Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For
the quarterly period ended March 31, 2005
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
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The registrant has two classes of common stock authorized, Class A
Common Stock and Class B Common Stock. The rights, preferences and privileges of
each class of common stock are 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 May 6, 2005, there were approximately 46,917,624
shares of Class A common stock outstanding and 66,000,000 shares of Class B
Common Stock outstanding.
================================================================================
OPTICAL COMMUNICATION PRODUCTS, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2005
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets as of March 31, 2005 (unaudited) and
September 30, 1 2004 1
Statements of Operations for the Three Months and Six Months
Ended March 31, 2005 and 2004 (unaudited) 2
Statements of Cash Flows for the Six Months Ended March 31,
2005 and 2004 (unaudited) 3
Notes to Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk 30
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5 Other Information 32
Item 6. Exhibits 32
SIGNATURES 33
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICAL COMMUNICATION PRODUCTS, INC.
BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2005 2004
- ----------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 83,892 $ 75,423
Marketable securities 64,945 75,131
Accounts receivable less allowance for doubtful accounts:
$305 at March 31, 2005 and $362 at September 30, 2004 8,144 8,566
Inventories 9,950 8,649
Prepaid expenses and other current assets 847 1,118
--------------- --------------
Total current assets 167,778 168,887
Property, plant and equipment, net 26,950 29,278
Intangible assets, net 1,352 1,802
--------------- --------------
TOTAL ASSETS $ 196,080 $ 199,967
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,587 $ 1,136
Accounts payable to related parties 3,652 3,325
Accrued payroll and benefits 1,069 1,989
Accrued bonus 1,884 4,451
Other accrued expenses 1,089 1,248
Income taxes payable 158 158
--------------- --------------
Total current liabilities 9,439 12,307
OTHER LONG-TERM LIABILITIES 400 400
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, $0.001 par value; 200,000,000 shares
authorized, 46,903,871 and 46,771,927 shares outstanding
at March 31, 2004 and September 30, 2004, respectively. 47 47
Class B common stock $0.001 par value; 66,000,000 shares
authorized, 66,000,000 shares issued and outstanding at
March 31, 2004 and September 30, 2004 66 66
Additional paid-in-capital 133,000 132,917
Retained earnings 53,128 54,230
--------------- --------------
Total stockholders' equity 186,241 187,260
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 196,080 $ 199,967
=============== ==============
See Notes to Financial Statements
OPTICAL COMMUNICATION PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, Six Months Ended March 31,
-------------------------------- -------------------------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------
REVENUE $ 13,527 $ 15,909 $ 27,551 $ 29,678
COST OF REVENUE 8,991 8,777 17,550 16,962
--------------- --------------- --------------- --------------
GROSS PROFIT 4,536 7,132 10,001 12,716
--------------- --------------- --------------- --------------
EXPENSES:
Research and development 3,918 4,565 7,645 8,818
Selling and marketing 1,252 1,330 2,454 2,678
General and administrative 1,248 1,628 2,441 3,224
--------------- --------------- --------------- --------------
Total expenses 6,418 7,523 12,540 14,720
--------------- --------------- --------------- --------------
LOSS FROM OPERATIONS (1,882) (391) (2,539) (2,004)
OTHER INCOME, Net 811 294 1,437 556
--------------- --------------- --------------- --------------
LOSS BEFORE INCOME TAXES (1,071) (97) (1,102) (1,448)
INCOME TAX PROVISION - - - 192
--------------- --------------- --------------- --------------
NET LOSS $ (1,071) $ (97) $ (1,102) $ (1,640)
=============== =============== =============== ==============
BASIC LOSS PER SHARE $ (0.01) $ (0.00) $ (0.01) $ (0.01)
=============== =============== =============== ==============
DILUTED LOSS PER SHARE $ (0.01) $ (0.00) $ (0.01) $ (0.01)
=============== =============== =============== ==============
BASIC SHARES OUTSTANDING 112,861 112,458 112,838 112,398
=============== =============== =============== ==============
DILUTED SHARES OUTSTANDING 112,861 112,458 112,838 112,398
=============== =============== =============== ==============
See Notes to Financial Statements
2
OPTICAL COMMUNICATION PRODUCTS, INC
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended March 31,
--------------------------
2005 2004
- ------------------------------------------------- -----------------------------
Operating Activities:
Net loss $ (1,102) $ (1,640)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization of property, plant
and equipment 2,515 2,533
Amortization of intangibles 450 450
Amortization of premiums on marketable securities 131 583
Changes in operating assets and liabilities:
Accounts receivable, net 422 (2,145)
Income taxes receivable - 192
Inventories (1,301) (1,355)
Prepaid expense and other assets 271 (1,000)
Accounts payable 451 427
Accounts payable to related parties 327 1,036
Accrued payroll and benefits (920) 701
Accrued bonuses (2,567) (885)
Other accrued expenses (159) (1,081)
------------ ------------
Net cash used in operating activities (1,482) (2,184)
------------ ------------
Investing Activities:
Purchase of marketable securities (24,945) (25,470)
Maturities of marketable securities 35,000 30,000
Purchase of property, plant and equipment (187) (1,735)
------------ ------------
Net cash provided by investing activities 9,868 2,795
------------ ------------
Financing Activities:
Principal payments on long-term debt - (235)
Issuance of common stock 83 100
------------ ------------
Net cash provided by (used in) financing
activities 83 (135)
------------ ------------
Increase in cash and cash equivalents 8,469 476
Cash and cash equivalents, beginning of period 75,423 64,895
------------ ------------
Cash and cash equivalents end of period $ 83,892 $ 65,371
============ ============
3
Optical Communication Products, Inc
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Optical
Communication Products, Inc., a Delaware corporation (the "Company"),
have been prepared in accordance with accounting principles generally
accepted in the United States of America and Article 10 of the
Securities and Exchange Commission's Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. In management's opinion, the
unaudited financial statements contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial statements as of March 31, 2005 and for all interim periods
presented. The financial statements should be read in conjunction with
the audited financial statements included in the annual report of the
Company filed on Form 10-K with the Securities and Exchange Commission
for the year ended September 30, 2004. The results of operations for the
period ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30,
2005. The Company's operations are primarily located in Woodland Hills,
California. The Company is a majority-owned subsidiary of The Furukawa
Electric Company, Ltd. of Japan ("Furukawa"). Furukawa beneficially
owned 58.5% of the Company's common stock at March 31, 2005, which
accounts for 93.4% of the combined voting power of all of the Company's
outstanding stock.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123R
Share-Based Payment 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. SFAS No.
123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
In April 2005 the SEC changed the effective date for SFAS 123R to the
first fiscal year that begins after June 15, 2005. We currently expect to
adopt SFAS No. 123R in the quarter ending December 31, 2005. We are
currently reviewing our alternatives for adoption under this new
pronouncement.
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.
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
4
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.
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. 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 Statement of Financial
Accounting Standards ("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:
Three months ended March 31, Six months ended March 31,
-------------------------------------- ----------------------------------
2005 2004 2005 2004
----------------- ------------------ ---------------- ----------------
(in thousands, except per share amounts)
Net loss:
As reported: $ (1,071) $ (97) $ (1,102) $ (1,640)
Deduct total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects: (252) (1,553) (501) (3,066)
------------- -------------- -------------- -------------
Pro forma net loss $ (1,323) $ (1,650) $ (1,603)50) $ (4,706)
============= ============== ============== =============
Basic loss per share
As reported $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.04)
Diluted loss per share
As reported $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.04)
The fair value of each option grant estimated on the date of grant used
to compute pro forma income per share is estimated using the
Black-Scholes option-pricing model. The following assumptions were used
in completing the model:
5
Three months ended March 31, Six months ended March 31,
------------------------------------- ------------------------------------
2005 2004 2005 2004
------------------ ----------------- ----------------- -----------------
Dividend yield 0% 0% 0% 0%
Expected volatility 94.2% 101.9% 94.2% 101.9%
Risk-free rate of return 4.4% 3.6% 4.3% 3.7%
Expected life (years) 8.0 7.1 8.0 7.1
During the three months ended March 2005 and 2004, the Company granted
3,100 and 214,000 stock options, respectively, with exercise prices
equal to the fair value of the underlying Common Stock on the date of
grant. The average exercise prices of the underlying Common Stock on the
dates of the grant were $1.87 and $2.95 for the three months ended March
31, 2005 and 2004, respectively.
During the six months ended March 31, 2005 and 2004, the Company granted
27,000 and 230,000 stock options, respectively, with exercise prices
equal to the fair value of the underlying Common Stock on the date of
grant. The fair market values of the underlying Common Stock on the
dates of grant were $2.06 and $3.00, for the six months ended March 31,
2005 and 2004, respectively.
2. INVENTORIES
Inventories consist of the following (in thousands):
March 31, 2005 September 30, 2004
----------------------------------------------------------------------------------------------
Raw materials $ 5,519 $ 4,911
Work-in-process 3,230 2,927
Finished goods 1,201 811
------------------------ -----------------------
Total inventories $ 9,950 $ 8,649
======================== =======================
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
March 31, 2005 September 30, 2004 Useful Life
- -------------------------------------------------------------------------------------------------------------------------
Land $ 6,729 $ 6,729
Building improvements 14,949 14,949 39 years
Machinery and equipment 20,078 19,965 5 years
Computer hardware and software 1,666 1,592 3 years
Furniture and fixtures 382 382 5 years
Leasehold improvements 181 181 9 years
------------------------- -------------------------
43,985 43,798
Less accumulated depreciation 17,035 14,520
------------------------- -------------------------
$ 26,950 $ 29,278
========================= =========================
6
4. INTANGIBLE ASSETS
The Company's intangible assets by major asset class are as follows:
Weighted Average
March 31, 2005 September 30, 2000 Amortization Period
-------------------------------------------------------------
(in thousands) (Years)
Licensing Fees $ 2,000 $ 2,000 3.5
Accumulated Amortization (1,767) (1,534)
Patents 950 950 5.0
Accumulated Amortization (459) (364)
Acquired Technology 1,216 1,216 5.0
Accumulated Amortization (588) (466)
----------------- -----------------
Total intangible assets, net $ 1,352 $ 1,802
================= =================
Aggregate amortization expense related to intangible assets was
approximately $225,000 and $225,000 for the three months ended March 31,
2005 and 2004, respectively and $450,000 and $450,000 for the six months
ended March 31, 2005 and 2004, respectively. There was no impairment loss
recorded during the three and six month periods ended March 31, 2005 or
2004.
Following is a summary of future amortization expense in each of the next
four fiscal years.
(in thousands)
Remaining six months fiscal 2005 $ 450
fiscal 2006 433
fiscal 2007 433
fiscal 2008 36
-------------
$ 1,352
=============
7
5. EARNINGS (LOSS) PER SHARE
The following is a calculation of basic and diluted loss per share
("EPS"):
Three Months Ended March 31, Six Months Ended March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
(in thousands, except per share data)
------------------------------------------------------------------------------------------------------
BASIC EPS COMPUTATION
Net loss applicable to common stock $ (1,071) $ (97) $ (1,102) $ (1,640)
Weighted average common shares outstanding 112,861 112,458 112,838 112,398
------------- ------------- ------------- -------------
Basic loss per share $ (0.01) $ (0.00) $ (0.01) $ (0.01)
============= ============= ============= =============
DILUTED EPS COMPUTATION
Net loss applicable to common stock $ (1,071) $ (97) $ (1,102) $ (1,640)
Weighted average common shares outstanding 112,861 112,458 112,838 112,398
------------- ------------- ------------- -------------
Basic loss per share $ (0.01) $ (0.00) $ (0.01) $ (0.01)
============= ============= ============= =============
The weighted average diluted common shares outstanding for the three
months ended March 31, 2005 and March 31, 2004 excludes the dilutive
effect of approximately 7,146,607 and 7,074,400 options, respectively.
The weighted average diluted common shares outstanding for the six
months ended March 31, 2005 and March 31, 2004 excludes the dilutive
effect of approximately 7,012,782 and 9,369,900 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 period or due to a net operating loss.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating leases for certain facilities. Lease payments
are made monthly. The Company's leases are renewable monthly,
semiannually, annually or for five years. Rent expense for these leases
for the three months ended March 31, 2005 and 2004 was $131,000 and
$120,000, respectively and for the six months ended March 31, 2005 and
2004 was $266,000 and $247,000, respectively.
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 March 31, 2005:
(in thousands)
-------------------------------------------------------------------
Six months thru September 30, 2005 $ 260
2006 189
2007 12
-------------------------------------------------------------------
Total minimum lease payments $ 461
----------------------------------------------------------------
Warranty Accruals
The Company provides a standard 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
8
return within one year from the date of the sale. The table below sets
forth the activity of the Company's warranty reserve.
Warranty Reserve Balance at Additions
beginning of charged to Balance at end
period expense Deductions of period
Six Months Ended:
March 31, 2004 $ 46 $ (2) $ (12) $ 32
March 31, 2005 $ 31 $ 25 $ (17) $ 39
In March 2005, the Internal Revenue Service commenced an audit of our
federal income tax returns for our 2001 and 2003 fiscal years. The audit
is in process and the outcome cannot currently be determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to such financial statements included elsewhere in this Report.
The following discussion contains forward-looking statements that involve risks
and uncertainties. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will" or similar expressions are intended to identify
forward-looking statements. The statements are based on current expectations and
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to the differences are discussed below in this Report
under "Risk Factors" and elsewhere in this Report, and in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year
ended September 30, 2004.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial Statements and accompanying notes. Note 2 to
the Financial Statements in the Annual Report on Form 10-K for the fiscal year
ended September 30, 2004 describes the significant accounting policies and
methods used in the preparation of the Financial Statements. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts
and sales returns, valuation of excess and obsolete inventory, 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 $8.1 million as of March 31, 2005, compared with $8.6
million as of September 30, 2004. The allowance for doubtful accounts and sales
returns as of March 31, 2005 was $305,000, compared with $362,000 as of
September 30, 2004. 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.
9
Inventory Write-downs
Our inventory balance was $10.0 million as of March 31, 2005, compared
with $8.7 million as of September 30, 2004. At March 31, 2005 and September 30,
2004 inventory with a historical cost of $9.8 million and $10.5 million,
respectively, was written down as excess and obsolete inventory. We estimate our
excess and obsolete inventory primarily through reference to historical usage
and future demand forecasts. We operate in a highly-volatile industry with high
and unpredictable rates of inventory obsolescence. 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. 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. We do not necessarily discard
written-down inventory and, on occasion, we have discovered that written-down
inventory was not obsolete or excess, as previously estimated. In those
situations, when written down inventory is sold and cost of sales reflects the
new written-down basis.
Warranty Accruals
The liability for product warranties, included in other accrued
liabilities, was $39,000 as of March 31, 2005, compared with $32,000 as of
September 30, 2004. 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. 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 $27.0 million and $1.4 million, respectively at
March 31, 2005. 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.
Income Taxes
At March 31, 2005, the unadjusted net book value of our deferred income
tax assets totaled approximately $4.7 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. 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.
10
We continually reassess our assumptions and judgments and make
adjustments when significant facts and circumstances dictate.
Overview
We design, manufacture and sell a comprehensive line of high
performance, highly reliable fiber optic subsystems and modules for fiber optic
transmission systems that are used to address the bandwidth limitations in the
metropolitan area network, or MAN, local area network, or LAN, and storage area
network, or SAN, 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
quarter ended March 31, 2005. 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 one-year Master
Purchase Agreement, which we entered into with Furukawa on October 1, 2003. This
Agreement renews automatically on October 1 of each year 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 68.4% and 67.9% of our
total revenue for the six months ended March 31, 2005 and 2004, respectively.
Cisco Systems and Alcatel (including sales to each of their contract
manufacturers) accounted for approximately 21.2% and 13.3%, respectively, of our
total revenue for the six months ended March 31, 2005. Cisco Systems and Alcatel
(including sales to each of their contract manufacturers) accounted for
approximately 15.0% and 12.2%, respectively, of our total revenue for the six
months ended March 31, 2004. No other end-user customer accounted for more than
10.0% of our total revenue for the six months ended March 31, 2005 or 2004.
For financial reporting purposes, we consider our customers to be the
CEMs, CMs and distributors who place purchase orders with us directly. No direct
customer accounted for more than 10.0% of our total revenue for the three months
or six months ended March 31, 2005 or 2004. 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.
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. Several service
providers, including BellSouth, SBC and Verizon, have recently announced current
and planned investments in Fiber-to-the-premises (FTTP) and Fiber-to-the-node
(FTTN) applications, which we believe could increase traffic demand on the
11
metropolitan area networks (MANs) into which such FTTP/FTTN infrastructure would
feed. However, it is too early to predict the outcome of these potential
FTTP/FTTN roll-outs on our business. 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.
The average selling prices of our products generally decrease as the
products mature from factors such as increased competition, the introduction of
new products or technology, increased unit volumes, and price concessions
required by our customers. We anticipate that average selling prices of our
existing products will continue to decline in future periods although the timing
and degree of the declines cannot be predicted with any certainty. We must
continue to develop and introduce new products that incorporate features that
can be sold at higher average selling prices on a timely basis.
Our cost of revenue consists principally of materials, as well as
salaries and related expenses for manufacturing personnel, and other production.
Our materials include purchase of several key components 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 technology or products and 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 may expand our sales and marketing operations and efforts in order to
increase sales and market awareness of our products. We believe that investment
in sales and marketing is critical to our success. As a result, these expenses
may increase in future periods.
General and administrative expenses consist primarily of salaries and
related expenses for our administrative, finance, information system and human
resources personnel, professional fees and other corporate expenses. We expect
that general and administrative expenses will increase in the near term
primarily due to an increase in professional fees associated with implementation
of the requirements of the Sarbanes-Oxley Act of 2002 and an increase in our
legal and consulting fees associated with analysis of strategic planning,
including future market opportunities, that have been undertaken by our
management and board of directors.
12
Results of Operations - Comparison of Three Months Ended March 31, 2005 and 2004
The following table sets forth statement of operations data and
percentage of change for the periods indicated:
Three Months Ended March 31,
-----------------------------------
(Unaudited) %
2005 2004 Change Change
- ------------------------------------------------------------------------------ -------------------------
(in thousands)
REVENUE $ 13,527 $ 15,909 $ (2,382) -15.0%
COST OF REVENUE 8,991 8,777 214 2.4%
--------------- ---------------- ------------
GROSS PROFIT 4,536 7,132 (2,596) -36.4%
--------------- ---------------- ------------
EXPENSES:
Research and development 3,918 4,565 (647) -14.2%
Selling and marketing 1,252 1,330 (78) -5.9%
General and administrative 1,248 1,628 (380) -23.3%
--------------- ---------------- ------------
Total expenses 6,418 7,523 (1,105) -14.7%
--------------- ---------------- ------------
LOSS FROM OPERATIONS (1,882) (391) (1,491) 381.3%
OTHER INCOME, Net 811 294 517 175.9%
--------------- ---------------- ------------
LOSS BEFORE INCOME TAXES (1,071) (97) (974) 1004.1%
INCOME TAX PROVISION - - - -
--------------- ---------------- ------------
NET LOSS $ (1,071) $ (97) $ (974) 1004.1%
=============== ================ ============
Revenue - Revenue decreased 15.0% to $13.5 million in the quarter ended
March 31, 2005 from $15.9 million in the quarter ended March 31, 2004. The
decrease in revenue was primarily due to a decrease of approximately $1.8
million in shipments to two customers who had purchased a higher volume of our
products during the quarter ended March 31, 2004 and a decrease in the demand
for our products. Sales of our products for metropolitan area networks were
approximately 89% of revenue for the quarter ended March 31, 2005 compared to
approximately 85% of revenue for the quarter ended March 31, 2004. Sales of our
products for local area and storage area networks were approximately 10% of
revenue for the quarter ended March 31, 2005 compared to approximately 14% of
revenue for the quarter ended March 31, 2004. We cannot assure you that our
decrease in revenue will reverse in future periods, as the average selling
prices for existing products may continue to decline in response to product
introductions by competitors or us, or 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 2.4% to $9.0 million in the
quarter ended March 31, 2005 from $8.8 million in the quarter ended March 31,
2004. Gross margin decreased to 33.5% from 44.8% in the quarters ended March 31,
2005 and 2004, respectively. The decrease in gross margin was primarily due to a
decrease in average selling prices and an increase in material costs as a
percent of revenue to 42.9% from 33.6%, in the quarters ended March 31, 2005 and
2004, respectively. Material cost increased because we used less inventory in
products sold during the quarter that was previously written down as excess
inventory. The resulting decrease was $812,000, which is the net of $875,000 for
quarter ended March 31, 2005 and $1.7 million for quarter ended March 31, 2004.
In addition, manufacturing overhead increased as a percent of revenue to 19.3%
from 17.4%, for the quarters ended March 31, 2005 and 2004, respectively.
Manufacturing overhead decreased by $151,000 primarily due to a $416,000
13
decrease in bonus expense offset by a $93,000 increase in capitalized overhead,
$71,000 increase in occupancy cost and $79,000 in equipment and supplies.
Research and Development - Research and development expenses decreased
$647,000 or 14.2% to $3.9 million in the quarter ended March 31, 2005 from $4.6
million in the quarter ended March 31, 2004. This decrease was primarily due to
a reduction in supplies expense of $122,000 and a $513,000 decrease in bonus
expense. We do not expect any of these factors to have a material impact on our
ongoing research and development efforts.
Sales and Marketing - Sales and marketing expenses decreased $78,000 or
5.9% to $1,252,000 for the quarter ended March 31, 2005 from $1,330,000 in the
quarter ended March 31, 2004. The decrease was primarily due to a $188,000
decrease in bonus expense, a decrease in professional fees of $48,000 offset by
increased salaries and related costs of $137,000 and increased advertising of
$33,000. We believe that investment in sales and marketing is critical to our
success and these expenses may increase in absolute dollars in the future.
General and Administrative - General and administrative expenses
decreased $380,000 or 23.3% to $1.2 million in the quarter ended March 31, 2005
from $1.6 million in the quarter ended March 31, 2004. The decrease in expense
in the quarter ended March 31, 2005 was primarily due to a $246,000 decrease in
Directors' and Officers' insurance expense as the Company negotiated the
extension of the current policy from 12 to 18 months at no additional cost and a
$188,000 decrease in bonus expense.
Other Income, net - Other income, net increased $517,000 or 175.9% to
$811,000 in the quarter ended March 31, 2005 from $294,000 in the quarter ended
March 31, 2004. This increase was primarily due to a $449,000 increase in
investment income, which was primarily the result of an increase in interest
rates, and a decrease, from $39,000 to zero, in the utilities, insurance, and
depreciation expenses associated with our Chatsworth facility, which we sold in
June 2004.
Income Taxes - There was no income tax provision recorded for the
quarters ended March 31, 2005 or 2004.
The following table compares our sales of MAN, LAN and SAN products for
the periods indicated:
Three months ended March 31,
-------------------------------------------
2005 2004
-------------------- --------------------
(in thousands) Change % change
--------------------------
MAN $ 12,016 $ 13,514 $ (1,498) -11.1%
LAN/SAN 1,295 2,272 (977) -43.0%
Others 216 123 93 75.6%
-------------------- -------------------- --------------
Total $ 13,527 $ 15,909 $ (2,382) -15.0%
==================== ==================== ==============
Metropolitan Area Network sales decreased $1.5 million or 11.1% for the three
months ended March 31, 2005 as compared to the similar period in 2004 due to
lower demand from our customers. Local Area Network and Storage Area Network
sales decreased $1.0 million or 43.0% for the three months ended March 31, 2005
as compared to the similar period in 2004, also was due to lower demand from our
customers.
14
Results of Operations - Comparison of Six Months Ended March 31, 2005 and 2004
The following table sets forth statement of operations data and
percentage of change for the periods indicated:
Six Months Ended March 31,
-----------------------------------
(Unaudited) %
------------
2005 2004 Change Change
- ------------------------------------------------------------------------------ -------------------------
(in thousands)
REVENUE $ 27,551 $ 29,678 $ (2,127) -7.2%
COST OF REVENUE 17,550 16,962 588 3.5%
--------------- ---------------- -------------
GROSS PROFIT 10,001 12,716 (2,715) -21.4%
--------------- ---------------- -------------
EXPENSES:
Research and development 7,645 8,818 (1,173) -13.3%
Selling and marketing 2,454 2,678 (224) -8.4%
General and administrative 2,441 3,224 (783) -24.3%
--------------- ---------------- -------------
Total expenses 12,540 14,720 (2,180) -14.8%
--------------- ---------------- -------------
LOSS FROM OPERATIONS (2,539) (2,004) (535) 26.7%
OTHER INCOME, Net 1,437 556 881 158.5%
--------------- ---------------- -------------
LOSS BEFORE INCOME TAXES (1,102) (1,448) 346 -23.9%
INCOME TAX PROVISION - 192 (192) -100.0%
--------------- ---------------- -------------
NET LOSS $ (1,102) $ (1,640) $ 538 -32.8%
=============== ================ =============
Revenue - Revenue decreased 7.2% to $27.6 million in the six months
ended March 31, 2005 from $29.7 million in the six months ended March 31, 2004.
The decrease in revenue was primarily due to a decrease of $3.4 million in
shipments to two customers who had purchased a higher volume of our products
during the six months ended March 31, 2004 offset by an increase in demand of
our products from other customers. Sales of our products for metropolitan area
networks were approximately 88% of revenue for the six months ended March 31,
2005 compared to approximately 86% of revenue for the six months ended March 31,
2004. Sales of our products for local area and storage area networks were
approximately 11% of revenue for the six months ended March 31, 2005 compared to
approximately 13% of revenue for the six months ended March 31, 2004. We cannot
assure you that our decrease in revenue will reverse in future periods, as the
average selling prices for existing products may continue to decline in response
to product introductions by competitors or us, or 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 3.5% to $17.5 million in the
six months ended March 31, 2005 from $17.0 million in the six months ended March
31, 2004. Gross margin decreased to 36.3% in the six months ended March 31, 2005
from 42.8% in the same period last year. The decrease in gross margin was
primarily due to increased manufacturing costs as a percent of revenue to 63.7%
from 57.2%, in the six months ended March 31, 2005 and 2004, respectively. This
is primarily due to increased material costs of $997,000, offset by a $313,000
decrease in the absolute dollar amount of manufacturing overhead to $5.1 million
from $5.4 million in the six months ended March 31, 2005 compared to the same
period in the prior year. The decrease in the absolute dollar amount of
manufacturing overhead was due to a $603,000 decrease in bonus expense offset by
increases of $144,000 in supplies and $101,000 in occupancy allocation. The
decrease in gross margin was also the result of a decrease in the average
selling price of our products sold, partially offset by a $1.4 million decrease
in inventory used in production that was previously written down as excess
inventory from $2.8 million used during the six months ended March 31, 2004
15
to $1.4 million used during the six months ended March 31, 2005.
Research and Development - Research and development expenses decreased
$1.2 million or 13.3% to $7.6 million in the six months ended March 31, 2005
from $8.8 million in the six months ended March 31, 2004. This decrease was due
primarily to a decrease in bonus expense of $786,000, decreased supplies of
$246,000 and decreased salaries and related expenses of $98,000. We do not
expect any of these factors to have a material impact on the results of our
ongoing research and development efforts.
Sales and Marketing - Sales and marketing expenses decreased $224,000 or
8.4% to $2.5 million in the six months ended March 31, 2005 from $2.7 million in
the six months ended March 31, 2004. The decrease was primarily due to decreased
bonus expense of $321,000 and decrease professional fees of $140,000 offset by
increased salaries and related expenses of $203,000.
General and Administrative - General and administrative expenses
decreased $783,000 or 24.3% to $2.4 million in the six months ended March 31,
2005 from $3.2 million in the six months ended March 31, 2004. The decrease was
primarily due to a $459,000 decrease in Directors' and Officers' insurance
expense as the company negotiated the extension of the current policy from 12 to
18 months at no additional cost, a decrease in bonus expense of $233,000,
decreased occupancy costs of $61,000 and a $45,000 reduction in consulting fees
associated with analysis of strategic alternatives, including future market
opportunities that have been undertaken by our management and board of
directors.
Other Income, net - Other income, net increased $881,000 or 158.5% to
$1,437,000 in the six months ended March 31, 2005 from $556,000 in the six
months ended March 31, 2004. This increase was due to a $692,000 increase in
investment income, which was primarily the result of increased interest rates
and a decrease, from $118,000 to zero, in the utilities, insurance, and
depreciation expenses associated with our Chatsworth facility, which we sold in
June 2004.
Income Taxes - There was no income tax provision recorded for the six
months ended March 31, 2005. Income tax expense of $192,000 in the six months
ended March 31, 2004 includes a charge of $557,000 related to the valuation
allowance for the carry-forward of net loss for the six months ended March 31,
2004, to reduce the deferred income tax asset to the amount determined more
likely than not to be realized.
The following table compares our sales of MAN, LAN and SAN products for
the periods indicated:
Six Months Ended March 31,
-----------------------------------
%
------------
2005 2004 Change Change
- ------------------------------------------------------------------------------ -------------------------
(in thousands)
MAN $ 24,346 $ 25,646 $ (1,300) -5.1%
LAN/SAN 2,935 3,801 (866) -22.8%
Other 270 231 39 16.9%
--------------- ---------------- -------------
Total revenue $ 27,551 $ 29,678 $ (2,127) -7.2%
=============== ================ =============
Metropolitan Area Network sales decreased $1.3 million or 5.1% for the six
months ended March 31, 2005 as compared to the similar period in 2004 due to
lower demand from our customers. Local Area Network and Storage Area Network
sales decreased $0.9 million or 22.8% for the six months ended March 31, 2005 as
16
compared to the similar period in 2004, also was due to lower demand from our
customers.
Liquidity and Capital Resources
As of March 31, 2005, our primary source of liquidity was our cash and
cash equivalents balance of $83.9 million and our marketable securities balance
of $65.0 million, which consists primarily of United States Treasury notes and
bonds. At September 30, 2004, we had $75.4 million in cash and cash equivalents
and $75.1 million in current marketable securities.
Since inception, we have financed our operations primarily with cash
generated from operations. Additional financing has been generated through lines
of credit and term loans, and through our initial public offering of our Class A
common stock, which we completed on November 3, 2000. As of March 31, 2005, our
working capital was $158.3 million with a current ratio of 18:1 compared to our
working capital of $156.6 million with a current ratio of 14:1 as of September
30, 2004. Our working capital increased during the six months ended March 31,
2005 primarily due to approximately $2.6 million decrease in accrued bonus
liability resulting from the annual bonus payment that occurred in November
2004. We believe that cash flow from operations, cash and equivalents, and
marketable securities will be sufficient to fund operations for the next twelve
months.
During the six months ended March 31, 2005, cash used by operations was
$1.5 million compared to $2.2 million in the six months ended March 31, 2004.
The cash used by operating activities during the six months ended March 31, 2005
was the result of an increase in inventories, decreases in accrued bonus and
accrued payroll and benefits, and the net loss offset by depreciation and
amortization and increases in accounts payable and accounts payable to related
parties. The cash used in operating activities during the six months ended March
31, 2004 was the result of increases in accounts receivable and prepaid
expenses, a decrease in accrued bonus, and the net loss offset by depreciation
and amortization and increases in accounts payable and accounts payable to
related parties.
During the six months ended March 31, 2005, cash provided by investing
activities was $9.9 million compared to $2.8 million in the six months ended
March 31, 2004. The cash provided by investing activities in the six months
ended March 31, 2005 was primarily the result of $10.0 million in marketable
securities maturities net of purchases. The cash provided by investing
activities during the six months ended March 31, 2004 was primarily the result
of $4.5 million in marketable securities purchases net of maturities, partially
offset by $1.7 million in property plant and equipment purchases.
During the six months ended March 31, 2005, cash provided by financing
activities was $83,000 compared to cash used in financing activities of $135,000
in the six months ended March 31, 2004. The cash provided by financing
activities in the six months ended March 31, 2005 was the result of an increase
in common stock shares issued for $83,000. The majority of cash used in
financing activities for the six months ended March 31, 2004 was for principal
payments on the Company's long-term debt offset by issuance of common stock.
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
17
securities that stockholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock.
Although we believe we have sufficient capital to fund our activities for at
least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:
o the market acceptance of our products;
o the levels of promotion and advertising that will be required to launch
our new products and achieve and maintain a competitive position in the
marketplace;
o price discounts on our products to our customers;
o our business, product, capital expenditure and research and development
plans and product and technology roadmaps;
o the levels of inventory and accounts receivable that we maintain;
o capital improvements to new and existing facilities;
o technological advances;
o our competitors' response to our products;
o our pursuit of strategic alternatives, including future market
opportunities; and
o our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
Inflation
Inflation has not had a material adverse effect on our results of
operations, however, our results of operations may be materially and adversely
affected by inflation in the future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is
defined in rules promulgated by the Securities and Exchange Commission, that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
Contractual Obligations
There have been no material changes to the contractual obligations as of
September 30, 2004 disclosed in our Form 10-K filed with the SEC on December 29,
2004.
18
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 MANs, LANs, and SANs.
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 91%, and 86%
of our revenue for the six months ended March 31, 2005, and 2004, 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:
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
19
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 or unwilling to meet our manufacturing
requirements, if they raise prices of their products, or if they discontinue
certain key components, 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. For example, we face the risk that price increases imposed on us by
our suppliers will be higher than the price increases (or cost increases)
imposed on our competitors when they purchase (or manufacture) similar
components; and we face a corresponding risk that any price decreases that we
are able to obtain from our suppliers will be less than the price decreases (or
cost reductions) that our competitor's obtain when they purchase (or
manufacture) similar components. 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.
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
20
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.
General economic factors could negatively impact our growth plan.
The unfavorable economic conditions in the United States that began in
2001 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 at the time indicated that there was a reduction in spending for fiber
optic equipment as a result of the economic slowdown and efforts to reduce
then-existing inventories. Based on these and other factors, some of our
customers reduced, modified, cancelled or rescheduled orders for our products
and expressed uncertainty as to their future requirements. Despite an
improvement in general economic conditions in the United States since that time,
capital spending by service providers in the fiber optic communications industry
on network infrastructure has remained substantially below pre-2001 levels. Our
business, operating results and financial condition are likely to suffer if the
global economy, or economic conditions in the United States, experiences another
downturn.
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.
21
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. We are currently registered under ISO 9001:2000. 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.
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 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, 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.
22
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 more than a year and
varies by product and customer. During this time, customers may perform or
require us to perform extensive evaluation and qualification testing of our
products. Generally, they consider a wide range of issues before purchasing our
products, including interoperation with other subsystems and components, product
performance and reliability. We may incur substantial sales and marketing
expenses and expend significant management effort while potential customers are
qualifying our products. Even after incurring these costs, we ultimately may not
sell any or sell only small amounts of our products to a potential customer. If
sales forecasts to specific customers are not realized, our revenue and results
of operations may be negatively impacted.
If we do not achieve acceptable manufacturing yields in a cost-effective manner,
or we are required to develop new manufacturing processes to improve our yields,
our operating results would be impaired.
The manufacture of our products involves complex and precise processes.
As a result, it may be difficult to cost-effectively meet our production goals.
In addition, changes in our manufacturing processes or those of our suppliers,
or our suppliers' inadvertent use of defective materials, could significantly
reduce our manufacturing yields, increase our costs and reduce our product
shipments. To increase our gross margin, while offering products at prices
acceptable to customers, we will need to develop new manufacturing processes and
techniques that will involve higher levels of automation.
We could be subjected to litigation regarding intellectual property rights,
which may divert management attention, cause us to incur significant costs or
prevent us from selling our products.
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights in the
networking technologies industry. Many companies aggressively use their patent
portfolios to bring infringement claims against competitors. As a result, we may
be a 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.
23
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights. These claims could result in costly
litigation and the diversion of our technical and management personnel. In the
process of asserting our intellectual property rights, these rights could be
found to be invalid, unenforceable or not infringed. Failure to successfully
assert our intellectual property rights could result in our inability to prevent
our competitors from utilizing our proprietary rights.
If we are unable to protect our proprietary technology, this technology could be
misappropriated, which would make it difficult for us to compete in our
industry.
Our success and ability to compete is dependent in part on our
proprietary technology. We rely primarily on patent, copyright, trademark and
trade secret laws, as well as confidentiality agreements and other methods, to
establish and protect our proprietary rights. Existing patent, copyright,
trademark and trade secret laws afford only limited protection. While we are
pursuing foreign patent protections, the laws of some foreign countries do not
protect the unauthorized use of our proprietary technology and processes to the
same extent as do the laws of the United States, and policing the unauthorized
use of our products is difficult. Many U.S. companies have encountered
substantial infringement problems in some foreign countries. Because we sell
some of our products overseas, we have exposure to foreign intellectual property
risks. Any infringement of our proprietary rights could result in costly
litigation, and any failure to adequately protect our proprietary rights could
result in our competitors offering similar products, potentially resulting in
the loss of some of our competitive advantage and a decrease in our revenue.
If we are unable to generate adequate additional revenue as a result of the
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
24
technologies, our products will no longer be competitive and our revenue will
decline.
The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products on a
timely basis, if at all. Furthermore, we cannot assure you that our new products
will gain market acceptance or that we will be able to respond effectively to
product announcements by competitors, technological changes or emerging industry
standards. Our failure to respond to product announcements, technological
changes or industry changes in standards would likely prevent our products from
gaining market acceptance and harm our competitive position.
Terrorist activities and resulting military and other actions 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, and Mohammad Ghorbanali, our Chief Operating Officer
and Vice President of Technical Operations. Competition for employees in our
industry is intense. We do not have life insurance policies covering any of our
executives. There can be no assurance that we will be successful in retaining
such key personnel, or that we will be successful in hiring replacements or
additional key personnel. Our loss of any key employee, the failure of any key
employee to perform in his or her current position, or the inability of our
officers and key employees to expand, train and manage our employee base 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
25
our growth effectively, we will incur additional expenses that will negatively
impact our operating results.
Our products may have defects that are not detected until full deployment of a
customer's system. Any of these defects could result in a loss of customers,
damage to our reputation and substantial costs.
We design our products for large and complex fiber optic networks, and
our products must be compatible with other components of the network system,
both current and future. We have experienced in the past, and may continue to
experience in the future, defects in our products. Defects in our products or
incompatibilities in our products may appear only when deployed in networks for
an extended period of time. In addition, our products may fail to meet our
customers' design specifications, or our customers may change their design
specifications after the production of our product. A failure to meet our
customers' design specification often results in a loss of the sale due to the
length of time required to redesign the product. We may also experience defects
in third party components that we incorporate into our products. We have 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 2005 fiscal year.
26
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 41.5%, and 42.8% of our revenue for the three months ended March
31, 2005, and 2004, 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. One of
our objectives is 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.
Our limited experience in acquiring other businesses, product lines and
technologies may make it difficult for us to overcome problems encountered in
connection with any acquisition we may undertake.
We expect to review opportunities to buy other businesses, products or
technologies that would enhance our technical capabilities, complement our
current products or expand the breadth of our markets or which may otherwise
offer growth opportunities. Our acquisition of businesses or technologies will
require significant commitment of resources. We may be required to pay for any
acquisition with cash, but we cannot be certain that additional capital will be
available to us on favorable terms, if at all. In lieu of paying cash, we could
issue stock as consideration for an acquisition that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. We have little experience in acquiring other businesses and
technologies. Potential acquisitions also involve numerous risks, including:
o problems assimilating the purchased operations, technologies or
products;
o unanticipated costs associated with the acquisition;
27
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.
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 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
28
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 April 29, 2005 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.
Three members of our board of directors are also executives of Furukawa.
These individuals have obligations to both our company and Furukawa and may have
conflicts of interest with respect to matters potentially or actually involving
or affecting us, such as acquisitions and other corporate opportunities that may
be suitable for both Furukawa and us.
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;
29
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.
The current audit by the Internal Revenue Service of our federal tax returns
could result in adverse adjustments to our financial statements.
In March 2005, the Internal Revenue Service commenced an audit of our
federal tax returns for our 2001 and 2003 fiscal years. At this early stage of
the audit, we are unable to predict whether any adjustments to our tax returns
will be required, and if so, whether these adjustments will be adverse or in
favor of us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are currently exposed to interest rate risk on our investment
portfolio. We do not have any term loan debt as of March 31, 2005.
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 $83.9 million the majority of
which is invested in money market and other interest bearing accounts. In
addition, we have $64.9 million invested in marketable securities, which
represents investments in United States treasury notes and treasury bonds.
As of March 31, 2005, our investment in marketable securities had a
weighted-average time to maturity of approximately 164 days. Marketable
securities represent United States treasury notes and treasury bonds with
maturity on the date purchased of greater than three months. These securities
are classified as held to maturity because we have the intention and ability to
hold the securities to maturity. Gross unrealized gains and losses on
held-to-maturity marketable securities have historically not been material.
Maturities on the date purchased of held-to-maturity marketable debt securities
can 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. Sales to
foreign customers are denominated in U.S. dollars and as such we have no foreign
currency fluctuation risk.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation, as of the end of the period covered by this quarterly
report, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange
Act")) are effective based on their evaluation of these controls and procedures
required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act.
30
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.
PART II.
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. We are
not aware of any other material legal proceedings threatened or pending against
us. From time to time, however, we may become subject to additional legal
proceedings, claims, and litigation arising in the ordinary course of business.
In addition, in the past we have received, and we may continue to receive in the
future, letters alleging infringement of patent or other intellectual property
rights. Our management believes that these letters generally are without merit
and intend to contest them vigorously.
ITEM 2. UNREGESTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2005 Annual Meeting of Stockholders as further discussed
below:
(a) Our 2005 Annual Meeting of Stockholders was held on February 24,
2005 in Woodland Hills, California.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934, as amended, there was no
solicitation in opposition to the management's nominees as listed in the proxy
statement, and all of such nominees were elected.
(c) At the Annual Meeting, the following matters were considered and
voted upon:
(i) The election of seven directors to our board of directors. At
the Annual Meeting, our stockholders elected each of the
following director nominees as directors, to serve on our board
of directors until the next Annual Meeting of Stockholders or
until their successors are duly elected and qualified. The vote
for each director was as follows:
Class A Class B
Class A Shares Class B Shares Class B
Name Votes Withheld Shares Withheld Votes Total Votes
---- ----- -------- ------ -------- ----- -----------
Muoi Van Tran 44,206,457 1,342,762 66,000,000 0 660,000,000 110,206,457
Stewart D. Personick 44,564,834 984,385 66,000,000 0 660,000,000 110,564,834
Naoomi Tachikawa 44,005,281 1,543,938 66,000,000 0 660,000,000 110,005,281
Hobart Birmingham 44,565,934 983,285 66,000,000 0 660,000,000 110,565,934
David Warnes 44,586,264 962,955 66,000,000 0 660,000,000 110,586,264
Yukimasa Shiga 44,218,612 1,330,607 66,000,000 0 660,000,000 110,218,612
Akihiro Fukunaga 44,218,343 1,330,876 66,000,000 0 660,000,000 110,218,343
31
(ii) To ratify the appointment of Deloitte & Touche LLP as our
independent auditors for the fiscal year ending September 30,
2005. At the Annual Meeting, our stockholders approved this
proposal by the votes indicated below:
Class A Class B Class B
Votes Shares Votes Total Votes
--------------- ---------------- ---------------- ----------------
For 45,036,261 66,000,000 660,000,000 111,036,261
Against 2,654 0 0 2,654
Abstain 510,304 0 0 510,304
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number Description
- -------------- --------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL COMMUNICATION PRODUCTS, INC.,
a Delaware corporation
Date: May 13, 2005 By: /s/ Muoi Van Tran
------------- ---------------------
Name: Muoi Van Tran
Title: Chairman of the Board,
Chief Executive Officer and President
Date: May 13, 2005 BY: /s/ Susie Nemeti
------------- ---------------------
Name: Susie Nemeti
Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
33
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.