the financial statements.
F-5
OPTICAL COMMUNICATION PRODUCTS, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2003, AND 2004 (in thousands)
- -------------------------------------------------------------------------------------------------------------------------
2002 2003 2004
OPERATING ACTIVITIES:
Net income (loss) $ 839 $ (10,201) $ (1,307)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,433 5,642 5,383
Amortization of premium on marketable securities 2,041 1,543 959
Gain from sale of real property - - (942)
Tax benefit from exercise of non-qualified stock options 1,406 1,303 -
Stock option compensation expense 86 (19) -
Changes in operating assets and liabilities:
Accounts receivable, net 4,541 (3,497) (1,606)
Income taxes receivable (1,008) (10,735) 11,743
Inventories 8,437 2,123 (3,057)
Deferred income taxes 101 9,138 -
Prepaid expense and other assets 6 25 (242)
Accounts payable (742) 546 (33)
Accounts payable to related parties (1,230) 1,031 2,264
Accrued bonuses 402 2,131 18
Other accrued expenses (49) 959 78
Income taxes payable (310) (92) 132
Other long-term liabilities 750 (150) (200)
----------- ---------- -----------
Net cash provided by (used in) operating activities 17,703 (253) 13,190
----------- ---------- -----------
INVESTING ACTIVITIES:
Purchase of marketable securities (66,713) (71,424) (70,435)
Maturities of marketable securities 75,000 65,000 65,000
Net proceeds from sale of real property - - 5,693
Purchase of property, plant and equipment (2,773) (3,441) (1,791)
Cash paid for acquisitions (10,005) -
----------- ---------- -----------
Net cash provided by (used in) investing activities 5,514 (19,870) (1,533)
----------- ---------- -----------
FINANCING ACTIVITIES:
Principal payments on long-term debt (472) (489) (1,335)
Issuance of common stock 152 81 206
----------- ---------- -----------
Net cash provided by (used in) financing activities (320) (408) (1,129)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,897 (20,531) 10,528
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 62,529 85,426 64,895
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 85,426 $ 64,895 $ 75,423
=========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest expense $ 85 $ 54 $ 36
Cash received during the year for income taxes, net $ (431) $ (1,567) $ (11,522)
The accompanying notes are an integral part of the financial statements.
F-6
OPTICAL COMMUNICATION PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL INFORMATION
The accompanying financial statements of Optical Communication Products,
Inc., a Delaware corporation (the "Company"), includes its balance
sheets as of September 30, 2003 and 2004 and reflects the results of its
operations for the years ended September 30, 2002, 2003 and 2004. The
Company's operations are primarily located in Woodland Hills,
California. The Company is a majority-owned subsidiary of Furukawa
Electric Company, Ltd. of Japan ("Furukawa"). Furukawa beneficially owns
58.5% of the Company's capital stock at September 30, 2004, which
accounts for 93.4% of the combined voting power of all of the Company's
outstanding common stock.
Operations - The Company operates in one industry segment, which
includes the design and manufacture of fiber optic components. The
Company's products consist of optical transmitters, receivers,
transceivers and transponders, which convert electronic signals into
optical signals and back to electronic signals.
The Company sells its products to communication equipment manufacturers
or CEMs, their contract manufacturers or CMs, who incorporate them into
systems they assemble for the CEMs and to distributors. For financial
reporting purposes, the Company considers its direct sale customers to
be either CEMs, CMs or distributors who place purchase orders with the
Company directly. Revenue from the Company's largest direct sale
customer amounted to 11.0% and 11.1% for the years ended September 30,
2003 and 2004 respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of the Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts
reported therein. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may differ from
those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include
unrestricted deposits and short-term investments with a maturity at the
date of purchase of three months or less.
Marketable Securities - Marketable securities represent United States
treasury notes and treasury bonds with an original maturity of greater
than three months. These securities are classified as held to maturity
because the Company has the intent and ability to hold the securities to
maturity. Gross unrealized gains and losses on held-to-maturity
marketable securities have historically not been material. Maturities on
held-to-maturity marketable debt securities range from three months to
two years.
Investments in marketable securities were as follows:
F-7
Unrealized Unrealized
Type of Security Book/Cost Fair Value gains (losses)
- -----------------------------------------------------------------------------------------------
(in thousands)
United States Treasury Notes
2003 $ 70,655 $ 70,689 $ 45 $ (11)
2004 75,131 74,959 - (172)
Inventories - Inventories are stated at the lower of cost or net
realizable value. Cost is determined using the first-in, first-out
method. The Company establishes its inventory write-downs based on
excess and obsolete inventories determined primarily by historical usage
and future demand forecasts. Provisions for excess and obsolete
inventory result in a new, lower-cost basis for that inventory and
subsequent changes in facts and circumstances do not result in the
restoration or increase in that newly established cost basis.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost. Provision for depreciation has been made based upon
the estimated useful lives of the assets, which range from three to
thirty-nine years, using the straight-line method. Significant
improvements and betterments are capitalized if they extend the useful
life of the asset. Routine repairs and maintenance are expensed when
incurred.
Impairment of Long-Lived Assets - The Company evaluates long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may no longer be
recoverable. If the estimated future cash flows (undiscounted and
without interest charges) from the use of an asset are less than the
carrying value, a write-down would be recorded to reduce the related
asset to its estimated fair value. For purposes of estimating future
cash flows from impaired assets, the Company groups assets at the lowest
level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. There have been
no impairment charges recorded by the Company.
Income Taxes - Income taxes are provided for taxes currently payable or
refundable, and deferred income taxes arising from future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred income tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
basis. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Valuation allowances are established when necessary to reduce
deferred income tax assets to the amounts expected to be realized.
Earnings per Share - Basic earnings per share are computed using the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share are computed using the weighted-average
number of common shares and dilutive potential common shares outstanding
during the period, using the as-if-converted method for the Company's
preferred shares and the treasury stock method for stock options.
Revenue Recognition - The Company recognizes revenue from product sales
upon shipment, as shipments are FOB shipping point, assuming
collectibility of the resulting receivable is probable.
Research and Development Costs - Costs associated with the development
of new products are charged to expense when incurred.
F-8
Common Stock - At September 30, 2004, the Company had two classes of
common stock with a par value of $0.001 per share. Holders of Class A
common stock generally have identical rights to holders of Class B
common stock, except that holders of Class A common stock are entitled
to one vote per share while holders of Class B common stock are entitled
to ten votes per share on matters submitted to a vote of the
stockholders. Furukawa owns all 66,000,000 shares of the Company's
outstanding Class B common stock.
Fair Value of Financial Instruments - The recorded values of marketable
securities, accounts receivable, accounts payable and accrued expenses
approximate their fair values based on their short-term nature. The
recorded value of long-term debt and other liabilities approximate fair
value, as interest is variable based on market rates.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily
of cash and cash equivalents, placed with high credit quality
institutions, and accounts receivable. The Company sells products and
extends credit to customers, primarily in the United States, and
periodically monitors its exposure to credit losses, and maintains
allowances for anticipated losses. The direct sales customer with the
largest accounts receivable amounted to $2,298,000 (31.0%) and
$1,745,000 (19.5%) at September 30, 2003 and 2004, respectively. For the
fiscal year ended September 30, 2003 and 2004, one customer accounted
for approximately 11.0% and 11.1%, of our total revenue, respectively.
No other direct sales customer accounted for more than 10.0% of our
total revenue for the fiscal years ended September 30, 2004 and 2003.
Segment Reporting - Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the manner in which public
companies report information about operating segments in annual and
interim financial statements. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas
and major customers. The method for determining what information to
report is based on the way management organizes the operating segments
within a Company for making operating decisions and assessing financial
performance.
The Company's chief executive officer ("CEO") and chief financial
officer ("CFO") are its chief operating decision makers. The financial
information the CEO and CFO review is identical to the information
presented in the accompanying financial statements. The Company has
determined that it operates in one reportable segment, which includes
the design and manufacture of fiber optic components. The Company has a
subsidiary in England, which provides commercial and technical support
to the Company's customers in Europe. The Company does not have foreign
operations.
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 September 30, 2003 operating results
include compensation expense related to the repurchase of stock from
certain executives of the Company. All options granted had an exercise
price equal to the quoted market price 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, as
amended by SFAS No. 148 Accounting for Stock-Based
Compensation--Transition and Disclosure an amendment of FASB Statement
No. 123 had been applied to stock-based employee compensation:
F-9
Year Ended September 30,
2002 2003 2004
(in thousands, except per share amounts)
Net income (loss):
As reported $ 839 $ (10,201) $ (1,307)
Add: The stock-based employee compensation cost, net
of related tax effects, included in the determination of
net income as reported 852
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (7,539) (6,972) (6,118)
------------------------------------------
Pro forma net loss $ (6,700) $ (16,321) $ (7,425)
==========================================
Basic income (loss) per share
As reported $ 0.01 $ (0.09) $ (0.01)
Pro forma $ (0.06) $ (0.15) $ (0.07)
Diluted income (loss) per share
As reported $ 0.01 $ (0.09) $ (0.01)
Pro forma $ (0.06) $ (0.15) $ (0.07)
The fair value of each option grant estimated on the date of grant used
to compute pro forma net income (loss) and pro forma net income (loss)
per share is estimated using the Black-Scholes option pricing model. The
following assumptions were used in completing the model:
September 30,
-----------------------------------------
2002 2003 2004
Dividend yield 0 % 0 % 0 %
Expected volatility 116 % 104 % 99 %
Risk-free rate of return 4.94 % 3.67 % 3.98 %
Expected life (years) 7.2 8.2 8.1
Recent Accounting Pronouncements - In November 2002, the FASB issued
FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation it has undertaken in issuing the guarantee. FIN 45 also
requires guarantors to disclose certain information for guarantees,
beginning December 31, 2002. The adoption of FIN 45 did not have a
material effect on the Company's financial condition, results of
operations or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 also requires consolidation of a variable interest
entity by an enterprise that holds such a controlling interest. In
December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN 46 and issued Interpretation No. 46R,
"Consolidation of Variable
F-10
Interest Entities--an Interpretation of ARB No. 51" ("FIN 46R"). The
decisions reached included a deferral of the effective date and
provisions for additional scope exceptions for certain types of variable
interests. Application of FIN 46R is required in financial statements of
public entities that have interests in variable interest entities, or
potential variable interest entities commonly referred to as
special-purpose entities, for periods ending after December 15, 2003.
Application by public entities (other than small business issuers) for
all other types of entities is required in financial statements for
periods ending after March 15, 2004. The adoption of FIN 46R did not
have a material effect on the Company's 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.
In July 2004, the Emerging Issues Task Force ("EITF") published its
consensus on Issue No. 03-01, "The Meaning of Other Than-Temporary
Impairment and Its Application to Certain Investments." EITF Issue No.
03-01 addresses the meaning of other-than-temporary impairment and its
application to debt and equity securities within the scope of Statement
of Financial Accounting Standards ("SFAS") No. 115, certain debt and
equity securities within the scope of SFAS No. 124, and equity
securities that are not subject to the scope of SFAS No. 115 and not
accounted for under the equity method of accounting. In September 2004,
the FASB issued FASB Staff Position ("FSP") Emerging Issues Task Force
(EITF) Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue
No. 03-1, which delays the effective date for the recognition and
measurement guidance in EITF Issue No. 03-1. In addition, the FASB has
issued a proposed FSP to consider whether further application guidance
is necessary for securities analyzed for impairment under EITF Issue No.
03-1. The Company continues to assess the potential impact that the
adoption of the proposed FSP could have on its financial statements.
In November 2004, the FASB issued SFAS 151, Inventory Costs. SFAS 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities
and unallocated overheads are recognized as an expense in the period in
which they are incurred. In addition, other items such as abnormal
freight, handling costs and amounts of wasted materials require
treatment as current period charges rather than a portion of the
inventory cost. SFAS 151 is effective for inventory costs incurred
during periods beginning after June 15, 2005. The Company is currently
assessing the impact of adopting SFAS 151.
On December 16, 2004, the FASB issued Statement 123 (revised 2004) that
will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on
the grant-date fair value of the equity or liability instruments issued.
In addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. Statement 123(R) replaces
FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS 123(R) is effective as of the first interim or annual reporting
period that begins after June 15, 2005. The Company is currently
assessing the impact of adopting SFAS 123(R).
F-11
Reclassifications -Certain reclassifications have been made to the 2003
financial statements to conform to the classifications used in 2004.
3. ACQUISITIONS
On October 9, 2002, the Company 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, the Company 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.
As a result of the acquisitions, the Company recorded $7.5 million in
capital equipment, $2.2 million of intangible assets, and $300,000 of
inventory.
4. INVENTORIES
Inventories consist of the following:
September 30,
-----------------------------
2003 2004
(in thousands)
Raw materials $ 1,988 $ 4,911
Work-in-process 3,090 2,927
Finished goods 514 811
---------- ----------
Total $ 5,592 $ 8,649
========== ==========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
F-12
September 30,
--------------------- Useful
2003 2004 Lives
(in thousands)
Land $ 8,074 $ 6,729
Buildings 17,959 14,949 39 years
Machinery and equipment 18,937 19,965 5 years
Furniture and fixtures 367 382 5 years
Computer hardware and software 1,388 1,592 3 years
Leasehold improvements 32 181 9 years
--------- ---------
46,757 43,798
Less accumulated depreciation (10,036) (14,520)
--------- ---------
Total $ 36,721 $ 29,278
========= =========
Depreciation and amortization expense for 2002, 2003 and 2004 was
approximately $2,433,000, $4,652,000 and $4,484,000, respectively.
On June 8, 2001, the Company purchased land and a 145,720 square foot
building in Woodland Hills, California for the purchase price of
$18,750,000. The Company is occupying an aggregate of approximately
89,000 square feet and currently leases an aggregate of 59,550 square
feet of this building to two unrelated parties under lease agreements
expiring through February 2006. Rental income from these leases was
$433,000, $398,000 and $473,000 for the fiscal years ended September 30,
2002, 2003 and 2004, respectively. Rental income is included in other
income in the accompanying financial statements. Future rental income is
expected to be $451,000 in 2005 and $169,000 in 2006.
In August, 2003, the Company relocated its corporate headquarters,
manufacturing, research and development and sales operations from
Chatsworth, California to the building in Woodland Hills, California.
On June 30, 2004, the Company sold the building located in Chatsworth,
California which was its former corporate headquarters and recognized a
gain of $942,000. The net proceeds from this transaction were
approximately $5.7 million.
6. INTANGIBLE ASSETS
During fiscal year 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." The Company completed its annual impairment
test during the fourth quarter of fiscal year ended September 30, 2004
and no impairment was recorded. The following sets forth the intangible
assets by major asset class:
F-13
2003 2004 Period
-----------------------------------------
(in thousands) (Years)
Licensing Fees $ 2,000 $ 2,000 3.5
Accumulated Amortization (1,067) (1,534)
Patents 950 950 5.0
Accumulated Amortization (174) (364)
Acquired Technology 1,216 1,216 5.0
Accumulated Amortization (223) (466)
----------------------------
Total intangible assets $ 2,702 $ 1,802
===== =====
Aggregate amortization expense related to intangible assets was
approximately $600,000, $864,000 and $900,000 for the years ended
September 30, 2002, 2003 and 2004, respectively. There was no impairment
loss recorded during fiscal years 2003 or 2004.
Following is a summary of future amortization expense in each of the
next five fiscal years.
(in thousands)
fiscal 2005 $ 900
fiscal 2006 433
fiscal 2007 433
fiscal 2008 36
-------
$ 1,802
=======
7. LONG-TERM DEBT
Term Loan - The term loan was used to fund the purchase of the Company's
land and building located in Chatsworth, California. The term loan bore
interest on the amount outstanding at various time intervals based on the
Company's election at a per annum rate equal to either (a) the prime rate
or (b) LIBOR plus 1.80%. This term loan was fully paid in August, 2004
and the Company has no other term loans outstanding.
Long-term debt at September 30, 2003 consists of the following:
F-14
2003
(in thousands)
--------------
Term loan due July, 2006 (3.10% at September 30, 2003) $ 1,335
Less current portion 471
-----------
Long-term debt, net of current portion $ 864
===========
Revolving Credit Facility - On March 27, 2003, the Company terminated its
revolving credit facility. The credit limit of the revolving credit
facility was $1.0 million. No amounts had been borrowed against the
revolving credit facility through the termination date of the revolving
credit facility in 2004.
8. EARNINGS PER SHARE
The following is a calculation of basic and diluted earnings per share
("EPS"):
Year Ended September 30,
----------------------------------------
2002 2003 2004
(in thousands, except per share data)
BASIC EPS COMPUTATION:
Net income (loss) applicable to common stock $ 839 $ (10,201) $ (1,307)
========== ========== =========
Weighted average common shares outstanding 108,391 111,074 112,553
---------- ---------- ---------
Basic earnings (loss) per share $ 0.01 $ (0.09) $ (0.01)
========== ========== =========
DILUTED EPS COMPUTATION:
Net income (loss) applicable to common stock $ 839 $ (10,201) $ (1,307)
========== ========== =========
Weighted average common shares outstanding 108,391 111,074 112,553
Effect of diluted securities:
Common stock options 4,187 - -
---------- ---------- ---------
Diluted shares outstanding 112,578 111,074 112,553
========== ========== =========
Diluted earnings (loss) per share $ 0.01 $ (0.09) $ (0.01)
========== ========== =========
The weighted average diluted common shares outstanding for years ended
September 30, 2002, 2003, and 2004 excludes the dilutive effect of
approximately 5,635,900, 7,893,300 and 7,748,800 options, respectively.
The options are excluded when the options have an exercise price in
excess of the average market value of the Company's Common Stock during
the fiscal year or as a result of the Company's net loss.
F-15
9. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company has operating leases for certain
facilities. Lease payments are made monthly. The Company's leases are
renewable either monthly, semiannually, annually or for five years. Rent
expense for these leases for the years ended September 30, 2002, 2003,
and 2004 was $83,000, $488,000 and $516,000, respectively.
The following is a summary of future minimum payments due under
operating leases that have initial or remaining noncancelable lease
terms in excess of one year at September 30, 2004:
(in thousands)
Fiscal Year
2005 $ 523
2006 189
2007 12
------------
Total minimum lease payments $ 725
============
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. As of
September 30, 2004, the remaining amount the Company is required to pay
under the settlement is $600,000 which will be payable annually in equal
installments in the next three years. Accordingly, $200,000 is included
in other accrued expenses and the remaining outstanding balance of
$400,000 is included in the Other Long Term Liabilities the 2004 balance
sheet.
Purchase Commitments - As of September 30, 2004, the Company has entered
into purchase commitments for materials, supplies, equipment and outside
services in aggregate of approximately $3.6 million of which $3.5
million and $100,000 is for fiscal year ending September 30, 2005 and
2006, respectively. Total purchase commitments to related party is
$804,000 for the next two years.
Warranty Accruals - The Company provides a warranty of its products from
defects in materials and workmanship. The warranty is limited to repair
or replacement, at the Company's option, of defective items authorized
for return within one year from the date of the sale. The table below
sets forth the activity of the Company's warranty reserve.
Balance at Additions Balance
Fiscal beginning charged to at end of
year of period expense (Deductions) period
Warranty Reserve 2002 $ 738,000 -- $ (695,000) $ 43,000
2003 $ 43,000 $ 19,000 $ (16,000) $ 46,000
2004 $ 46,000 $ 11,000 $ (26,000) $ 31,000
F-16
10. STOCKHOLDERS' EQUITY
Initial Public Offering - On November 3, 2000, the Company completed its
initial public offering of 12,075,000 newly issued shares of Class A
common stock, which included the exercise of the underwriters'
over-allotment option of 1,575,000 shares, at an offering price of
$11.00 per share. Proceeds from the offering were $123,572,000, less
underwriting discounts and commissions.
Preferred and Common Stock - On October 27, 2000, the Company
reincorporated in Delaware and created two new classes of common stock
with a par value of $0.001 per share. All of the Company's outstanding
shares of common stock and convertible preferred stock automatically
converted into shares of Class A and Class B common stock, respectively.
Holders of Class A common stock generally have identical rights to
holders of Class B common stock, except that holders of Class A common
stock are entitled to one vote per share while holders of Class B common
stock are entitled to ten votes per share on matters submitted to a vote
of the stockholders. As of September 30, 2004 Furukawa owns all
66,000,000 shares of the Company's outstanding Class B common stock,
which accounts for 93.4% of the combined voting power of all of the
Company's outstanding common stock.
Stock Options - In September 1992, the Company's Board of Directors
approved the 1992 Stock Option Plan for the issuance of 6,666,680 shares
of the Company's common stock to certain key employees. In August 2000,
the Company's Board of Directors approved the 2000 Stock Option/Stock
Issuance Plan for the issuance of 1,000,000 shares of the Company's
common stock to certain key employees. These plans provide that options
may have a term of up to 10 years, and become exercisable and generally
vest in annual increments of 25 percent per year over four years. In
addition, key executives were granted 9,670,360 stock options that were
separate from the Company's stock option plans and are fully vested. All
options were granted at fair value.
On August 29, 2000, the Board of Directors approved the 2000 Stock
Incentive Plan. Upon the effectiveness of the Company's IPO, the 1992
Stock Option Plan and the 2000 Stock Option/Stock Issuance Plan were
terminated and no further options grants may be made under these plans.
All options outstanding from the 1992 Stock Option Plan and the 2000
Stock Option/Stock Issuance Plan were transferred to the 2000 Stock
Incentive Plan. The 2000 Stock Incentive Plan provides that options may
have a term of up to 10 years, and become exercisable and vest in
increments. The normal vesting is 25 percent per year. However, the
vesting period can vary. All options were granted with the exercise
price equal to the fair value of the Company's common stock on the date
of grant.
In July 2002, the Company granted stock options under the 2000 Stock
Incentive Plan to a member of the Board of Directors for consulting
services to be performed through January 2004. The options vest ratably
in monthly increments over the term of the services rendered.
Compensation cost has been determined on the basis of fair value
pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation" and
EITF 96-18 "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or Conjunction with Selling, Goods or
Services." Compensation expense recognized on the vested options for
fiscal year ended September 30, 2002 was $85,700. On November 2002, that
member of the Board of Directors terminated performance of the
consulting services. Compensation expense for the fiscal year ended
September 30, 2003 was ($19,500), representing an adjustment of
compensation expense previously recognized due to the early termination
of the consulting services.
F-17
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. The stock
repurchased by the Company resulted in a new measurement date and
therefore compensation expense of $1,311,000 has been recorded for the
net cash paid for the shares less the intrinsic value of the options on
the original date of grant.
There were 6,103,369 shares available for future grant under the
Company's 2000 Stock Incentive Plan at September 30, 2004. Stock option
activity, including the options granted outside the plans, is as
follows:
Weighted
Number Exercise Price Average
of Options per Option Exercise Price
Options outstanding - September 30, 2001 12,459,635 0.0003 to 17.38 5.67
Options granted 867,460 1.04 to 4.55 1.93
Options exercised (974,250) 0.0003 to 0.39 0.04
Options canceled (375,795) 0.19 to 17.38 7.95
---------------- ------------------------ -------------
Options outstanding - September 30, 2002 11,977,050 0.0003 to 17.38 5.78
Options granted 946,504 0.68 to 2.29 1.02
Options exercised (3,186,651) 0.0003 to 0.39 0.007
Options canceled* (1,843,555) 0.0003 to 17.38 1.25
---------------- ------------------------ -------------
Options outstanding - September 30, 2003 7,893,348 0.0562 to 17.38 8.60
Options granted 451,140 1.69 to 4.05 2.98
Options exercised (370,710) 0.562 to 2.57 0.29
Options canceled (224,997) 0.68 to 13.38 4.87
---------------- ------------------------ -------------
Options outstanding - September 30, 2004 7,748,781 $0.100 to $17.38 $ 8.78
================ ======================== =============
* Cancelled options include 1,366,579 options repurchased by the Company from
two executive officers.
These options were granted outside of the Company's stock option plan.
The following table summarizes information regarding options outstanding
at September 30, 2004:
F-18
Range of Number Remaining Average Shares Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$0.0000 - $1.7380 1,471,811 6.2 $ 0.6636 908,093 $ 0.4487
$1.7381 - $3.4760 978,710 8.2 $ 2.5074 311,205 $ 2.2775
$3.4761 - $5.2140 43,000 8.1 $ 3.9940 12,250 $ 4.2157
$6.9521 - $8.6900 68,670 6.8 $ 8.0500 51,600 $ 8.0500
$8.6901 - $10.4280 15,000 6.8 $ 9.7200 11,250 $ 9.7200
$10.4281 - $12.1660 4,099,390 5.9 $ 11.0014 3,994,471 $ 11.0011
$12.1661 - $13.9040 6,000 6.6 $ 13.3800 4,500 $ 13.3800
$15.6421 - $17.3800 1,066,200 6.3 $ 17.3800 799,649 $ 17.3800
--------- ----- ----------- ---------- -----------
7,748,781 6.4 $ 8.7770 6,093,018 $ 9.7808
========= ===== =========== ========== ===========
The weighted average estimated fair value of options granted in 2002,
2003, and 2004 was $1.90, $1.00 and $3.00, respectively. The total number
of shares exercisable were 6,093,018, 5,686,086 and 9,479,242 as of
September 30, 2004, 2003 and 2002, respectively.
11. PROFIT SHARING PLAN
The Company has a deferred cash and profit sharing plan covering all
employees, subject to certain participation and vesting requirements.
The plan provides that the Company will partially match employees
contributions or provide discretionary contributions up to a certain
amount. Total contributions by the Company were $705,000 and $1,462,000
for the years ended September 30, 2002 and 2003, respectively. The
Company has $1,218,000 reserved for year ended September 30, 2004
contributions.
12. INCOME TAXES
The components of income tax expense are as follows:
F-19
Year Ended September 30,
---------------------------------------------
2002 2003 2004
(in thousands)
Current:
Federal $ (1,546) $(12,408) $ 192
State (226) 19 133
Foreign - 26 44
-------- -------- ------
Total current (1,772) (12,363) 369
-------- -------- ------
Effect of non-qualified stock option exercises
upon inome taxes currently payable 1,406 1,273 0
Deferred:
Federal 64 7,453 0
State 37 1,685 0
-------- -------- ------
Total deferred 101 9,138 0
-------- -------- ------
Provision for income taxes $ (265) $ (1,952) $ 369
======== ======== ======
The components of deferred income taxes are as follows:
September 30,
-----------------------
2003 2004
Allowance for doubtful accounts $ 195 $ 247
Uniform capitalization and obsolete inventory 1,542 1,145
State NOL and credits carry-forwards 1,738 1,742
Federal NOL 0 698
Depreciation (259) 464
Other 246 194
------- -------
Net deferred tax asset 3,462 4,490
Valuation allowance (3,462) (4,490)
------- -------
Net deferred tax asset $ - $ -
======= =======
A reconciliation of the Company's provision for income taxes to the U.S.
federal statutory rate is as follows (in thousands):
F-20
Year Ended September 30,
------------------------------------------------ ----------------------
2002 2003 2004
Amount % Amount % Amount %
----------------------- ----------------------- ----------------------
Provision for income taxes
at statutory rate $ 201 35.0 % $(4,254) (35.0)% $ (328) (35.0)%
State taxes, net of federal
benefit 123 21.4 1,107 9.1 86 9.2
Federal valuation allowance 1,373 11.3 413 44.0
Tax benefit on export sales (595) (103.6)
Adjustment of prior year deferred tax 192 205
Other 6 1.0 (178) (1.5) 6 0.6
------- ----- ------- ----- ------- ----
$ (265) (46.2)% $(1,952) (16.1)% $ 369 39.3 %
======= ===== ======= ===== ======= ====
The Company has federal net operating loss carryforwards of
approximately $2,115,000, which expire in 2024 and state net operating
loss carryforwards of approximately $1,742,000, which expire in 2009.
13. RELATED PARTY TRANSACTIONS
The Company is a subsidiary of Furukawa Electric North America, which is
a wholly owned subsidiary of Furukawa. The Company's related party
transactions occur between itself and other Furukawa owned subsidiaries
and affiliates.
The Company sells fiber optic components and purchases raw materials
from some of these entities in the regular course of business. Sales of
fiber optic subsystems and modules to related parties amounted to
$399,000, $481,000 and $218,000 for the years ended September 30, 2002,
2003, and 2004, respectively. Purchases of raw materials from related
parties amounted to $5,967,000, $6,690,000 and $13,285,000 for the years
ended September 30, 2002, 2003, and 2004, respectively. Accounts
receivable due from related parties were $7,000 and $7,000 at September
30, 2003 and 2004, respectively. Accounts payable to related parties
were $1,061,000 and $3,325,000 at September 30, 2003 and 2004,
respectively. No management fees were paid in the fiscal years ended
September 30, 2002, 2003, and 2004.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment, which includes the
design and manufacture of fiber optic subsystems and modules. The
following are summaries of sales to geographic areas based on the
location of the entity purchasing the Company's products and sales for
each of the components within the segment:
F-21
September 30,
2002 2003 2004
(in thousands)
Revenue by Geographical Area:
United States $ 23,587 $ 19,933 $ 26,358
Canada 4,582 3,578 6,004
Israel 1,563 3,129 7,639
Asia 2,932 6,395 9,716
Europe 3,603 5,565 7,148
Other 940 280 278
-------- -------- --------
$ 37,207 $ 38,880 $ 57,143
======== ======== ========
Revenue by Component:
Receivers $ 3,975 $ 4,208 $ 4,164
Transceivers 26,574 28,249 47,601
Transmitters 5,241 5,254 5,140
Other 1,417 1,169 238
-------- -------- --------
$ 37,207 $ 38,880 $ 57,143
======== ======== ========
******
F-22
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
- --------------------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
3.2.1*** Amendment Number One to Bylaws
4.1 See Exhibits 3.1, 3.2 and 3.2.1 for provisions of the Certificate
of Incorporation and Bylaws for the Registrant defining the rights
of holders of common stock of the Registrant
4.2* Specimen Stock Certificate
4.3* Standstill and Registration Rights Agreement, dated as of October
26, 2000, by and between the Registrant and The Furukawa Electric
Co., Ltd.
10.1*+ 2000 Stock Incentive Plan
10.2*+ Employee Stock Purchase Plan
10.3* Form of Indemnification Agreement
10.5*+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Muoi Van Tran, as currently in effect
10.6*+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Mohammad Ghorbanali, as currently in effect
10.7*+ Employment Agreement, dated November 1, 1999, by and between the
Registrant and Susie L. Nemeti, as currently in effect
10.8*+ Form of Stock Option Agreement, dated August 29, 2000, by and
between the Registrant and each of Muoi Van Tran, Mohammad
Ghorbanali and Susie L. Nemeti (including a schedule of
substantially identical terms)
10.9*+ Form of Stock Option Agreement, dated June 28, 1993, by and between
the Registrant and each of Muoi Van Tran, Mohammad Ghorbanali and
Susie L. Nemeti (including a schedule of substantially identical
terms)
10.10** Master Purchase Agreement, dated October 1, 2003, by and between
the Registrant and The Furukawa Electric Co., Ltd.
21.1* List of Subsidiaries of the Registrant
23.1 Independent Registered Public Accounting Firm Consent
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.
* This exhibit was previously filed as an exhibit to the Company's
Registration Statement on Form S-1 declared effective November 2, 2000
(File No. 333-44862) under the same exhibit number, and is incorporated by
reference herein.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(c) of Form 10-K.
** Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed with the Securities and Exchange Commission.
*** Filed as an exhibit to the Annual Report on Form 10-K for the year ended
September 30, 2002 on December 27, 2002 and incorporated herein by
reference.