S-1 1 s-1.txt FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 2000 REGISTRATION NO. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NEW FOCUS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 33-0404910 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2630 WALSH AVENUE SANTA CLARA, CALIFORNIA 95051-0905 (408) 980-8088 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) KENNETH E. WESTRICK PRESIDENT AND CHIEF EXECUTIVE OFFICER 2630 WALSH AVENUE SANTA CLARA, CALIFORNIA 95051-0905 (408) 980-8088 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: ALISANDE M. ROZYNKO, ESQ. JOHN B. MONTGOMERY, ESQ. JUDITH E. BROWN, ESQ. MICHAEL C. DORAN, ESQ. WILSON SONSINI GOODRICH & ROSATI BROBECK PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE 650 PAGE MILL ROAD 2200 GENG ROAD PALO ALTO, CA 94304 PALO ALTO, CA 94303 (650) 493-9300 (650) 424-0160
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3) ---------------------------------------------------------------------------------------------------------------------------- Common stock, $0.001 par value........................ 4,025,000 $117.19 $471,689,750 $124,527 ---------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes 525,000 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, based on the average of the high and low sale prices of the common stock on the Nasdaq National Market on July 26, 2000. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 28, 2000 Filed Pursuant to Rule 424(B)(4) Registration No. 333-31396 3,500,000 Shares [New focus Logo] Common Stock ------------------ We are selling 3,500,000 shares of our common stock. Our common stock is quoted on The Nasdaq Stock Market's National Market under the symbol "NUFO." The last reported sale price of our common stock on the Nasdaq Stock Market's National Market on July 27, 2000 was $105.00 per share. The underwriters have an option to purchase up to 525,000 additional shares from us to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS NEW FOCUS ----------------- ----------------- ----------------- Per Share................................. Total.....................................
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON CHASE H&Q CIBC WORLD MARKETS U.S. BANCORP PIPER JAFFRAY DAIN RAUSCHER WESSELS EPOCH PARTNERS The date of this prospectus is , 2000. 3 [INSIDE FRONT COVER] The inside front cover page of the prospectus starts with the heading "Smart Optics for Networks." To the right of the heading is the name of the company. Under the heading is a diagram of a typical optical network containing terminals represented by blue boxes with text "Optical Networking Equipment" on them, routers represented by white cylinders with text "ROUTERS" on them and fiber amplifiers with text "Fiber Amplifiers" next to them represented by small rectangular green boxes. These elements in the network are connected by red and black lines representing fiber optic interconnections. Underneath this diagram are 5 circles each containing a photograph of a New Focus product. Under the first circle is text "Fiber Amplifier Products", under the second "Wavelength Management Products", under the third "High-Speed Opto-Electronics", under the fourth "Tunable Laser Modules" and under the fifth "Advanced Photonic Tools". From each of these circles is a black dotted line that goes to the network element in which each of these products are used. [INSIDE BACK COVER] The inside back cover page of the prospectus at the top has the name of the company. To the right of the entire page are 5 photographs of New Focus products. To the left of each of photograph is text describing the product. The first product has the heading "Fiber Amplifier Products". Under this heading are 4 bullet points that read "For advanced fiber amplifiers Extended wavelength range for more channels Low loss and high pump power for longer reach Compact size" The second product has the heading "Wavelength Management Products". Under this heading are 4 bullet points that read "For management of many channels Efficient processing of densely packed channels Requires no active cooling Flexibility for enabling new services" The third product has the heading "High-Speed Opto-Electronics". Under this heading are 3 bullet points that read "For connecting network equipment within a site High data rate of 10 gigabits per second Compact, efficient and cost-effective" The fourth product has the heading "Tunable Laser Modules". Under this heading are 4 bullet points that read "For testing fiber optic products Rapid and precise for high throughput Rugged and reliable design" The fifth product has the heading "Advanced Photonic Tools". Under this heading is 1 bullet point that reads "Enables development and manufacturing of next-generation fiber optic products" 4 ------------------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 7 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS.................. 19 USE OF PROCEEDS....................... 20 PRICE RANGE OF COMMON STOCK........... 20 DIVIDEND POLICY....................... 20 CAPITALIZATION........................ 21 DILUTION.............................. 22 SELECTED CONSOLIDATED FINANCIAL DATA................................ 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 24
PAGE ---- BUSINESS.............................. 35 MANAGEMENT............................ 50 CERTAIN TRANSACTIONS.................. 61 PRINCIPAL STOCKHOLDERS................ 65 DESCRIPTION OF CAPITAL STOCK.......... 67 SHARES ELIGIBLE FOR FUTURE SALE....... 69 UNDERWRITING.......................... 71 NOTICE TO CANADIAN RESIDENTS.......... 74 LEGAL MATTERS......................... 75 EXPERTS............................... 75 ADDITIONAL INFORMATION................ 75 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1
------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5 PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. NEW FOCUS, INC. We design, manufacture and market innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks(TM) brand. We leverage our ten years of experience in developing advanced optical products to enable networking solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. Our high performance products are compact, consume less power and are designed to be manufacturable in high volumes. We sell our products to over 50 customers including Agilent Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks Corporation. The increase in data traffic, coupled with demand for enhanced services and improved connection times, has increased demand for communications networks capable of handling large volumes of traffic. Network service providers have had difficulty in meeting this increased demand due to significant constraints of the existing communications infrastructure, which was originally designed to carry only voice traffic. To alleviate this bottleneck, network service providers are increasingly deploying next-generation optical networks. Next-generation optical networks will depend on systems and components that enable extremely long reach, high data rates, increased channel counts and new services at a low network cost of ownership. The optical networking market is one of the fastest growing portions of the telecommunications market. Ryan, Hankin & Kent estimates that the market for fiber optic components was approximately $6.6 billion in 1999 and is expected to grow to over $22.5 billion by 2003. Our Smart Optics for Networks(TM) products enable systems providers to meet the dynamic demands of next-generation optical networks. Our fiber amplifier products are widely deployed in optical networks to enable the transmission of an increased amount of information at very high speeds over extended distances. Fiber amplifiers enhance the strength of optical signals. Our wavelength management products, which process and control the many wavelengths on an optical fiber, enable network equipment providers to increase the number of channels transmitted and to accurately, efficiently and reliably manage a vast number of optical signals. We offer high-speed opto-electronic products, or products that process both optical and electrical signals, that enable interconnections between equipment in a network service provider's site at 10 gigabits per second. Our high performance tunable laser modules, or laser modules that have a dynamically adjustable wavelength, enable rapid development, manufacturing and testing of fiber optic components and systems. We also offer advanced photonics, or optical, tools that enable network service and equipment providers to develop their next-generation products. These products leverage our core competencies for a variety of optical networking applications. We are committed to designing and manufacturing high quality products that have been thoroughly tested for reliability and performance. We perform extensive in-house testing to industry accepted Telcordia, or Bellcore, standards and have also been recommended for ISO-9001 quality certification. Our in-house manufacturing capabilities include optical assembly, integration and testing of our fiber optic products and advanced photonics tools. To meet the growing demand for our products, we are continuing to expand our manufacturing capacity while leveraging our capabilities in rapid prototyping, automation, proprietary tools and processes. 3 6 Our objective is to be the leading provider of innovative, fiber optic products that enable our customers to deploy and optimize next-generation optical networks. Key elements of our strategy include: - leveraging our position as a leading market innovator; - focusing our research and development efforts on continuing to broaden our product offerings; - collaborating with leading innovative systems companies; - continuing to expand manufacturing capacity and improve process efficiency; and - pursuing strategic acquisitions. We were incorporated in April 1990 in California. We reincorporated in Delaware in May 2000. Our principal executive offices are located at 2630 Walsh Avenue, Santa Clara, California 95051, and our telephone number is (408) 980-8088. Our web site is located at "www.newfocus.com." Information contained on our web site does not constitute a part of this prospectus. "New Focus," our logo, and "Smart Optics for Networks" are some of the trademarks, trade names or service marks that we use. This prospectus contains other trademarks and trade names of our company and other entities. 4 7 THE OFFERING Common stock offered by New Focus..... 3,500,000 shares Common stock to be outstanding after this offering......................... 63,121,717 shares Use of proceeds....................... General corporate purposes, including working capital, capital expenditures, and potential acquisitions. Nasdaq National Market symbol......... NUFO The total number of outstanding shares of our common stock as of July 2, 2000 is 59,621,717, excluding: - 5,250,000 shares issuable upon exercise of outstanding stock options with a weighted average exercise price of $8.57 per share; - 2,855,000 shares reserved for future issuance under our stock plans; and - 170,000 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.35 per share. Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. 5 8 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) You should be aware that we recently changed our fiscal year end to December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers to the twelve-month period ended March 31, 1999. Fiscal year 1998 refers to the twelve-month period ended March 31, 1998. Beginning in 2000, we maintain a fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to December 31.
SIX-MONTH PERIOD NINE-MONTH PERIOD ENDED ENDED FISCAL YEAR ENDED MARCH 31, --------------------------- ------------------- ------------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, JULY 2, 1996 1997 1998 1999 1998 1999 1999 2000 ------- ------- ------- ------- ------------ ------------ -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues...................... $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 9,322 $ 24,233 Cost of net revenues.............. 5,095 5,946 8,186 9,225 6,625 12,525 5,421 23,842 Gross profit...................... 5,299 4,597 7,296 8,060 5,919 5,576 3,901 391 Operating income (loss)........... 678 (1,449) 27 (4,666) (3,168) (7,594) (2,870) (27,523) Net income (loss)................. 457 (1,661) (286) (4,971) (3,375) (7,677) (3,063) (26,588) Historical net income (loss) per share: Basic(1)........................ $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======= ======= ======= ======== Diluted(1)...................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======= ======= ======= ======== Weighted average shares: Basic(1)...................... 1,011 1,096 1,148 2,284 2,245 2,468 2,413 19,546 ======= ======= ======= ======= ======= ======= ======= ======== Diluted(1).................... 18,768 1,096 1,148 2,284 2,245 2,468 2,413 19,546 ======= ======= ======= ======= ======= ======= ======= ======== Pro forma net loss per share: Basic and diluted(1)............ $ (0.24) $ (0.13) $ (0.52) ======= ======= ======== Weighted average shares(1)...... 32,223 24,191 51,000 ======= ======= ========
JULY 2, 2000 -------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 94,998 Working capital........................................... 103,166 Total assets.............................................. 140,239 Long term debt, less current portion...................... 239 Total stockholders' equity................................ 126,391
------------------------- (1) See note 10 of notes to consolidated financial statements for an explanation of the determination of the number of shares used in completing per share data. (2) The as adjusted amounts above give effect to the sale of shares of common stock in this offering at an offering price of $ per share, less estimated underwriting discounts and commissions and estimated offering expenses. 6 9 RISK FACTORS This offering and any investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our common stock. RISKS RELATED TO OUR FINANCIAL RESULTS WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE FUTURE. We incurred net losses of $26.6 million for the six-month period ended July 2, 2000, $7.7 million for the nine-month period ended December 31, 1999, $5.0 million for our fiscal year ended March 31, 1999, and $286,000 for our fiscal year ended March 31, 1998. As of July 2, 2000, we had an accumulated deficit of $42.1 million. We may not be able to sustain the recent growth in our revenues, and we may not realize sufficient revenues to achieve or maintain profitability. We also expect to incur significant product development, sales and marketing and administrative expenses, and, as a result, we will need to generate increased revenues to achieve profitability. Even if we achieve profitability, given the competition in, and the evolving nature of, the optical networking market, we may not be able to sustain or increase profitability on a quarterly or annual basis. As a result, we will need to generate significantly higher revenues while containing costs and operating expenses if we are to achieve profitability. WE HAVE ONLY RECENTLY BEGUN SELLING FIBER OPTIC PRODUCTS TO THE TELECOMMUNICATIONS INDUSTRY, AND WE MAY NOT ACCURATELY PREDICT OUR REVENUES FROM THESE PRODUCTS, WHICH COULD CAUSE QUARTERLY FLUCTUATIONS IN OUR NET REVENUES AND RESULTS OF OPERATIONS AND MAY RESULT IN VOLATILITY OR DECLINES IN OUR STOCK PRICE. We have only recently begun selling our fiber optic products to the telecommunications industry, and we have only generated revenues from the sale of these products since March 1999. Because we have only recently begun to sell these products, we may be unable to accurately forecast our revenues from sales of these products, and we have limited meaningful historical financial data upon which to plan future operating expenses. Many of our expenses are fixed in the short term, and we may not be able to quickly reduce spending if our revenue is lower than we project. Major new product introductions will also result in increased operating expenses in advance of generating revenues, if any. Therefore, net losses in a given quarter could be greater than expected. We may not be able to address the risks associated with our limited operating history in an emerging market and our business strategy may not be sustainable. Failure to accurately forecast our revenues and future operating expenses could cause quarterly fluctuations in our net revenues and may result in volatility or a decline in our stock price. WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF THESE CUSTOMERS OR A SIGNIFICANT REDUCTION IN SALES TO THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR REVENUES. In the three-month period ended July 2, 2000, Agilent Technologies, Corvis Corporation, Alcatel USA and Corning Incorporated accounted for 14.2%, 11.6%, 11.0% and 10.7% of our net revenues, respectively. In the nine-month period ended December 31, 1999, none of our customers accounted for more than 10% of our net revenues. We anticipate that our operating results will continue to depend on sales to a relatively small number of customers. The loss of any of these customers or a significant reduction in sales to these customers could adversely affect our revenues. SALES TO ANY SINGLE CUSTOMER MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER, WHICH MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE. Customers in our industry tend to order large quantities of products on an irregular basis. This means that customers who account for a significant portion of our net revenue in one quarter may not place any orders in the succeeding quarter. These ordering patterns may result in significant quarterly fluctuations in our revenues and operating results. 7 10 If current customers do not continue to place significant orders, we may not be able to replace these orders with orders from new customers. None of our current customers have any minimum purchase obligations, and they may stop placing orders with us at any time, regardless of any forecast they may have previously provided. For example, any downturn in our customers' business could significantly decrease sales of our products to these customers. The loss of any of our key customers or a significant reduction in sales to these customers could significantly reduce our net revenues. RISKS RELATED TO THE OPTICAL NETWORKING INDUSTRY IF THE INTERNET DOES NOT CONTINUE TO EXPAND AND OPTICAL NETWORKS ARE NOT DEPLOYED TO SATISFY THE INCREASED BANDWIDTH REQUIREMENTS AS WE ANTICIPATE, SALES OF OUR PRODUCTS MAY DECLINE, AND OUR NET REVENUES MAY BE ADVERSELY AFFECTED. Our future success depends on the continued growth of the Internet as a widely-used medium for commerce and communications, the continuing increase in the amount of data transmitted over communications networks, or bandwidth, and the growth of optical networks to meet the increased demand for bandwidth. If the Internet does not continue to expand as a widespread communications medium and commercial marketplace, the need for significantly increased bandwidth across networks and the market for optical networking products may not continue to develop. Future demand for our products is uncertain and will depend to a great degree on the continued growth and upgrading of optical networks. If this growth does not continue, sales of our products may decline, which would adversely affect our revenues. THE OPTICAL NETWORKING MARKET IS NEW AND UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE DEMAND FOR OUR PRODUCTS MAY DECLINE, WHICH WOULD ADVERSELY IMPACT OUR REVENUES. The optical networking market is new and characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Because this market is new, it is difficult to predict its potential size or future growth rate. Widespread adoption of optical networks is critical to our future success. Potential end-user customers who have invested substantial resources in their existing copper lines or other systems may be reluctant or slow to adopt a new approach, like optical networks. Our success in generating revenues in this emerging market will depend on: - maintaining and enhancing our relationships with our customers; - the education of potential end-user customers and network service providers about the benefits of optical networks; and - our ability to accurately predict and develop our products to meet industry standards. If we fail to address changing market conditions, the sales of our products may decline, which would adversely impact our revenues. IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICE OF OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER. We have experienced decreases in the average selling prices of some of our products. We anticipate that as products in the optical networking market become more commoditized, the average selling price of our products may decrease in response to competitive pricing pressures, new product introductions by us or our competitors or other factors. If we are unable to offset the anticipated decrease in our average selling prices by increasing our sales volumes or product mix, our net revenues and gross margins will decline. In addition, to maintain or improve our gross margins, we must continue to reduce the manufacturing cost of our products and we must develop and introduce new products and product enhancements with higher margins. If we cannot maintain or improve our gross margins, our financial position may be harmed and our stock price may decline. 8 11 RISKS RELATED TO OUR BUSINESS IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY NOT SUCCEED. Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We continue to expand the scope of our operations domestically and internationally and have increased the number of our employees substantially in the past year. At June 30, 1999, we had a total of 167 employees and at July 2, 2000, we had a total of 888 employees. In addition, we plan to hire a significant number of employees over the next few quarters. We currently operate facilities in Santa Clara, California, San Jose, California, Madison, Wisconsin, Middleton, Wisconsin and Shenzhen, China and are in the process of establishing additional manufacturing facilities in San Jose, California and Shenzhen, China. In May 2000, we entered into a lease for 130,000 square feet in San Jose, California to facilitate our anticipated growth over the next twelve months. If we outgrow our current facilities in Northern California, we will need to locate and obtain additional space. The commercial real estate market in Northern California is extremely competitive and we may not be able to obtain additional needed space on reasonable terms, or at all. Our failure to obtain additional space could adversely impact our ability to expand our business and operations and increase our revenues. The increase in employees and the growth in our operations, combined with the challenges of managing geographically-dispersed operations, has placed, and will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures and continue to expand, train and manage our work force worldwide. The failure to effectively manage our growth could adversely impact our ability to manufacture and sell our products, which could reduce our revenues. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS IN A TIMELY MANNER. Our future success depends on our ability to anticipate our customers' needs and develop products that address those needs. Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with the efforts of our suppliers to rapidly achieve volume production. If we fail to effectively transfer production processes, develop product enhancements or introduce new products that meet the needs of our customers as scheduled, our net revenues may decline. COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS, OR CAUSE US TO LOSE MARKET SHARE. Competition in the optical networking market in which we compete is intense. We face competition from public companies, including JDS Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation. Many of our competitors are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion, sale and support of their products. In addition, several of our competitors have large market capitalizations or cash reserves, and are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. For example, JDS Uniphase Corporation recently acquired E-Tek Dynamics and announced the acquisition of SDL, Inc. Any of these acquisitions could give our competitors a strategic advantage. For example, if significant customers are acquired by our competitors, these customers may reduce the amount of products they purchase from us. Alternatively, some of our competitors may spin-out new companies in the optical networking components market. For example, Lucent Technologies recently announced that it will spin-off its microelectronics business, which includes the optoelectronics components and integrated circuits division. These companies may compete more aggressively than their former parent companies due to their greater dependence on our markets. Many of our potential competitors have significantly more established sales and customer support organizations than we do. In addition, many of our competitors have much greater name recognition, more extensive customer bases, better developed distribution channels and broader product offerings than we have. These companies can leverage their customer bases and broader product offerings and adopt 9 12 aggressive pricing policies to gain market share. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We expect to encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins and loss of market share. For a more detailed discussion of our competition, see "Business -- Competition." WE HAVE LIMITED PRODUCT OFFERINGS, AND IF DEMAND FOR THESE PRODUCTS DECLINES OR FAILS TO DEVELOP AS WE EXPECT OUR NET REVENUES WILL DECLINE. We derive a substantial portion of our net revenues from a limited number of products. Specifically, in the six-month period ended July 2, 2000, we derived approximately 25% and 23%, respectively, of our net revenues from our circulators and tunable laser modules (for test and measurement). We expect that net revenues from a limited number of products will continue to account for a substantial portion of our total net revenues. Continued and widespread market acceptance of these products is critical to our future success. We cannot assure you that our current products will achieve market acceptance at the rate at which we expect, or at all, which could reduce our net revenues. WE MUST EXPAND SUBSTANTIALLY OUR SALES ORGANIZATION IN ORDER TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS OR OUR REVENUES MAY NOT INCREASE. The sale of our products requires long and involved efforts targeted at several key departments within our prospective customers' organizations. Sales of our products require the prolonged efforts of executive personnel and specialized systems and applications engineers working together with a small number of dedicated salespersons. Currently, our sales organization is limited. We will need to grow our sales force in order to increase market awareness and sales of our products. Competition for these individuals is intense, and we might not be able to hire the kind and number of sales personnel and applications engineers we need. If we are unable to expand our sales operations, we may not be able to increase market awareness or sales of our products, which would prevent us from increasing our revenues. OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND MAY CONTAIN DEFECTS THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED, WHICH COULD DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS. Some of our products are designed to be deployed in large and complex optical networks. Because of the nature of these products, they can only be fully tested for reliability when deployed in networks for long periods of time. Our fiber optic products may contain undetected defects when first introduced or as new versions are released, and our customers may discover defects in our products only after they have been fully deployed and operated under peak stress conditions. In addition, our products are combined with products from other vendors. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things: - loss of customers; - damage to our brand reputation; - failure to attract new customers or achieve market acceptance; - diversion of development and engineering resources; and - legal actions by our customers. The occurrence of any one or more of the foregoing factors could cause our net revenues to decline. THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK PRICE. The timing of our revenue is difficult to predict because of the length and variability of the sales and implementation cycles for our products. We do not recognize revenue until a product has been shipped to 10 13 a customer, all significant vendor obligations have been performed and collection is considered probable. Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products and our manufacturing process. This customer evaluation and qualification process frequently results in a lengthy initial sales cycle of up to one year or more. In addition, some of our customers require that our products be subjected to Telcordia qualification testing, which can take up to nine months or more. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customer's needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. Because of the evolving nature of the optical networking market, we cannot predict the length of these sales and development cycles. As a result, these long sales cycles may cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter, which could cause volatility in our stock price. WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL OR RETAIN EXISTING PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED. Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel. None of our officers or key employees are bound by an employment agreement for any specific term and these individuals may terminate their employment at any time. In addition, we do not have "key person" life insurance policies covering any of our employees. In order to implement our business plan, we must hire a significant number of additional employees in 2000, particularly engineering, sales and manufacturing personnel. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful. Competition for highly skilled personnel is intense, especially in the San Francisco Bay Area. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, which could adversely impact our ability to manufacture and sell our products. ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION. We have in the past made strategic acquisitions of intellectual property and anticipate that in the future, as part of our business strategy, we will continue to make strategic acquisitions of complementary companies, products or technologies. In the event of any future acquisitions, we could: - issue stock that would dilute our current stockholders' percentage ownership; - incur debt; - assume liabilities; or - incur expenses related to in-process research and development, amortization of goodwill and other intangible assets. These acquisitions also involve numerous risks, including: - problems combining the acquired operations, technologies or products; - unanticipated costs or liabilities; - diversion of management's attention from our core business; - adverse effects on existing business relationships with suppliers and customers; - risks associated with entering markets in which we have no or limited prior experience; and - potential loss of key employees, particularly those of the acquired organizations. We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, which may harm our business. 11 14 WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. For the six-month period ended July 2, 2000, 30.3% of our net revenues were from international sales. We plan to increase our international sales activities. Our international sales will be limited if we cannot establish relationships with international distributors, establish additional foreign operations, expand international sales channel management, hire additional personnel and develop relationships with international service providers. Even if we are able to successfully continue international operations, we may not be able to maintain or increase international market demand for our products. Our international operations are subject to the following risks: - greater difficulty in accounts receivable collection and longer collection periods; - difficulties and costs of staffing and managing foreign operations; - the impact of recessions in economies outside the United States; - unexpected changes in regulatory requirements; - sudden and unexpected reductions in demand in particular countries in response to exchange rate fluctuations; - certification requirements; - reduced protection for intellectual property rights in some countries; - potentially adverse tax consequences; and - political and economic instability. While we expect our international revenues and expenses to be denominated predominantly in U.S. dollars, a portion of our international revenues and expenses may be denominated in foreign currencies in the future. Accordingly, we could experience the risks of fluctuating currencies and may choose to engage in currency hedging activities to reduce these risks. WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES AND LITIGATION, WHICH COULD SUBJECT US TO SIGNIFICANT LIABILITY, DIVERT THE TIME AND ATTENTION OF OUR MANAGEMENT AND PREVENT US FROM SELLING OUR PRODUCTS. We anticipate, based on the size and sophistication of our competitors and the history of rapid technological advances in our industry, that several competitors may have patent applications in progress in the United States or in foreign countries that, if issued, could relate to our product. If such patents were to be issued, the patent holders or licensees may assert infringement claims against us or claim that we have violated other intellectual property rights. These claims and any resulting lawsuits, if successful, could subject us to significant liability for damages and invalidate our proprietary rights. The lawsuits, regardless of their merits, could be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the following, any of which could harm our business: - stop selling, incorporating or using our products that use the disputed intellectual property; - obtain from third parties a license to sell or use the disputed technology, which license may not be available on reasonable terms, or at all; or - redesign our products that use the disputed intellectual property. 12 15 WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S PATENT, CONTRACTUAL AND TRADE SECRET RIGHTS, AND IF WE ARE UNSUCCESSFUL IN DEFENDING THIS CLAIM, WE MAY HAVE TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS NON-INFRINGING AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES. U.S.A. Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., which was recently acquired by JDS Uniphase, filed a complaint against us and some of our employees in December 1999 in the United States District Court for the Northern District of California, alleging, among other things, that we have infringed one of their patents, interfered with their contractual rights and misappropriated their trade secrets. We cannot be certain that we will be successful in our defense. If we are unsuccessful in defending this action, any remedies awarded to Kaifa may harm our business. Furthermore, defending this action will be costly and divert management's attention regardless of whether we successfully defend the action. For more information about current legal proceedings, see "Business -- Legal Proceedings." WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT MAY SUBSTANTIALLY INCREASE OUR COSTS AND HARM OUR BUSINESS. We may from time to time become involved in various lawsuits and legal proceedings. For example, in March 2000, a former employee filed a complaint against us. We believe that this claim is without merit and we have not accrued for the possible unfavorable outcome of this litigation. However, litigation is subject to inherent uncertainties, and an adverse result in this or other matters that may arise from time to time may adversely impact our operating results or financial condition. Any litigation to which we are subject could require significant involvement of our senior management and may divert management's attention from our business and operations. For more information about current legal proceedings, see "Business -- Legal Proceedings." RISKS RELATED TO MANUFACTURING OUR PRODUCTS WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS. We typically purchase our components and materials through purchase orders, and in general we have no guaranteed supply arrangements with any of these suppliers. We currently purchase several key components and materials used in the manufacture of our products from single or limited source suppliers. For example, we purchase a specialized type of garnet crystal from Mitsubishi International Corporation, the world's only commercial supplier of this type of garnet crystal. In addition, Fujian Casix Laser, Inc., or Casix, has supplied substantially all of our yttrium vanadate crystals to date. JDS Uniphase Corporation, one of our competitors, recently acquired Casix. We have no agreements with Casix to continue to supply us with yttrium vanadate crystals other than purchase orders which have been accepted by Casix. In May 2000, we entered into a three-year supply agreement with Fuzhou Koncent Communication, Inc., or Koncent, formerly Fuzhou Conet Communication, Inc., to supply us with yttrium vanadate crystals. Koncent has only recently begun production of these crystals, and we cannot assure you that Koncent will be able to manufacture crystals that meet our specifications or will be able to meet our anticipated supply requirements. If our relationship with Casix or Koncent, or both, terminates, we may not be able to find another manufacturer that can meet our specifications and anticipated supply requirements, in which case, we may experience difficulty identifying alternative sources of supply for certain components used in our products. In addition, we may need to make advance payments against future orders in order to secure supply. For example, we have agreed to advance Koncent RMB 29 million or approximately U.S.$3.5 million in conjunction with our supply agreement with Koncent, of which U.S. $2.5 million has been advanced to date. We are also currently negotiating to expand our supply agreement with Koncent, which could require further advances. If we have to advance payment to Koncent or to other suppliers, this will reduce our working capital. We may fail to obtain required components in a timely manner in the future. We would experience further delays from evaluating and testing the products of these potential alternative suppliers. Furthermore, financial or other difficulties faced by these suppliers or significant 13 16 changes in demand for these components or materials could limit the availability. Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders. IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS. We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components or materials at a given time. For substantial increases in production levels, some suppliers may need six months or more lead time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our revenues. IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED AND OUR REVENUES MAY SUFFER. The manufacture of our products involves complex and precise processes. Our manufacturing costs are relatively fixed, and, thus, manufacturing yields are critical to our results of operations. Changes in our manufacturing processes or those of our suppliers, or the use of defective components or materials, could significantly reduce our manufacturing yields and product reliability. In addition, we may experience manufacturing delays and reduced manufacturing yields upon introducing new products to our manufacturing lines. We have experienced, and continue to experience, lower than targeted product yields, which have resulted in delays of customer shipments, lost revenues and impaired gross margins. In order to improve our gross margins, we may need to develop new, more cost-effective manufacturing processes and techniques, and if we fail to do so, our gross margins may be adversely affected. IF WE ARE UNABLE TO EXPAND OUR MANUFACTURING CAPACITY IN A TIMELY MANNER, OR IF WE DO NOT ACCURATELY PROJECT DEMAND, WE WILL HAVE EXCESS CAPACITY OR INSUFFICIENT CAPACITY, EITHER OF WHICH WILL SERIOUSLY HARM OUR NET REVENUES. We currently manufacture substantially all of our products in our facilities located in Santa Clara, and San Jose, California. We have begun to manufacture certain of our products at our first smaller facility in China. We plan to devote significant resources to expand our manufacturing capacity at our second facility in San Jose, California and our significantly larger second facility in Shenzhen, China. We are in the process of fitting up both of these new facilities in San Jose and Shenzhen and any delay in the fit up of these facilities could result in delays of product delivery. We could experience difficulties and disruptions in the manufacture of our products while we transition to these new facilities, which could prevent us from achieving timely delivery of products and could result in lost revenues. We could also face the inability to procure and install the necessary capital equipment, a shortage of raw materials we use in our products, a lack of availability of manufacturing personnel to work in our facilities, difficulties in achieving adequate yields from new manufacturing lines and an inability to predict future order volumes. We may experience delays, disruptions, capacity constraints or quality control problems in our manufacturing operations, and, as a result, product shipments to our customers could be delayed, which would negatively impact our revenues, competitive position and reputation. For example, we have experienced a disruption in the manufacture of some of our products due to changes in our manufacturing processes, which resulted in reduced manufacturing yields and delays in the shipment of our products. If we experience similar disruptions in the future, it may result in lower yields or delays of our product shipments, which could 14 17 adversely affect our revenues, gross margins and results of operations. If we are unable to expand our manufacturing capacity in a timely manner, or if we do not accurately project demand, we will have excess capacity or insufficient capacity, either of which will seriously harm our profitability. For a more detailed discussion about our manufacturing, see "Business -- Manufacturing." OUR MANUFACTURING OPERATIONS IN CHINA SUBJECT US TO RISKS INHERENT IN DOING BUSINESS IN CHINA, WHICH MAY HARM OUR MANUFACTURING CAPACITY AND OUR NET REVENUES. We have a manufacturing facility located in Shenzhen, China that became operational in June 2000. In addition, in July 2000, we acquired a second facility in Shenzhen, China. These facilities and our ability to operate the facilities may be adversely affected by changes in the laws and regulations of the People's Republic of China, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. These manufacturing facilities are located on land leased from China's government by Shenzhen New and High-Tech Village Development Co. and the Shenzhen Libaoyi Industry Development Co., Ltd. under land use certificates and agreements each with terms of 50 years. We lease one of our manufacturing facilities from Shenzhen New and High-Tech Village Development Co. under a lease agreement that will expire in November 2002, subject to our option to renew for an additional three-year period. We purchased approximately 43% of the second facility in Shenzhen, China and leased the remainder of the facility for a term of five years from Shenzhen Libaoyi Industry Development Co., Ltd. with an option to purchase the leased portion of the facility during the first three years of the lease term. Our assets and facilities located in China are subject to the laws and regulations of China and our results of operations in China are subject to the economic and political situation there. We believe that our operations in Shenzhen, China are in compliance with China's applicable legal and regulatory requirements. However, there can be no assurance that China's central or local governments will not impose new, stricter regulations or interpretations of existing regulations which would require additional expenditures. China's economy differs from the economies of many countries in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position, among others. In the past, China's economy has been primarily a planned economy subject to state plans. Since 1978, China's government has been reforming its economic and political systems. Reforms of this kind have resulted in significant economic growth and social change. We can not assure you that China's policies for economic reforms will be consistent or effective. Our results of operations and financial position may be harmed by changes in the political, economic or social conditions in China. We plan to export substantially all the products manufactured at our facilities in China. Accordingly, upon application to and approval by the relevant government authorities, we will not be subject to certain of China's taxes and are exempt from customs duties on imported components or materials and exported products. We are required to pay income tax in China, subject to certain tax holidays. We may become subject to other taxes in China or may be required to pay customs duties in the future. In the event that we are required to pay other taxes in China or customs duties, our results of operations could be materially and adversely affected. To successfully meet our overall production goals, we will have to coordinate and manage effectively between our facilities in the United States and in China. We have limited experience in coordinating and managing production facilities that are located on different continents or in the transfer of manufacturing operations from one facility to another. Our failure to successfully coordinate and manage multiple sites on different continents or to transfer our manufacturing operations could seriously harm overall production. IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS, OUR OPERATING RESULTS COULD SUFFER. Generally, customers do not purchase our products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as 15 18 well as each new manufacturing line, must pass through varying levels of qualification with our customers. Customers may require that we be registered under international quality standards, such as ISO 9001. This customer qualification process determines whether our manufacturing lines meet the customers' quality, performance and reliability standards. If there are delays in qualification of our products, our customers may drop the product from a long-term supply program, which would result in significant lost revenue opportunity over the term of that program. RISKS RELATED TO OUR INTELLECTUAL PROPERTY WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD SERIOUSLY HARM OUR ABILITY TO USE OUR PROPRIETARY TECHNOLOGY TO GENERATE REVENUE. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot assure you that our patent applications will be approved, that any patents that may issue will protect our intellectual property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. Our contract with Agilent provides Agilent the right to manufacture our products using our proprietary intellectual property if Agilent terminates the contract for cause, including if we are unable to supply specified quantities of our products to Agilent. The contract contains a confidentiality provision designed to prevent misappropriation of our intellectual property. However, we cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. For a more detailed discussion about our intellectual property, see "Business -- Intellectual Property." WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE UNSUCCESSFUL IN DEFENDING THIS CLAIM, WE MAY HAVE TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS NON-INFRINGING AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES. U.S.A. Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., which was recently acquired by JDS Uniphase, filed a complaint against us in December 1999 in the United States District Court for the Northern District of California, alleging, among other things, that we have infringed some of their intellectual property rights. We cannot be certain that we will be successful in our defense. If we are unsuccessful in defending this action, any remedies awarded to Kaifa may harm our business. Furthermore, defending this action will be costly and divert management's attention regardless of whether we successfully defend the action. On February 23, 2000, we filed a motion to dismiss several of Kaifa's claims. On the same date, our employees named in the complaint also filed motions to dismiss Kaifa's complaints against them. On April 28, 2000, Kaifa voluntarily dismissed its claims against two of the individual defendants. On May 3, 2000, the Court dismissed Kaifa's claim against us for negligent interference with contract with prejudice. Also on May 3, 2000, the Court dismissed Kaifa's claims for trade secret misappropriation and unfair competition against an individual defendant. On June 2, 2000, we answered the complaint, denying any liability, asserting various affirmative defenses and seeking a declaration that the patent is not infringed by us, is invalid and/or is unenforceable. Currently, the parties are engaged in fact discovery. For more information about current legal proceedings, see "Business -- Legal Proceedings." IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. We regard substantial elements of our technology as proprietary and attempt to protect them by relying on patent, trademark, service mark, copyright and trade secret laws. We also rely on confidentiality procedures and contractual provisions with our employees, consultants and corporate partners. The steps we take to protect our intellectual property may be inadequate, time consuming and expensive. 16 19 Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property, which could harm our business. It may be necessary to litigate to enforce our patents, copyrights, and other intellectual property rights, to protect our trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation can be time consuming, distracting to management, expensive and difficult to predict. Our failure to protect or enforce our intellectual property could have an adverse effect on our business, financial condition, prospects and results of operation. For more information about current legal proceedings, see "Business -- Legal Proceedings." NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND SELL OUR PRODUCTS. From time to time we may be required to license technology from third parties to develop new products or product enhancements. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, or at all. The inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm our ability to manufacture and sell our products. RISKS RELATED TO THIS OFFERING WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, AND OUR ABILITY TO GROW MAY BE LIMITED AS A RESULT. We have accelerated the expansion of our manufacturing capacity and our capital expenditures in connection with this expansion, which has increased our need for working capital. We believe that the anticipated net proceeds of this offering, together with our existing cash balances, will be sufficient to meet our capital requirements at least through the next 12 months. However, if we are unable to raise a substantial portion of the anticipated proceeds from this offering, we will be required to seek additional funding prior to that time. If we are required, to raise additional funds, we may not be able to do so on favorable terms, or at all. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which would seriously harm our business. WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE, WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE. This offering price may vary from the market price of our common stock after the offering. If you purchase shares of common stock, you may not be able to resell those shares at or above the offering price. The market price of our common stock has fluctuated significantly since our initial public offering in May 2000 and we expect that our common stock price will fluctuate significantly in the future due to: - any deviations in our net revenues, gross margins or net losses from levels expected by securities analysts; - changes in financial estimates by securities analysts; - changes in market valuations of other optical networking companies; and - future sales of common stock or other securities. In addition, the Nasdaq Stock Market's National Market has experienced extreme volatility that has often been unrelated to the performance of particular companies. Future market fluctuations may cause our stock price to fall regardless of our performance. 17 20 INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN OUR CORPORATE CONTROL AND CAUSE OUR STOCK PRICE TO DECLINE. Upon completion of this offering and assuming no exercise of the underwriters' over-allotment option, our executive officers, directors and principal stockholders who hold 5% or more of the outstanding common stock and their affiliates will beneficially own, in the aggregate, approximately 55.7% of our outstanding common stock based on shares outstanding as of July 2, 2000. As a result, these stockholders will be able to continue to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us and cause our stock price to decline. For a full presentation of the equity ownership of these stockholders, see "Principal Stockholders." PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND CHANGE OF CONTROL AGREEMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE. Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: - authorizing our board of directors to issue preferred stock without stockholder approval; - providing for a classified board of directors with staggered, three-year terms; - prohibiting cumulative voting in the election of directors; - requiring super-majority voting to effect significant amendments to our certificate of incorporation and bylaws; - eliminating the ability of stockholders to call special meetings; - prohibiting stockholder actions by written consent; and - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. Certain provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock to decline. See "Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions." In addition, we have a change of control agreement with one of our officers and option agreements with certain officers which have change of control provisions, which may discourage, delay or prevent someone from acquiring or merging with us. For more information about the change of control agreement, see "Management -- Employment and Change-of-Control Agreements." THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL. Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market beginning November 13, 2000. Sales of a substantial number of shares of our common stock after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. You should read "Shares Eligible for Future Sale" for a full discussion of the shares that may be sold in the public market in the future. 18 21 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. In addition, these forward-looking statements include, but are not limited to, statements regarding the following: - the expansion of our manufacturing capacity; - improvement of our manufacturing efficiencies; - anticipated development and release of new products; - anticipated sources of future revenues; - anticipated expenditures for research and development, sales and marketing and general and administrative expenses; and - the adequacy of our capital resources to fund our operations. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. 19 22 USE OF PROCEEDS We expect to receive net proceeds of approximately $ from the sale of the shares of common stock or approximately $ if the underwriters' over-allotment option is exercised in full, at a public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering primarily for general corporate purposes, including capital expenditures of approximately $45.0 million in the next six months, primarily for the purchase of equipment and the acquisition of and improvements to our United States and China facilities, and working capital. The amounts we actually expend for working capital and other purposes may vary significantly and will depend on a number of factors, including the amount of our future revenues and other factors described under "Risk Factors." Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this offering. We may also use a portion of the net proceeds to acquire products, technologies or businesses that are complementary to our current and future business and product lines. From time to time, we engage in discussions with companies regarding potential acquisitions; however we currently have no material commitments or agreements with respect to any acquisition. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol "NUFO" since May 18, 2000. Prior to that time, there was no public market for the common stock. The following table sets forth, for the period indicated, the high and low closing prices per share of the common stock as reported on the Nasdaq National Market.
HIGH LOW ------- ------ 2000 Second Quarter (since May 18, 2000)......................... $100.00 $45.25 Third Quarter (until July 26, 2000)......................... $158.00 $74.52
On July 26, 2000 the reported last sale price of the common stock on the Nasdaq National Market was $124.44. As of July 26, 2000 there were in excess of 400 stockholders of record. DIVIDEND POLICY We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future. 20 23 CAPITALIZATION The following table sets forth our capitalization as of July 2, 2000: - on an actual basis; and - as adjusted basis to give effect to the sale of shares of common stock at an offering price of $ per share (less underwriting discounts and commissions and estimated offering expenses payable by us) and the application of the net proceeds from the sale. You should read this table in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, Selected Consolidated Financial Data and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
JULY 2, 2000 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term debt, less current portion........................ $ 239 $ Stockholders' equity: Preferred stock, $0.001 par value: 10,000,000 shares authorized, no shares issued and outstanding actual and as adjusted............................................ -- Common stock, $0.001 par value: 250,000,000 shares authorized, 59,621,717 shares issued and outstanding actual; shares issued and outstanding as adjusted............................................... 60 Additional paid-in capital.................................. 212,951 Notes receivable from stockholders.......................... (7,378) Deferred compensation....................................... (37,144) Accumulated deficit......................................... (42,098) -------- -------- Total stockholders' equity........................... 126,391 -------- -------- Total capitalization................................. $126,630 ======== ========
The total number of outstanding shares of our common stock as of July 2, 2000 is 59,621,717, excluding: - 5,250,000 shares issuable upon exercise of outstanding stock options with a weighted average exercise price of $8.57 per share; - 2,855,000 shares reserved for future issuance under our stock plans; and - 170,000 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.35 per share. 21 24 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the offering price per share of our common stock and the net tangible book value per share of common stock after this offering. Our net tangible book value as of July 2, 2000, was $125,722,000 or $211.00 per share of common stock. Net tangible book value per share was calculated by dividing the sum of total assets less liabilities, less intangible assets by the total number of common shares outstanding at July 2, 2000. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the sale of the 3,500,000 shares of common stock offered hereby at an offering price of $ per share less underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of July 2, 2000, would have been $ or approximately $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors, or approximately % of the offering price of $ per share. The following table illustrates this per share dilution: Offering price per share.................................... $ Net tangible book value per share at July 2, 2000......... $211.00 Increase in net tangible book value per share attributable to this offering....................................... ------- Pro forma net tangible book value per share after this offering.................................................. ------ Dilution in net tangible book value per share to new investors................................................. $ ======
The following table shows on a pro forma basis after giving effect to this offering, based on an offering price of $ per share, as of July 2, 2000, the differences between the existing holders of common stock and the new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid, before deducting the underwriting discounts and commissions and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ------------ ------- ------------- Existing stockholders.................. 59,621,717 % $172,398,138 % $2.89 New investors.......................... ----------- ----- ------------ ----- Total................................ % $ % =========== ===== ============ =====
The foregoing discussion and table are based on the number of shares of common stock outstanding after this offering and excludes the following: - 5,250,000 shares issuable upon exercise of outstanding stock options as of July 2, 2000, with a weighted average exercise price of $8.57 per share; - 2,855,000 shares reserved for issuance under our stock plans; and - 170,000 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $4.35 per share. New investors will suffer additional dilution upon exercise of outstanding options. At July 2, 2000, assuming exercise and payment of all outstanding options, net tangible book value per share would be $ representing dilution of $ per share to new investors. See "Capitalization," "Management -- Stock Plans," "Description of Capital Stock" and note 8 of notes to consolidated financial statements for more information about dilution. 22 25 SELECTED CONSOLIDATED FINANCIAL DATA You should read the selected consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. The statement of operations data for the fiscal years ended March 31, 1998 and 1999, and the nine-month period ended December 31, 1999, and the consolidated balance sheet data at March 31, 1999, and December 31, 1999, are derived from, and are qualified by reference to, our audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The statement of operations data for the years ended March 31, 1996 and 1997, and the consolidated balance sheet data as of March 31, 1996, 1997 and 1998, are derived from, and are qualified by reference to, consolidated financial statements not appearing in this prospectus. The consolidated statement of operations data for the six-month periods ended June 30, 1999 and July 2, 2000 and the consolidated balance sheet data as of July 2, 2000 are unaudited. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements and notes thereto appearing elsewhere in this prospectus. Historical results are not necessarily indicative of results that may be expected for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
NINE-MONTH NINE-MONTH SIX-MONTH SIX-MONTH FISCAL YEAR ENDED MARCH 31, PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED ------------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, JULY 2, 1996 1997 1998 1999 1998 1999 1999 2000 ------- ------- ------- ------- ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues................ $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 9,322 $ 24,233 Cost of net revenues........ 5,095 5,946 8,186 9,225 6,625 12,525 5,421 23,842 ------- ------- ------- ------- ------- ------- ------- -------- Gross profit.............. 5,299 4,597 7,296 8,060 5,919 5,576 3,901 391 Operating expenses: Research and development............. 1,724 3,115 3,721 7,379 5,250 7,352 3,721 8,501 Sales and marketing....... 1,289 1,662 2,193 2,987 2,113 2,982 1,800 2,565 General and administrative.......... 1,608 1,269 1,355 2,360 1,724 2,704 1,241 3,792 Deferred compensation..... -- -- -- -- -- 132 9 13,056 ------- ------- ------- ------- ------- ------- ------- -------- Total operating expenses........... 4,621 6,046 7,269 12,726 9,087 13,170 6,771 27,914 ------- ------- ------- ------- ------- ------- ------- -------- Operating income (loss)..... 678 (1,449) 27 (4,666) (3,168) (7,594) (2,870) (27,523) Interest and other income, net....................... (200) (210) (303) (303) (207) (81) (191) 935 ------- ------- ------- ------- ------- ------- ------- -------- Income (loss) before provision for income taxes..................... 478 (1,659) (276) (4,969) (3,375) (7,675) (3,061) (26,588) Provision for income taxes..................... 21 2 10 2 -- 2 2 -- ------- ------- ------- ------- ------- ------- ------- -------- Net income (loss)........... $ 457 $(1,661) $ (286) $(4,971) $(3,375) $(7,677) $(3,063) $(26,588) ======= ======= ======= ======= ======= ======= ======= ======== Historical net income (loss) per share: Basic..................... $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======= ======= ======= ======== Diluted................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======= ======= ======= ======== Weighted average shares: Basic................... 1,011 1,096 1,148 2,284 2,245 2,468 2,413 19,546 ======= ======= ======= ======= ======= ======= ======= ======== Diluted................. 18,768 1,096 1,148 2,284 2,245 2,468 2,413 19,546 ======= ======= ======= ======= ======= ======= ======= ======== Pro forma net loss per share: Basic and diluted......... $ (0.24) $ (0.13) $ (0.52) ======= ======= ======== Weighted average shares... 32,223 24,191 51,000 ======= ======= ========
MARCH 31, ----------------------------------- DECEMBER 31, JULY 2, 1996 1997 1998 1999 1999 2000 ------ ------ ------- ------- ------------ --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 376 $ 250 $ 196 $ 51 $28,067 $ 94,998 Working capital........................................... 2,066 616 (1,166) 479 29,026 103,166 Total assets.............................................. 5,186 5,564 8,197 8,240 44,852 140,239 Long-term debt, less current portion...................... 60 129 79 588 368 239 Total stockholders' equity (net capital deficiency)....... 1,229 (431) (702) (1,183) 35,013 126,391
See note 10 of notes to consolidated financial statements for an explanation of the determination of the weighted average common and common equivalent shares used to compute net loss per share. 23 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus. The results described below are not necessarily indicative of the results to be expected in any future period. This discussion and analysis contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. See "Special Note Regarding Forward-Looking Statements." OVERVIEW We design, manufacture and market innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks(TM) brand. We were founded in April 1990 and initially developed and offered advanced optical products principally for research and commercial applications. In January 1997, we began development of a high performance tunable laser module, a laser module with a dynamically adjustable wavelength, for test and measurement in the manufacturing and development of optical networking products. In May 1998, we began leveraging our extensive experience in developing advanced optical products to enable networking solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. Our high-performance products are compact, consume less power and are designed to be manufacturable in high volumes. We currently derive revenues from the sales of two groups of products, telecom products and commercial photonics products. Through fiscal 1999, comprised of the twelve-month period ended March 31, 1999, substantially all of our revenues were generated from sales of commercial photonics products. Our commercial photonics products include advanced photonics tools, which are primarily used for commercial and research applications in a wide variety of industries. Beginning in 1999, we began to derive an increasing amount of our revenues from sales of telecom products. Our telecom products include fiber amplifier products, wavelength management products, high-speed opto-electronics and tunable laser modules. We sell these products primarily to manufacturers of networking and test equipment in the optical telecommunications market. For the nine-month period ended December 31, 1999, sales of our telecom products accounted for 27.6% of overall net revenues. For the six-month period ended July 2, 2000, sales of our telecom products accounted for 55.1% of overall net revenues and are expected to continue to increase as a percentage of our overall net revenues. We sell our products to over 50 customers including Agilent Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks Corporation. In the nine-month period ended December 31, 1999, none of our customers accounted for more than 10% of our net revenues. In the six-month period ended July 2, 2000, Agilent Technologies and Corvis Corporation accounted for 14.3% and 14.2% of our net revenues, respectively. None of our other customers accounted for more than 10% of our net revenues for the six-month period ended July 2, 2000. We market and sell our telecom products predominantly through our direct sales force. To date, most of our direct sales have been in North America, however, we recently began marketing and selling our telecom products internationally, principally in Europe. We market and sell our commercial photonics products through a combination of catalog sales, international distributors and direct sales primarily in the United States, Europe and Asia. For the nine-month period ended December 31, 1999, 28.7% of international sales were from telecom products and 71.3% were from commercial photonics products. For the six-month period ended July 2, 2000, 47.9% of international sales were from telecom products and 52.1% were from commercial photonics products. Our cost of net revenues consists of raw materials, direct labor and manufacturing overhead, which includes, among other costs, production start-up and prototype costs. In addition, we rely on contract manufacturers for some of our key components, which are included in our cost of net revenues. Research and development expenses consist primarily of salaries and related personnel expenses, fees paid to consultants and outside service providers, materials costs and test units and other expenses related 24 27 to the design, development, testing and enhancements of our products. We expense our research and development costs as they are incurred. In addition, from time to time, we receive funding for research and development projects. For fiscal years 1998 and 1999, the nine-month period ended December 31, 1999 and the six-month period ended July 2, 2000, we received an aggregate of $6.0 million for research and development activities, which was used to offset research and development costs. Of this amount, funding from government agency contracts accounted for $4.7 million. Under the terms of these contracts, we were reimbursed for substantially all of our costs incurred under the related projects. Research and development funding from corporate customers provided $1.3 million of which Agilent Technologies, accounted for $1.0 million. Agilent Technologies funded a portion of the development of a tunable laser product. We believe that a significant level of investment for product research and development is required to remain competitive. Accordingly, we expect to continue to devote substantial resources to product research and development, and we expect our research and development expenses to continue to increase in absolute dollars. Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer engineering support functions, as well as costs associated with trade shows, promotional activities and travel expenses. We intend to expand our sales and marketing operations and efforts substantially for our telecom products, both domestically and internationally, in order to increase market awareness and to generate sales of our products. However, we cannot be certain that any increased expenditures will result in higher net revenues. In addition, we believe our future success depends upon establishing successful relationships with a variety of key customers. We believe that continued investment in sales and marketing is critical to our success and expect these expenses to increase in absolute dollars in the future. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, information technology, facilities and human resources personnel, recruiting expenses, professional fees and costs associated with expanding our information systems. We expect these expenses to increase in absolute dollars as we continue to add personnel and incur additional costs related to the growth of our business and our operations as a public company. In connection with the grant of stock options to our employees, we recorded deferred compensation of approximately $50.3 million through July 2, 2000, representing the difference between the estimated fair market value of the common stock for accounting purposes and the option exercise price of these options at the date of grant. These amounts are being amortized using the attribution vesting method over the vesting period of the stock options, which for us is generally five years from the date of grant. 25 28 RESULTS OF OPERATIONS You should be aware that we recently changed our fiscal year end to December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers to the twelve-month period ended on March 31, 1999. Fiscal year 1998 refers to the twelve-month period ended on March 31, 1998.
SIX-MONTH NINE-MONTH PERIOD ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED PERIOD ENDED -------------------- MARCH 31, MARCH 31, DECEMBER 31, JUNE 30, JULY 2, 1998 1999 1999 1999 2000 ----------------- ----------------- ------------- -------- -------- (UNAUDITED) SUMMARY OF OPERATIONS DATA: Net revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of net revenues........ 52.9 53.4 69.2 58.2 98.4 ----- ----- ----- ----- ------ Gross profit................ 47.1 46.6 30.8 41.8 1.6 ----- ----- ----- ----- ------ Operating expenses: Research and development............ 24.0 42.7 40.6 39.9 35.1 Sales and marketing...... 14.2 17.3 16.5 19.3 10.6 General and administrative......... 8.8 13.6 14.9 13.4 15.6 Deferred compensation.... -- -- 0.7 -- 53.9 ----- ----- ----- ----- ------ Total operating expenses.......... 47.0 73.6 72.7 72.6 115.2 ----- ----- ----- ----- ------ Operating income (loss)..... 0.1 (27.0) (41.9) (30.8) (113.6) Interest and other income, net...................... (2.0) (1.8) (0.5) (2.1) 3.9 ----- ----- ----- ----- ------ Loss before provision for income taxes............. (1.9) (28.8) (42.4) (32.9) (109.7) Provision for income taxes.................... -- -- -- -- -- ----- ----- ----- ----- ------ Net loss.................... (1.9)% (28.8)% (42.4)% (32.9)% (109.7)% ===== ===== ===== ===== ======
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND JULY 2, 2000 Net Revenues Net revenues increased from $9.3 million for the six-month period ended June 30, 1999 to $24.2 million for the six-month period ended July 2, 2000, primarily as a result of increased sales of our telecom products. Sales of our telecom products, which began in March 1999, accounted for $495,000, or 5.3% of total net revenues, for the six-month period ended June 30, 1999 and $13.4 million, or 55.1% of total net revenues for the six months ended July 2, 2000. Gross Margin Gross margin, including amortization of deferred stock compensation, decreased from a positive 41.8% in the six-month period ended June 30, 1999 to a negative 8.6% in the six-month period ended July 2, 2000. Excluding $2.5 million of amortization of deferred stock compensation for the six-month period ended July 2, 2000, gross margin decreased from a positive 41.8% in the six-month period ended June 30, 1999 to a positive 1.6% in the six-month period ended July 2, 2000. This decrease in the gross margin was primarily a result of increased manufacturing overhead costs of approximately $5.3 million associated with the expansion of our telecom manufacturing operations domestically and internationally and costs of approximately $3.8 million associated with the transition to volume manufacturing of new telecom products. Increased U.S. manufacturing overhead costs included increases in payroll and related costs for additional manufacturing personnel of approximately $2.0 million and higher equipment and facility costs of approximately $1.1 million. Start-up manufacturing costs for our China operations, which began limited production in June 2000, accounted for approximately $2.0 million of the increase in manufacturing overhead in the six-month period ended July 2, 2000. We have experienced and continue to experience lower-than-targeted yields for our telecom products which have resulted in delays of customer shipments, 26 29 lost revenue and lower than anticipated gross margins for these products. We are currently implementing programs to improve yields for our telecom products, which we expect to improve gross margins for these products in the long term. If these programs are not successful, however, we would expect that our overall gross margins would not increase as anticipated. Research and Development Expenses Research and development expenses, including amortization of deferred stock compensation, increased from 39.9% of net revenues, or $3.7 million, in the six-month period ended June 30, 1999, to 48.7% of net revenues, or $11.8 million in the six-month period ended July 2, 2000. Excluding the $3.3 million of amortization of deferred stock compensation for the six-month period ended July 2, 2000, research and development expenses decreased from 39.9% of net revenues, or $3.7 million in the six-month period ended June 30, 1999 to 35.1% of net revenues, or $8.5 million, in the six-month period ended July 2, 2000. Research and development expenses decreased as a percentage of net revenues as a result of increased sales but increased in absolute dollars as a result of increased research and development efforts for our telecom products. Sales and Marketing Expenses Sales and marketing expenses, including amortization of deferred stock compensation, increased from 19.3% of net revenues, or $1.8 million, in the six-month period ended June 30, 1999 to 13.7% of net revenues, or $3.3 million, in the six-month period ended July 2, 2000. Excluding $755,000 of amortization of deferred compensation for the six-month period ended July 2, 2000, sales and marketing expenses decreased as a percentage of net revenues from 19.3%, or $1.8 million, in the six-month period ended June 30, 1999 to 10.6% of net revenues, or $2.6 million, in the six-month period ended July 2, 2000. General and Administrative Expenses General and administrative expenses, including amortization of deferred stock compensation, increased from 13.3% of net revenues, or $1.2 million, in the six-month period ended June 30, 1999 to 42.6% of net revenues, or $10.3 million, in the six-month period ended July 2, 2000. Excluding $6.5 million of amortization of deferred stock compensation for the six-month period ended July 2, 2000, general and administrative expenses increased from 13.3% of net revenues, or $1.2 million, in the six-month period ended June 30, 1999 to 15.6% of net revenues, or $3.8 million, in the six-month period ended July 2, 2000. The increase was primarily due to increased staffing and associated expenses necessary to manage and support our increased scale of operations. Interest and Other Income, Net Interest and other income totaled a net interest expense of $191,000 for the six-month period ended June 30, 1999 compared to net interest and other income of $935,000 for the six-month period ended July 2, 2000. Interest expense totaled $202,000 and $143,000 in the six-month period ended June 30, 1999 and the six-month period ended July 2, 2000, respectively. Interest income totaled $3,000 and $1.0 million in the six-month period ended June 30, 1999 and six-month period ended July 2, 2000. The increase in interest income for the six-month period ended July 2, 2000 compared to the six-month period ended June 30, 1999 was primarily due to interest on the $103.6 million in proceeds from our May 2000 initial public offering. Income Taxes The provision for income taxes of approximately $2,000 for the six-month period ended June 30, 1999 consists of current state minimum taxes. Due to our loss position, there was no provision for income taxes for the six-month period ended July 2, 2000. 27 30 FISCAL YEARS ENDED MARCH 31, 1998 AND 1999 AND THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 Net Revenues Net revenues increased from $15.5 million in fiscal 1998 to $17.3 million in fiscal 1999 as a result of increased sales of our commercial photonics products. We began shipping our telecom products in March 1999. Total net revenues for the nine-month period ended December 31, 1999 increased to $18.1 million, primarily as a result of sales of our telecom products, which were $5.0 million, or 27.6% of total net revenues. Gross Margin Gross margin decreased from 47.1% in fiscal 1998 to 46.6% in fiscal 1999. The absolute dollar amount of manufacturing costs increased by $1.0 million from fiscal 1998 to fiscal 1999, due primarily to an increase in net revenues. Gross margin, including amortization of deferred stock compensation, decreased to 30.5% for the nine-month period ended December 31, 1999. Excluding $62,000 of amortization of deferred stock based compensation for the nine-month period ended December 31, 1999, gross margin decreased to 30.8% for the nine-month period ended December 31, 1999. The decrease in gross margin from fiscal 1999 to the nine-month period ended December 31, 1999, was primarily due to the costs related to the expansion of our manufacturing facilities for our telecom products. Increases in manufacturing overhead costs from fiscal 1999 to the nine-month period ended December 31, 1999, included increases of approximately $472,000 in payroll and related costs for additional manufacturing personnel, higher materials costs for manufacturing prototyping of approximately $279,000, and higher depreciation costs of approximately $127,000 related to increased investment in plant and equipment. Research and Development Expenses Research and development expenses increased from 24.0% of net revenues, or $3.7 million, in fiscal 1998 to 42.7% of net revenues, or $7.4 million, in fiscal 1999. This increase was primarily due to the costs related to the development of our telecom products. Research and development, including amortization of deferred stock compensation expenses were 40.9% of net revenues, or $7.4 million, for the nine-month period ended December 31, 1999. Excluding $54,000 of amortization of deferred stock compensation for the nine-month period ended December 31, 1999, research and development expenses were 40.6% of net revenues, or $7.4 million, for the nine-month period ended December 31, 1999. These expenses were incurred primarily in connection with the continued development of existing telecom products, as well as for new telecom products. Sales and Marketing Expenses Sales and marketing expenses increased from 14.2% of net revenues, or $2.2 million, in fiscal 1998 to 17.3% of net revenues, or $3.0 million, in fiscal 1999. Sales and marketing expenses were 16.5% of net revenues, or $3.0 million, for the nine-month period ended December 31, 1999. The increase in the sales and marketing expenses in each of these periods was attributable primarily to the hiring of additional sales and marketing personnel and to the expansion of our sales and marketing efforts. In the nine-month period ended December 31, 1999 we increased our sales and marketing headcount by 14% and we increased our spending for marketing communication materials, including catalogs, and customer and technical service system improvements. General and Administrative Expenses General and administrative expenses increased from 8.8% of net revenues, or $1.4 million, in fiscal 1998 to 13.6% of net revenues, or $2.4 million, in fiscal 1999. General and administrative expenses increased to 15.0% of net revenues including amortization of deferred stock compensation, or $2.7 million, for the nine-month period ended December 31, 1999. The increase over these periods was primarily due to increased staffing and associated expenses necessary to manage and support our increased scale of operations. In addition, the increase in general and administrative costs for the nine-month period ended December 31, 1999, was also attributable to hiring and recruiting expenses for personnel associated with our telecom products. 28 31 Interest and Other Income, Net Interest and other income totalled a net expense of $303,000 in 1998 and 1999 and $81,000 for the nine-month period ended December 31, 1999. Interest expense was the largest component of these amounts totalling $328,000, $327,000 and $176,000 for fiscal 1998, 1999 and the nine-month period ended December 31, 1999, respectively. The interest expense for these periods consisted of interest on debt and capital lease obligations. Income Taxes The provision for income taxes of approximately $2,000 for the nine-month period ended December 31, 1999 and fiscal 1999 consists of current state minimum taxes. The provision for income taxes of $10,000 for fiscal 1998, reflects federal alternative minimum taxes and state minimum taxes. As of December 31, 1999, we had approximately $12 million of federal and $400,000 of state net operating loss carryforwards for tax purposes and $900,000 and $700,000 of federal and state research and development tax credit carryforwards available to offset future taxable income. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2004 through 2019, if not utilized. We have not recognized any benefit from the future use of loss carryforwards for these periods or for any other periods since inception. Financial Accounting Standards Board Statement No. 109 provides for the recognition of deferred tax assets if realization of the assets is more likely than not. Based upon the weight of available evidence, which included our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets. 29 32 QUARTERLY RESULTS OF OPERATIONS The following table sets forth, for the periods presented, certain data from our consolidated statement of operations and the data as a percentage of net revenues. The consolidated statement of operations data have been derived from our unaudited consolidated financial statements. In the opinion of management, these statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods presented. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus.
THREE-MONTH PERIOD ENDED ----------------------------------------------------------------------------------------------- SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, APRIL 2, JULY 2, 1998 1998 1999 1999 1999 1999 2000 2000 --------- -------- --------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues............... $4,251 $ 4,375 $ 4,741 $ 4,581 $ 6,675 $ 6,845 $ 9,782 $ 14,451 Cost of net revenues....... 2,181 2,347 2,600 2,821 4,367 5,337 10,786 13,056 ------ ------- ------- ------- ------- ------- -------- -------- Gross profit (loss)...... 2,070 2,028 2,141 1,760 2,308 1,508 (1,004) 1,395 ------ ------- ------- ------- ------- ------- -------- -------- Operating expenses: Research and development............ 1,633 2,384 2,129 1,592 2,259 3,501 3,609 4,892 Sales and marketing...... 732 698 874 926 930 1,126 1,100 1,465 General and administrative......... 605 550 636 605 940 1,159 1,424 2,368 Deferred compensation.... -- -- -- 9 29 94 5,548 7,508 ------ ------- ------- ------- ------- ------- -------- -------- Total operating expenses............. 2,970 3,632 3,639 3,132 4,158 5,880 11,681 16,233 ------ ------- ------- ------- ------- ------- -------- -------- Operating loss............. (900) (1,604) (1,498) (1,372) (1,850) (4,372) (12,685) (14,838) Interest and other income, net...................... (70) (45) (96) (95) 33 (19) 224 711 ------ ------- ------- ------- ------- ------- -------- -------- Loss before provision for income taxes............. (970) (1,649) (1,594) (1,467) (1,817) (4,391) (12,461) (14,127) Provision for income taxes.................... -- -- 2 -- -- 2 -- -- ------ ------- ------- ------- ------- ------- -------- -------- Net loss................... $ (970) $(1,649) $(1,596) $(1,467) $(1,817) $(4,393) $(12,461) $(14,127) ====== ======= ======= ======= ======= ======= ======== ======== Net loss per share......... $(0.41) $ (0.69) $ (0.66) $ (0.61) $ (0.74) $ (1.74) $ (2.12) $ (0.45) ====== ======= ======= ======= ======= ======= ======== ======== Shares used in computing net loss per share....... 2,354 2,396 2,406 2,419 2,455 2,530 5,891 31,691 ====== ======= ======= ======= ======= ======= ======== ========
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, APRIL 2, JULY 2, 1998 1998 1999 1999 1999 1999 2000 2000 --------- -------- --------- -------- --------- -------- -------- ------- STATEMENT OF OPERATIONS DATA: Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of net revenues............ 51.3 53.6 54.8 61.6 65.4 78.0 110.3 90.4 ------ ------- ------- ------- ------- ------- ------- ------ Gross profit (loss)........... 48.7 46.4 45.2 38.4 34.6 22.0 (10.3) 9.7 ------ ------- ------- ------- ------- ------- ------- ------ Operating expenses: Research and development...... 38.4 54.5 44.9 34.8 33.8 51.1 36.9 33.9 Sales and marketing........... 17.2 16.0 18.4 20.2 13.9 16.4 11.2 10.1 General and administrative.... 14.2 12.6 13.4 13.2 14.1 16.9 14.6 16.4 Deferred compensation......... -- -- -- 0.2 0.4 1.4 56.7 52.0 ------ ------- ------- ------- ------- ------- ------- ------ Total operating expenses.... 69.8 83.1 76.7 68.4 62.2 85.8 119.4 112.3 ------ ------- ------- ------- ------- ------- ------- ------ Operating loss.................. (21.1) (36.7) (31.5) (30.0) (27.6) (63.8) (129.7) (102.7) Interest and other income, net........................... (1.7) (1.0) (2.1) (2.0) 0.4 (0.3) 2.3 4.9 ------ ------- ------- ------- ------- ------- ------- ------ Loss before provision for income taxes......................... (22.8) (37.7) (33.6) (32.0) (27.2) (64.1) (127.4) (97.8) Provision for income taxes...... -- -- 0.1 -- -- 0.1 -- -- ------ ------- ------- ------- ------- ------- ------- ------ Net loss........................ (22.8)% (37.7)% (33.7)% (32.0)% (27.2)% (64.2)% (127.4)% (97.8)% ====== ======= ======= ======= ======= ======= ======= ======
We believe that quarter-to-quarter comparisons of our operating results will not be meaningful. You should not rely on our results for any quarter as an indication of our future performance. Our operating results in future quarters may be below public market analysts' or investors' expectations, which would 30 33 likely cause the price of our common stock to fall. The following discussion highlights significant events that have impacted our net revenues and financial results for the eight quarters ended July 2, 2000. Net revenues increased in each of the previous eight quarters, with the exception of a decrease in the three-month period ended June 30, 1999. In that quarter, we experienced component supply and integration issues related to new versions of some of our commercial photonics products, which affected our ability to meet demand for these products. These issues were addressed in the following quarter as we refined and improved our manufacturing processes. Increased demand for our telecom products resulted in significant revenue increases from these products in our four most recent quarters. Net revenues from our telecom products were $450,000, or 9.8% of net revenues, for the three-month period ended June 30, 1999, $2.0 million, or 30.3% of net revenues, for the three-month period ended September 30, 1999, $2.5 million, or 36.9% of net revenues, for the three-month period ended December 31, 1999, $4.9 million, or 49.9%, of net revenues, for the three-month period ended April 2, 2000 and $8.5 million, or 58.6% of net revenues, for the three-month period ended July 2, 2000. We expect quarterly revenues from our telecom products to continue to increase. Sales of our commercial photonics products have fluctuated between $4.1 million and $6.0 million over the last eight quarters. Gross margins as a percentage of net revenues decreased in each of the previous eight quarters, with the exception of increases in the three-month periods ended September 30, 1998 and July 2, 2000. In the three-month period ended April 2, 2000, we experienced a significant decrease in our gross margin percentage primarily as a result of increased manufacturing costs associated with the expansion of our telecom manufacturing operations domestically and internationally and the transition to volume manufacturing of new telecom products. Manufacturing overhead spending for telecom products increased during each of the five quarters from the three-month period ended March 31, 1999, to the three-month period ended July 2, 2000, as we added manufacturing employees, expanded production facilities and invested in additional manufacturing equipment. In the three-month period ended July 2, 2000, our gross margin percentage increased from the three-month period ended April 2, 2000 primarily as a result of increased manufacturing volumes for both our telecom and commercial photonics products resulting in improved absorption of our fixed manufacturing costs. We plan to accelerate our manufacturing overhead spending to support the growth in our worldwide operations. This additional spending will dampen the favorable impact of expected improvements in manufacturing efficiencies on our telecom products, thus affecting the rate of improvement in our gross margin percentage for the near term. Research and development expenses increased in each of the previous eight quarters, with the exception of a decrease in the three-month period ended March 31, 1999, and the three-month period ended June 30, 1999. These increases were primarily due to the addition of personnel, development prototyping costs, depreciation expense related to increased investment in development equipment, consulting charges and other costs incurred for the development of our telecom products. We have also incurred significant expenses related to the expansion of our patent portfolio for our telecom products. We expect research and development costs to continue to increase for our telecom products. Sales and marketing expenses increased in each of the previous eight quarters, with the exception of slight decreases in the three-month periods ended December 31, 1998 and April 2, 2000. The increased sales and marketing expenses were primarily due to an increase in the number of sales and marketing personnel, sales commissions, marketing expenses and other customer-related costs. We expect sales and marketing costs to continue to increase in absolute dollars as we build our sales and marketing organization. General and administrative expenses increased in each of the previous eight quarters, with the exception of the three-month periods ended December 31, 1998, and June 30, 1999. During the three-month periods ended September 30, 1999, December 31, 1999 April 2, 2000 and July 2, 2000, we experienced a substantial increase in general and administrative costs due to an increase in the number of personnel and additional costs related to building an infrastructure for a public company, which included 31 34 increased legal, accounting, recruiting and information systems costs. We expect general and administrative expenses to continue to increase in absolute dollars. LIQUIDITY AND CAPITAL RESOURCES From our inception in 1990 to our initial public offering we have financed our operations primarily through private sales of convertible preferred stock, bank debt and loans from Dr. Milton Chang, one of our founders and a member of our board of directors. On May 17, 2000 we sold 5,650,000 shares of common stock (including exercise of the underwriters' over-allotment option) at a price of $20.00 per share in our initial public offering. Proceeds to us, net of issuance costs, were approximately $103.6 million. Our cash and cash equivalents totaled $95.0 million as of July 2, 2000. Net working capital increased by $1.6 million for fiscal 1999, by $28.5 million for the nine-month period ended December 31, 1999 and by $74.1 million for the six-month period ended July 2, 2000. Our cash and cash equivalents increased from $51,000 as of March 31, 1999, to $28.1 million as of December 31, 1999 to $95.0 million as of July 2, 2000. The cash and cash equivalent increase in the nine-month period ended December 31, 1999 was primarily due to cash generated by financing activities, including the receipt of an aggregate of $43.7 million from the sales of convertible preferred stock during the nine-month period ended December 31, 1999, partially offset by $5.7 million of cash used in operations, $5.8 million used to purchase equipment and the net repayment of debt of approximately $4.3 million. The cash and cash equivalent increase for the six-month period ended July 2, 2000 was primarily due to cash generated by financing activities, including the receipt of $103.6 million from our initial public offering, partially offset by $19.0 million of cash used in operations and $13.9 million used to purchase equipment. Cash used in operating activities was $583,000 in fiscal 1998, $3.9 million in fiscal 1999 $5.7 million in the nine-month period ended December 31, 1999, $2.0 million for the six-month period ended June 30, 1999 and $19.0 million for the six-month period ended July 2, 2000. Cash used in operating activities in fiscal 1998 was primarily due to our net loss of $286,000, increases in inventory balances of $1.5 million, increases in accounts receivable balances of $1.2 million, partially offset by non-cash charges of $700,000 and increases in accounts payable of $1.1 million. Cash used in operating activities in fiscal 1999 was primarily due to our net loss of $5.0 million, decreases in accounts payable of $884,000, partially offset by non-cash charges of $598,000 and increases in accrued expenses of $697,000. Cash used in operating activities in the nine-month period ended December 31, 1999, was primarily due to our net loss of $7.7 million, increases in inventory balances of $2.6 million and the accounts receivable balance of $1.0 million, partially offset by non-cash charges of $872,000 and increases in accounts payable of $3.9 million. Cash used in operating activities for six-month period ended July 2, 2000 was primarily due to our net loss of $26.6 million, increases in inventories of $7.1 million and increases in accounts receivable of $2.7 million partially offset by non-cash charges of $14.8 million and increases in accounts payable of $2.6 million. Cash used in investing activities was $379,000 in fiscal 1998, $1.4 million in fiscal 1999, $5.7 million in the nine-month period ended December 31, 1999, $1.4 million for the six-month period ended June 30, 1999 and $18.4 million for the six-month period ended July 2, 2000. In each period, cash was primarily used to acquire property, plant and equipment. In the six-month period ended July 2, 2000, advances to a supplier and increases in other assets accounted for $4.5 million of the total cash used in investing activities. Cash generated by financing activities was $908,000 in fiscal 1998, $5.1 million in fiscal 1999 and $39.5 million in the nine-month period ended December 31, 1999 and $104.3 million in the six-month period ended July 2, 2000. Cash generated by financing activities in fiscal 1998 was primarily due to net borrowings of $567,000 under our bank lending facilities and proceeds of $400,000 from promissory notes issued. Cash generated by financing activities in fiscal 1999 was primarily due to proceeds of $4.2 million from the sale of convertible preferred stock and net borrowings of $750,000 under an equipment loan. Cash generated by financing activities in the nine-month period ended December 31, 1999, was primarily 32 35 due to proceeds of $43.7 million from the sales of convertible preferred stock and $1.2 million under our bank lending facilities, partially offset by $5.5 million of repayments of our bank lending facilities, an equipment loan and promissory notes. Cash generated by financing activities in the six-month period ended July 2, 2000 was primarily due to proceeds of $103.6 million from the sale of 5,650,000 shares of our common stock in our initial public offering. We entered into an equipment loan facility with Western Technology Investment for a maximum of $2,000,000, under which our right to borrow has expired. The loan facility bears interest at 8.4% per annum and has a termination payment of 10% of the original principal amount. Certain equipment we own secures the loan facility. At March 31, 1999, we had borrowed $800,000 under this facility of which $750,000, $598,000 and $526,000 was outstanding at March 31, 1999, December 31, 1999 and July 2, 2000, respectively. In May 2000, we entered into a lease for an additional 130,000 square feet of space in San Jose, California from Lincoln-RECP Hellyer Opco, LLC. Under the terms of the lease we are obligated for future minimum lease payments of approximately $25.0 million over the seven-year lease term. In addition, we have agreed to provide an irrevocable letter of credit for $4.0 million as collateral for the performance of our obligations under the lease. In connection with the lease, we issued a two-year warrant to Lincoln-RECP Hellyer Opco, LLC to purchase 30,000 shares of our common stock with an exercise price of $20 per share. The warrant is non-forfeitable and immediately exercisable. In May 2000, we entered into a three-year supply agreement with Fuzhou Koncent Communication, Inc. ("Koncent") (formerly Fuzhou Conet Communication, Inc.) to supply us with yttrium vanadate crystals and agreed to advance $3.5 million (of which $2.5 million had been advanced as of July 2, 2000) to Koncent against future orders of these crystals. We expect to incur approximately $45.0 million of capital expenditures over the next six months to purchase equipment and expand our operations and manufacturing capacity in the United States and China. In July 2000, we acquired a second manufacturing facility in Shenzhen, China. Pursuant to the agreement, we purchased approximately 43% of the second facility in Shenzhen for approximately U.S. $3.7 million and leased the remainder of the facility for a term of five years from the Shenzhen Libaoyi Industry Development Co., Ltd. with an option to purchase the leased portion of the facility during the first three years of the lease term. We have accelerated the expansion of our manufacturing capacity and our capital expenditures in connection with this expansion, which has increased our need for working capital. We believe that the anticipated net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity We maintain our cash and cash equivalents primarily in money market funds. We do not have any derivative financial instruments. As of July 2, 2000, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Exchange Rate Sensitivity We operate primarily in the United States, and all sales to date have been made in U.S. dollars. Accordingly, we currently have no material exposure to foreign currency rate fluctuations. While we expect our international revenues and expenses to be denominated predominately in U.S. dollars, a portion of our international revenues and expenses may be denominated in foreign currencies in the future. Accordingly, we could experience the risks of fluctuating currencies and may choose to engage in currency hedging activities to reduce these risks. 33 36 RECENT ACCOUNTING PRONOUNCEMENTS In December 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB 101 is effective for years beginning after December 15, 1999 and is required to be reported beginning in the quarter ended December 31, 2000. SAB 101 is not expected to have a significant effect on the Company's consolidated results of operations, financial position, or cash flows. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not expect the application of FIN 44 to have a material impact on the Company's results of operations, financial position, or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). SFAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. In June 1999, the Board issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, which deferred the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. We will become subject to SFAS No. 133 on January 1, 2001. Because we do not currently hold any derivative instruments and do not engage in hedging activities, we do not believe that the adoption of SFAS No. 133 will have a material impact on our financial position or results of operations. 34 37 BUSINESS OVERVIEW We design, manufacture and market innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks brand. We leverage our ten years of experience in developing advanced optical products, to enable networking solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. Our high-performance products are compact, consume less power and are designed to be manufacturable in high volumes. INDUSTRY BACKGROUND Dramatic Increases in the Volume of Data Traffic The Internet has become an essential communications and transaction medium. The volume of high-speed data traffic over communications networks continues to grow dramatically, outpacing that of traditional voice traffic. According to International Data Corporation, a leading market research company, the number of Internet users worldwide reached approximately 142 million in 1998 and is forecasted to grow to approximately 502 million users by the end of 2003. According to Ryan, Hankin & Kent, a leading market research and consulting firm, Internet and other data traffic is expected to increase 8,100% between 1999 and 2003. This growth is primarily attributable to the increasing use of the Internet among consumer and business users, easier and cheaper access to the Internet and the large and growing number of personal computers in the home and the workplace. E-commerce in particular is generating enormous data traffic over communications networks as it becomes a critical strategic element of many businesses. Evolution of the Optical Network The increase in data traffic, coupled with demand for enhanced services and improved connection times, has increased demand for high capacity, or high bandwidth, communications networks. Network service providers have had difficulty in meeting this increased demand due to significant constraints of the existing communications infrastructure, which was originally designed to carry only voice traffic. These constraints have caused network congestion, decreased reliability and made it difficult for network service providers to upgrade networks effectively. To alleviate this bottleneck, network service providers are increasingly deploying next-generation optical networks that address the demand for high-speed communications. Optical networks transmit data by pulses of light through an optical fiber. Light in a glass medium can carry more information over longer distances than electrical signals over a copper medium. Optical signals are generated through the use of lasers that produce light at specific colors, or wavelengths. In addition to lasers, a variety of other fiber optic components are used to create, combine, isolate, amplify, split, channel and perform various other functions on these optical signals. Fiber optic components are split into two broad categories: actives, or opto-electronics, which process both optical and electrical signals and passives, which process only optical signals. Innovations at the fiber optic component level have historically enabled a number of major advances in optical networking systems. Traditionally, optical signals at only a single wavelength, or channel, were used to carry information in optical networks. With the invention of innovative components capable of separating light into different specified wavelengths for transmission in an optical fiber, network systems vendors began developing enhanced equipment, including wavelength division multiplexing, or WDM, systems, which greatly increased network capacity based on these new components. WDM solutions increase network capacity by transmitting data simultaneously on a number of different wavelengths along the same optical fiber. At the destination, these wavelengths are separated and the data extracted. Therefore, WDM technology increases the bandwidth of an optical network proportional to the number of different wavelengths that are transmitted. 35 38 In addition to increasing the number of channels, component innovation has also resulted in an increase in the amount of data which can be transmitted per channel, or data rate. Network service providers have been continually upgrading the data rates of their optical networks, for example, from OC-3, or 155.5 megabits per second, to OC-48, or 2.5 gigabits per second. Service providers today are beginning to deploy OC-192, or 10 gigabits per second, equipment throughout their networks and are in the early stages of developing and testing equipment with OC-768, or 40 gigabits per second, capability, creating a need for innovative components in optical testing equipment capable of operating at these high speeds. With increased data rates and number of channels, the amount of data processed by network equipment has increased dramatically. As the data rate and bandwidth between network equipment sites has expanded, the data rate between the equipment within these sites has not kept pace. As a result, there is increasingly a need for high data rate, or high-speed, connections to link the equipment within a network service provider's site. Component innovations have also led to the development of the fiber amplifier, which enhances the strength of optical signals, resulting in a dramatic increase in the distance over which optical signals can be transmitted without regeneration, which is the process of converting the signals from optical to electrical and back to optical to restore signal quality and strength. Regeneration requires large, expensive equipment, often in remote locations, which can be costly to deploy, operate and maintain. Fiber amplifiers restore the signal strength without regeneration and result in significantly lower equipment, operations and maintenance costs. Prior to the development of fiber amplifiers, signal attenuation, or loss, limited the distance over which an optical signal could be transmitted without regeneration, or reach, to approximately 70 kilometers. With fiber amplifiers, the reach of optical networks has increased to thousands of kilometers. With improvements in fiber amplifiers, network equipment manufacturers are continuing to develop longer reach capability that has led to, among other things, all-optical networks that operate without any regeneration. These all-optical networks depend on advanced fiber optic components that enable extremely long reach. Requirements of Optical Communications Systems The increasing need for bandwidth has resulted in strong demand for optical networking systems and a proliferation of new development efforts by traditional and emerging network equipment providers. These providers are seeking to develop next-generation optical networking systems, which require: Increased channel counts. Service providers are demanding optical networks with higher channel counts to increase bandwidth. However, with current WDM technology, the number of wavelengths that can be transmitted, or channel count, is limited. Current WDM technology requires that data be transmitted within a defined range of wavelengths and with a large space between each channel. These limitations constrain the channel count and the overall bandwidth. Network equipment providers can increase the channel count by extending the range of wavelengths over which data can be transmitted. At the same time, the channel count can be increased by reducing the spacing between channels with dense wavelength division multiplexing, or DWDM, which is a technology that increases network capacity by transmitting data simultaneously on many densely packed wavelengths along the same optical fiber. According to Ryan, Hankin & Kent, the market for DWDM optical components is expected to grow at a compound annual growth rate of 51% from 1999 to 2003. As wavelength range and channel counts increase, service and network equipment providers will also need to effectively manage the increasingly complex flow of high speed optical signals in a vast number of wavelengths. Higher data rates. Future systems will continue to require higher data rates to handle the rapid growth in data traffic. Next-generation optical networks are being developed with data rates of OC-192 and OC-768. As higher speed optical networking systems are being developed, service and equipment providers will need test and measurement equipment that is faster than the products being measured in order to ensure accurate testing of the equipment. In addition to increasing data rates between network equipment sites, network service providers are demanding an increase in data rates between network equipment, such as between routers, switches and DWDM terminals and other equipment, within a site. As a result, service 36 39 and network equipment providers are demanding a large number of short-reach, high data rate interconnections. Longer reach. The varied and unpredictable geographical pattern of Internet data traffic requires longer reach networks. Regeneration stations are expensive and are costly to deploy, operate and maintain. As a result, service providers are demanding optical networks with longer reach between regeneration stations. Very long reach is ultimately needed for all-optical networks that do not require regeneration. Enabling new services. Competition among service providers is driving the need to provide differentiated services. Similar to the introduction of systems that increased the bandwidth and reach of current networks, there is a need for network equipment capable of managing and flexibly delivering this bandwidth at the fiber optic component level. Traditional methods of managing bandwidth by converting optical signals to electrical signals for processing are limited to a specific protocol and data rate. When processing is performed entirely in optics without the conversion to electronics, the processing is independent of the protocol and data rate. Cost-effectiveness. Growth in data traffic and price competition in the telecommunications market increasingly requires service providers to seek solutions that reduce their overall network cost of ownership. In addition to the basic cost of equipment, service providers incur substantial costs in terms of space required to deploy the equipment, power consumption and on-going operations and maintenance. In order to continue to grow and upgrade their networks to meet higher traffic demands in a cost-effective manner, service providers need compact, low-power consuming equipment. THE NEW FOCUS OPPORTUNITY In order to address the growing requirements of communications networks, there is a demand for the introduction of increasingly sophisticated systems at a rapid rate. To meet this performance and functionality requirement, equipment providers must utilize increasingly sophisticated components. The fiber optic components market, including actives and passives, is one of the fastest growing portions of the telecommunications market. Ryan, Hankin & Kent estimates that the market for fiber optic components was approximately $6.6 billion in 1999 and is expected to grow to over $22.5 billion by 2003. As a result of the rapid pace of new product introductions and the difficulty of designing and producing the requisite components, equipment providers are increasingly turning to suppliers of fiber optic products. These suppliers must offer high performance products that are compact, consume less power and are designed to be manufacturable in high volumes. These new innovative fiber optic products enable systems companies to offer solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. THE NEW FOCUS SOLUTION We design, manufacture and market innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks brand. We enable networking solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. Our high-performance products are compact, consume less power and are designed to be manufacturable in high volumes. We believe our Smart Optics for Networks(TM) products provide our customers the following key benefits: Increased channel counts. Our wavelength management products, which process and control the many wavelengths on an optical fiber, and fiber amplifier products enable systems with extended fiber bandwidth, thereby increasing the efficiency of optical networks by transmitting a greater number of wavelengths in a single optical fiber. Our wavelength management products also enable network DWDM systems to accurately, efficiently and reliably manage the vast number of optical signals by separating these signals into different paths that can be processed individually. Our interleavers effectively double the capacity of DWDM systems by doubling the number of channels operating on a single fiber. Our WDM couplers split optical signals on a single fiber into two different wavelengths on two fibers, enabling them to be processed on an individual basis. Our optical circulators are used for directing optical signals into the 37 40 appropriate sections of a fiber amplifier and offer wide wavelength operation to accommodate many optical channels. These circulators enable advanced next-generation fiber amplifiers that amplify signals at multiple wavelength bands and signals travelling in both directions along a fiber. Higher data rates. Our high-speed opto-electronics enable our customers to solve the bandwidth bottleneck between equipment within a network service provider's site. To address this problem we offer our 10 gigabits per second, or Gbps, transceivers which are designed to be low cost, small sized and low-power consuming solutions. Our advanced photonics tools enable network service and equipment providers to develop and test their next-generation offerings, including OC-768 products. Longer reach. Our fiber amplifier products enable the transmission of information at very high speeds over extended distances. We reduce the expense associated with amplification and regeneration equipment by extending the distances over which an optical signal can be transmitted. We offer products with wide wavelength range and low loss that enable the high power amplification needed to drive optical signals for very long distances often associated with next-generation all-optical networks. Enabling new services. Our products enable network equipment manufacturers and service providers to offer products capable of managing and flexibly delivering bandwidth at the fiber optic component level. Our optical circulators enable equipment capable of delivering or dynamically adding and dropping a single wavelength at any point in the network. Our tunable lasers, or lasers with dynamically adjustable wavelengths, are being developed to enable flexible networks that can be reconfigured to address changing data traffic patterns. Cost-effectiveness. Our products enable network solutions with reduced overall network cost of ownership. Our products are designed with compact form factor and low power consumption to reduce system space and power requirements. We design our products for high volume manufacturing and offer several different products utilizing the same or similar fiber optic packaging, thereby decreasing cost. Our fiber amplifier products increase the reach and number of channels within a DWDM network, reducing the expense of signal amplification and regeneration. THE NEW FOCUS STRATEGY Our objective is to be the leading provider of innovative, fiber optic products that enable our customers to deploy and optimize next-generation optical networks. Key elements of our strategy include: Leverage our position as a leading market innovator. We believe that we have a unique combination of component design and systems architecture knowledge, an extensive intellectual property portfolio, as well as strong management experience in the optical networking industry. Since our founding in 1990, we have focused exclusively on developing optical products and have formed close relationships with leading research and development organizations in addition to optical networking companies. We intend to leverage our reputation in the industry to obtain new customers, partners and employees. Focus our research and development efforts on continuing to broaden our product offerings. We believe that the breadth and depth of our product line, including both actives and passives, differentiates us from many of our competitors. We will continue to expand the breadth of our product line by developing and offering best-in-class Smart Optics for Networks(TM) products. We believe we can accomplish this goal by continuing to aggressively invest in product development and leverage our existing technological capabilities, including the intellectual property and optical expertise gained through the development of our position as a leading innovator of advanced photonics tools. For example, we are presently leveraging our expertise in tunable lasers for test and measurement to develop advanced tunable transmitters as solutions to replace existing fixed wavelength lasers. Collaborate with leading innovative systems companies. We believe that we are integral to the development efforts of our customers, which provides us with unique insight into the requirements of next-generation optical networks. Regular contact with key decision-makers in both service and equipment providers' organizations provides us with opportunities to collaborate with these companies to provide the required products, solve implementation problems and aid in the design of future systems architecture. In 38 41 addition, we believe our ability to design and offer our customers innovative fiber optic products for their system solutions gives us a strategic advantage over our competitors with respect to system design wins. We intend to continue to target our development efforts to both the current systems manufacturers as well as emerging optical systems companies, whose innovative designs, we believe, will drive the next-generation optical network. Continue to expand manufacturing capacity and improve process efficiency. We intend to continue to expand our first, smaller manufacturing capacity and improve process efficiency. We commenced operations in our Shenzhen, China facility in June 2000 and will continue to expand our capacity within our current facilities. We will also look for additional sites for future expansion. We will continue to invest in improving our processing efficiencies through the use of automation, proprietary tools and processes. Pursue strategic acquisitions. We believe that we have a strong reputation for technical innovation combined with a willingness to collaborate with the leading technologists in the optical, or photonics, industry. We are regularly approached by photonic technologists looking to commercialize their intellectual property. We have integrated the intellectual property from several of these technologists into our existing business, resulting in several new product introductions. We intend to continue to leverage our reputation to aggressively pursue strategic acquisitions that can provide us with key intellectual property, strategic products and highly-qualified engineering personnel to rapidly increase our technological expertise and expand the breadth of our product portfolio. PRODUCTS Our Smart Optics for Networks(TM) products enable systems providers to meet the dynamic demands of next-generation optical networks. Our product offerings include fiber amplifier products, wavelength management products, high-speed opto-electronics, tunable laser modules and advanced photonics tools. We categorize our products by stage of development, such as shipping to customers, beta testing, which refers to products in advanced customer testing, and alpha testing, which refers to products in the early stages of customer and industry testing. FIBER AMPLIFIER PRODUCTS Fiber amplifiers are widely deployed in DWDM and other networks to amplify optical signals at periodic intervals along a fiber optic link. Our fiber amplifier products enable systems with increased channel counts and longer reach lengths at a lower overall network cost of ownership. ---------------------------------------------------------------------------------------------------- PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE ---------------------------------------------------------------------------------------------------- Optical Circulators - Wide wavelength range - Increased channel counts Shipping (C-Band) - Low loss - Longer reach ---------------------------------------------------------------------------------------------------- Optical Circulators - Wide wavelength range - Increased channel counts Beta testing (L-Band) - Low loss - Longer reach ---------------------------------------------------------------------------------------------------- Polarization Beam - Low loss - Longer reach Shipping Combiners - Efficient polarization - Cost-effectiveness control - Compact ---------------------------------------------------------------------------------------------------- Isolator Arrays - Low loss - Longer reach Beta testing - Reduced part count, - Cost-effectiveness lower cost per port ----------------------------------------------------------------------------------------------------
- Optical circulators. Optical circulators are used for directing optical signals into the appropriate sections of a fiber amplifier. Current optical circulators are inadequate for the next generation of fiber amplifiers because of their limited wavelength range and relatively high losses. Our optical circulators have fewer parts than available alternatives, resulting in wide wavelength operation and 39 42 very low losses to accommodate many optical channels. The wide wavelength range enables next-generation fiber amplifiers to amplify signals at multiple wavelength bands and signals travelling in both directions along a fiber. Our optical circulators operate in the two standard wavelength bands, the C-Band and the L-Band. - Polarization beam combiners. Polarization beam combiners are used to combine the optical power from two pump lasers operating at the same wavelength into a single fiber, thereby effectively doubling the amount of power in the fiber amplifier. Additional pump power is essential to support the increased number of channels in the next-generation DWDM systems. However, current solutions are bulky and do not efficiently combine optical power of the same wavelength in order to increase pump power. Our polarization beam combiners are compact components which efficiently combine the optical power of the same wavelength with minimal loss, thereby enabling efficient pumping of these high power amplifiers. - Isolator arrays. Isolators are fiber optic devices that ensure that light is transmitted in the correct direction. Isolator arrays are multiple isolators in a single package. As the functionality and performance of fiber amplifiers increase, the number of components within each amplifier increases greatly and the size of each component becomes a significant factor. Our two-in-one isolator arrays offer very low loss and the same functionality as traditional isolators in half of the space, thus providing significant cost and space savings. WAVELENGTH MANAGEMENT PRODUCTS As the number of channels in DWDM systems increases, advances in products to manage optical signals on different wavelengths are increasingly critical. Our wavelength management products enable DWDM systems to accurately, efficiently and reliably manage the vast number of optical signals. --------------------------------------------------------------------------------------------------------- PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE --------------------------------------------------------------------------------------------------------- DWDM Interleavers - Dense channel spacing - Increased channel Alpha testing - Compact counts - Requires no active cooling - Cost-effectiveness --------------------------------------------------------------------------------------------------------- WDM Couplers - Low loss - Longer reach Beta testing - Cost-effective all-fiber product - Cost-effectiveness - Enables new services --------------------------------------------------------------------------------------------------------- Optical Circulators - Wide wavelength range - Increased channel Shipping and - Low loss counts Beta testing - Enables new services ---------------------------------------------------------------------------------------------------------
- DWDM interleavers. DWDM interleavers combine signals from two fibers onto a single fiber in the same wavelength range. Thus, DWDM interleavers effectively double the capacity of DWDM systems by doubling the number of channels transmitted on a single fiber. Current interleavers are bulky, expensive and require active cooling, or separately powered temperature control, which significantly increases system complexity. Our DWDM interleaver design does not require active cooling and is considerably smaller and less expensive than current solutions. - WDM couplers. WDM couplers split optical signals on a single fiber into two different wavelength ranges on two fibers so that they can be processed separately. Our WDM couplers have low loss and are designed for robust operation under difficult environmental conditions, such as vibration, mechanical shock or humidity, over a long period of time. - Optical circulators. Our optical circulators, as described above, are also used in wavelength management applications to direct optical signals to the appropriate sections of the system. These circulators enable new services such as adding or dropping individual channels at defined points in the network. 40 43 HIGH-SPEED OPTO-ELECTRONICS Our high-speed, high data rate opto-electronic products are focused on compact, low power consuming, low cost solutions for short-range interconnections at 10 Gbps and above.
---------------------------------------------------------------------------------------------- PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE ---------------------------------------------------------------------------------------------- 10 Gbps VCSEL-based - Compact - Cost-effectiveness Alpha transceivers - Low power consumption - Higher data rates testing - Requires no active cooling ----------------------------------------------------------------------------------------------
- 10 Gbps Vertical Cavity Surface Emitting Lasers. Transceivers convert optical signals to electronic signals and vice versa and are an essential component of optical networks. Current solutions for service providers are expensive, large and power consuming transmitters and receivers. In contrast, our 10 Gbps transceivers are designed around vertical cavity surface emitting laser-based transceivers, or VCSEL, which are lasers that emit light perpendicular to the semiconductor surface. These lasers do not require external modulation or active cooling and are low cost to manufacture. In addition, our transceivers are designed to consume little power and to be compact, making them an attractive solution for short-range, high data rate interconnections. TUNABLE LASER MODULES Our high performance tunable laser modules are used for testing and measuring fiber optic components and systems in manufacturing, development and research environments. We are also developing a tunable laser module for replacement of conventional fixed wavelength lasers in telecommunications networks.
---------------------------------------------------------------------------------------------- PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE ---------------------------------------------------------------------------------------------- Swept-wavelength lasers - Rapid, precise - Reduced development Shipping wavelength scanning and manufacturing time ---------------------------------------------------------------------------------------------- Test and measurement - Wide wavelength range - Enables development of Shipping lasers systems with increased channel counts systems ---------------------------------------------------------------------------------------------- Tunable transmitters - High output power - Cost-effectiveness Alpha testing - Wide wavelength range - Enables new services ----------------------------------------------------------------------------------------------
- Swept-wavelength lasers. Swept-wavelength lasers continuously and linearly scan wavelengths. Our swept-wavelength lasers provide rapid wavelength scanning for precise measurement of network components and systems, reducing development time for new products and reducing manufacturing bottlenecks. - Test and measurement tunable lasers. Our high precision tunable lasers are used for test and measurement in the manufacturing and development of optical network products. Our test and measurement tunable laser modules operate across a wide tuning range for thorough testing and provide high output power for improved accuracy. These laser modules are designed and tested to withstand harsh environmental conditions without degradation of performance. - Tunable transmitters. As DWDM systems rapidly grow in channel count, the number of wavelength-specific parts has grown proportionally. Current fixed wavelength laser solutions result in deployment, inventory and maintenance problems for network service and equipment providers. We are presently developing advanced tunable transmitters as solutions to replace existing fixed wavelength lasers. Our tunable transmitters are designed for high output power over a very wide 41 44 wavelength range to meet the requirements of existing transmitters while providing a high degree of flexibility. These tunable transmitters are designed to enable reconfigurable, flexible networks. ADVANCED PHOTONICS TOOLS We offer a wide range of photonics tools for advanced research, development and manufacturing. These products leverage our core competencies in optics for a number of applications including telecommunications research and product development. For example, our precision opto-mechanics and picomotor products, or products that position fiber optic and optical parts, are used for advanced manufacturing of fiber optic components and for research and development of high-speed network products. As another example, photodetectors, which are devices that convert optical signals to electrical signals, faster than the products being measured are needed to accurately characterize the optical performance of the tested device, and our high-speed photodetectors are being used to develop OC-768 products.
---------------------------------------------------------------------------------------------------- PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE ---------------------------------------------------------------------------------------------------- Precision - Precise positioning - Enables automated fiber Shipping opto-mechanics optic manufacturing ---------------------------------------------------------------------------------------------------- Picomotors - Precise positioning - Enables development of Shipping next-generation products ---------------------------------------------------------------------------------------------------- Photodetectors - High speeds - Enables development of high Shipping data rate products ----------------------------------------------------------------------------------------------------
TECHNOLOGY Our technical capabilities span several key areas that we believe will result in rapid development and deployment of our Smart Optics for Networks(TM) products. Wideband passives technology. As more channels are needed in DWDM networks to handle more data traffic, the fiber optic elements within the network need to accommodate more wavelengths and hence more channels. Our wideband passives technology, or capability to develop fiber optic devices that process only optical signals, enables us to develop advanced fiber amplifier and WDM products that have a wide wavelength operating range with low cost by design. Our wideband passives technology is based on a patent pending design that eliminates unnecessary parts that are wavelength sensitive, thereby resulting in wide wavelength operation for high channel count. Our wideband passives technology is used in our rapidly growing optical circulator products. Wavelength management technology. The growing number of wavelengths or channels in DWDM systems has caused these systems to become increasingly complex and difficult to handle. Our wavelength management technology enables efficient management of numerous signals by separating them into different paths that can be treated individually. This technology includes capabilities in advanced micro-optic design for products with new materials, geometries and functionality, and in design, development and manufacturing for all-fiber based products. Our wavelength management technology is used in our wavelength management products. Advanced fiber optic packaging. Our advanced fiber optic packaging technology enables us to develop components with compact size, high reliability and improved temperature sensitivity. This technology also enables a common platform across many products, resulting in economies of scale and significantly reducing design, development and test time. Our packaging meets Telcordia, or Bellcore, industry standards for reliability and is qualified by many key network equipment providers. This technology is based on our design capabilities in micro-optic and all-fiber packaging and our advanced testing facilities and expertise. Our advanced fiber optic packaging technology is used in our fiber amplifier and wavelength management products. 42 45 Tunable laser technology. Traditional laser transmitters operate at only a single wavelength, corresponding to a single channel. Our tunable laser technology allows us to create transmitters that have a tunable, or adjustable, wavelength so that each laser can operate on any number of the required channels. Our capabilities and intellectual property in this area include advanced laser design, development and manufacturing, advanced laser packaging for high robustness and reliability, dynamic filter technology to adjust the laser wavelength to any desired channel, and integrated wavelength locking technology that results in minimal error in the laser wavelength from the desired channel. These capabilities have resulted in tunable laser products with high output power and wide wavelength coverage. High-speed opto-electronics technology. Our high-speed opto-electronics capabilities include analog chip design, photodetector design and advanced manufacturing, packaging and assembly. This capability has resulted in our 60 gigahertz photodetector product and electronic amplifier products at speeds greater than 15 gigahertz, while allowing us to develop transmitters, modulators and receivers that operate at data rates of OC-192 or OC-768. Advanced thin films. Specialized precision thin film coatings result in extremely low optical reflections and are a critical part of many optical devices. When applied to our tunable lasers, the low reflections result in high optical power output and wide wavelength tunability, or range, of over 50 nanometers. Our advanced thin film capability includes advanced thin film design and processes, equipment and facilities for depositing the specialized coatings and thin film monitoring capability for precision control of the thin film properties. This capability has resulted in high performance active devices such as our tunable lasers modules. CUSTOMERS We sell our fiber optic products to network equipment providers and our advanced photonics tools to suppliers of components, systems and services-related products in the optical networking industry. We have sold our products to over 50 customers, and no single customer accounted for more than 10% of our revenues for the nine-month period ended December 31, 1999. For the three-month period ended July 2, 2000, Agilent Technologies, Corvis Corporation, Alcatel USA and Corning Incorporated accounted for 14.2%, 11.6%, 11.0% and 10.7% of our net revenues, respectively. None of our other customers accounted for more than 10% of our net revenues for the six-month period ended July 2, 2000. The following is a list of our telecom product customers that represented more than $500,000 of revenue in the twelve months ended July 2, 2000 and a list of our commercial photonics product customers that represented more than $200,000 of revenue in the twelve months ended July 2, 2000: TELECOM PRODUCTS: COMMERCIAL PHOTONICS PRODUCTS: Agilent Technologies Applied Laser Technology Alcatel USA BFI Optilas Avanex Corporation Corning Incorporated Corning Incorporated ERIM International Corvis Corporation GSI Lumonics JDS Uniphase Corporation INDECO Jet Propulsion Laboratory KLA-Tencor Corporation Molecular Dynamics, Inc. Optima Research Positive Light Schlumberger Technology Corporation
AGILENT TECHNOLOGIES Agilent Technologies is a global, diversified technology company focusing on high-growth markets in the communications, electronics, life sciences and healthcare industries. In 1996, Agilent found that they required a low-cost tunable laser for testing long-range optical equipment. In that year, we began 43 46 collaborating with Agilent for the development of a low-cost tunable laser product. From 1996 to 1999, we developed a low-cost tunable laser according to Agilent's needs. In addition to funding a portion of this project, Agilent agreed to begin commercial purchase of our low-cost tunable laser product. We delivered the first product, a tunable laser module along with the associated control electronics, in the second half of 1999. By incorporating our products, Agilent has been able to offer a broader line of tunable lasers for their customers at more competitive prices than previous solutions. ALCATEL Alcatel is a premier provider of optical networking equipment for the telecommunications industry. In order to meet the need for next-generation systems, Alcatel's systems require a number of optical circulators. In 1998, we first developed the intellectual property for design and production of a circulator that allows wider wavelength range, lower loss, and more compact size than previously available products. In early 1999, Alcatel took delivery of a beta test version of this product, concluding a number of very successful tests. Alcatel presently deploys our circulator products to enhance the performance of their systems. AVANEX Avanex is a provider of photonics processors for optical networks. Avanex requires highly reliable tunable lasers to use as an integral part of their manufacturing process. Our products address these needs in two areas. First, we supply the tunable test lasers that are incorporated into Avanex's standard production line. Our tunable test lasers have allowed Avanex to decrease the calibration time required at each station. Second, our swept wavelength lasers are being incorporated into production lines for Avanex's next-generation high performance devices. Our technology allows faster optimization for the device in production. CORNING Corning is a premier provider of optical fiber, cable and photonic products for the telecommunications industry. In order to meet the need for higher power amplifiers driven by increasing channel counts in WDM networks, Corning developed a complex, high-end fiber amplifier product that required a number of circulators. In 1998, we first developed the intellectual property for design and production of a circulator that allows higher channel counts than previously available products. In early 1999, Corning took delivery of a beta test version of this product, concluding a number of successful tests. Corning presently deploys our circulator products to enhance the performance of their fiber amplifier products and to allow for more complex fiber amplifier architectures demanded by Corning's customers. QTERA Qtera Corporation, a wholly owned subsidiary of Nortel Networks, is a provider of extremely long reach, high power network solutions. In developing these solutions, Qtera had a need for a packaging solution for one of the key components used in their system. This package was required to pass rigid Telcordia testing. We used our existing intellectual property and developed new intellectual property that solves the packaging problem and addresses Qtera's needs. We consider this technology to be a core competency. In addition to enhancing Qtera's product offerings, we have leveraged this technology to supply solutions to other systems vendors. Qtera's deployment of this technology will provide carriers with increased power and signal transmission distance, reducing the number of regeneration points in a network. CUSTOMER AGREEMENTS In December 1996, we entered into a development agreement with Hewlett-Packard GmbH, now Agilent Technologies Deutschland GmbH, for the development of tunable laser modules meeting 44 47 specifications established by Agilent. Pursuant to this development agreement, as amended in November 1997 and December 1999, we agreed to develop tunable laser modules for Agilent and Agilent agreed to make installment payments to us to cover part of the development costs of the tunable laser modules with each installment payment payable upon the completion of specified development phases. In addition, the agreement provides for an initial price to Agilent per tunable laser module purchased, with increases or decreases in the price based upon increases or decreases in Agilent's list prices to its customers. Pursuant to this agreement, Agilent has an irrevocable, exclusive, transferable right to manufacture and distribute the product developed by us, and Agilent may manufacture the product itself or have the tunable laser modules manufactured by a third party. We may not sell the tunable laser modules developed under our contract with Agilent to anyone other than Agilent without Agilent's prior written consent. In January 2000, we entered into a memorandum of agreement with Alcatel USA in which Alcatel commits to purchase from us a minimum percentage of Alcatel's demand for one of our products. The issuance of purchase orders is subject to receipt of final approval by internal management of Alcatel and to mutually agreed to terms and conditions. If the required management approval is withheld, Alcatel will not place a purchase order and will not be subject to penalties, costs or other liability. In January 2000, we entered into an agreement with Corning Incorporated, pursuant to which Corning agrees to pay certain negotiated prices for our products during the term of the agreement and offers price protection to Corning should Corning receive offers from one of our competitors for similar quantity and quality goods under like terms and conditions. Corning is not obligated to purchase any minimum amounts of our products under the terms of the agreement, and they may stop placing orders with us at any time, regardless of any forecast they may have previously provided. The agreement terminates by its terms in December 2000, unless we agree with Corning to extend the term for another one year period. SALES, MARKETING AND CUSTOMER SUPPORT We sell and market our fiber optic products primarily through direct sales. We sell and market our photonics tools primarily through a combination of direct sales, catalog sales and distributors. We focus our direct sales efforts on service providers and optical network equipment manufacturers. Our direct sales account managers cover the market on an assigned account basis. We believe that support services are essential to the successful installation and ongoing support of our products. Our support services include customer service and technical support. Our customer service representatives assist customers with orders, returns and other administrative functions. Our technical support engineers provide customers with answers to technical and product related questions as well as application support relating to the use of our products in the customer's applications. These engineers also help to define the features that are required for our products to be successful in specific applications. MANUFACTURING We manufacture the majority of our products internally. We do, however, outsource, on a limited basis, manufacturing of selected subcomponents, primarily for our commercial photonics products. We have manufacturing operations in Santa Clara, California, San Jose, California, Madison, Wisconsin, Middleton, Wisconsin and Shenzhen, China. We are currently establishing additional manufacturing facilities in San Jose, California and Shenzhen, China. In May 2000, we entered into a three-year supply agreement with Fuzhou Koncent Communication, Inc., or Koncent, formerly Fuzhou Conet Communication, Inc., to supply us with yttrium vanadate crystals. Pursuant to this supply agreement, we have agreed to advance Koncent RMB 29 million, or approximately U.S.$3.5 million, against future orders of which we have already advanced $2,500,000 as of July 2, 2000. The advancement will be repaid in full by May 31, 2003 to the extent that any amount remains outstanding. The agreement provides that Koncent will devote specified manufacturing capacity to meet our anticipated supply requirements based on our projections, and we have agreed to place our orders 45 48 for yttrium vanadate crystals with Koncent, up to their manufacturing capacity. Our agreement may be terminated if either party materially breaches the agreement or upon the consent of both parties. We are committed to designing and manufacturing high quality products that have been thoroughly tested for reliability and performance. Our manufacturing processes utilize stringent quality controls, including incoming material inspection, in-process testing and final test. We perform extensive in-house thermal, shock and environmental testing, including testing to industry accepted standards developed by Telcordia, a company that provides certain centralized research and standard coordination for Regional Bell Operating Companies. Our products are designed to be fully compliant with standards for quality and interoperability with existing installation and maintenance systems. Our commitment to manufacturing high quality products is evidenced by our being recommended for ISO-9001 quality certification. We will also continue to leverage our competencies in rapid prototyping, automation and proprietary tools and processes to improve our manufacturing abilities. Rapid prototyping. As advances in optical network technologies accelerate, the time required to introduce new products into the market needs to be minimized. Our capabilities include precision machining and advanced tooling design for quick turn implementation of new designs into product prototypes. These capabilities result in reduced development times for new products and support yields and capacity improvement efforts within manufacturing. Automation and proprietary tools and processes. Traditional manufacturing processes for fiber optic components and modules are highly manual, yet require high precision and high yields. Our proprietary tools and processes include automated precision processes, technology and equipment that result in increased capacity and yields. For example, our robotics technology has pick-and-place capability at the one micro-meter level, the precision required in the assembly of our products. We have developed intellectual property in this area and have applied it to products that are presently in production as well as those that are in development. RESEARCH AND DEVELOPMENT We have assembled a team of engineers, technicians and operators with significant experience in the optical networking industry, highly specialized manufacturing industries such as semiconductor capital equipment and optical storage, and the communications industry. Our team has expertise in optics, fiber optic package design, opto-electronics and systems architecture. Our product development efforts focus on high-speed opto-electronics, innovative fiber optic products and advanced automation techniques, which will enable us to offer next-generation products in volume. We have made, and will continue to make, a substantial investment in research and development. Our gross research and development expenses totaled $6.2 million for our fiscal year ended March 31, 1998, $9.1 million for our fiscal year ended March 31, 1999, $8.4 million for the nine-month period ended December 31, 1999 and $9.2 million for the six-month period ended July 2, 2000. COMPETITION Competition in the optical networking market in which we provide products is intense. We face competition from companies, including JDS Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation. Some of our competitors, including JDS Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation are also our customers. Lucent Technologies and Nortel Networks Corporation are vertically integrated and provide both entire fiber optic systems and the components that comprise fiber optic systems. We compete with these companies with respect to the development, marketing and sale of fiber optic components. In some cases, we supply test equipment and photonics tools to competitors of our fiber optics components business. Many of our competitors are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion, sale and 46 49 support of their products. In addition, our competitors have large market capitalizations or cash reserves and are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage. Many of our potential competitors have significantly more established sales and customer support organizations than we do. In addition, many of our competitors have much greater name recognition, more extensive customer bases, better developed distribution channels, broader product offerings and greater manufacturing capacity than we have. These companies can leverage their customer bases and broader product offerings and adopt aggressive pricing policies to gain market share. Additional competitors may enter the market and we are likely to compete with new companies in the future. We expect to encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors. The principal factors upon which we compete are: - the innovative nature and features of fiber optic component products; - ability to rapidly develop and introduce new products; - responsive customer service and support; and - price. We believe we compete favorably on each of these factors. INTELLECTUAL PROPERTY Our success and ability to compete depend substantially upon our technology. We pursue patent protection in the United States and abroad, and as of July 2, 2000 we have been granted 28 U.S. patents and one European patent. As of July 2, 2000, we have 30 U.S. utility filings, of which two have been allowed by the U.S. Patent and Trademark Office, 20 U.S. provisional filings and nine overseas filings in various stages of prosecution, and we continue to file new patent applications in the United States and overseas. The expiration dates of our patents range from May 25, 2009 to September 15, 2017. While we rely on patent, copyright, trade secret and trademark law to protect our technology, we also believe that factors such as our existing contracts with equipment manufacturers, our licensing agreements with companies and universities, the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. We cannot assure you that others will not develop technologies that are similar or superior to our technologies. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our proprietary information. Our confidentiality agreements generally prohibit the disclosure or use of the technology being evaluated or licensed. From time to time we license our technology to various third parties pursuant to non-exclusive license agreements that prohibit the disclosure or use of the technology except as set forth in the agreements. Despite these efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our products is difficult, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. Substantial litigation regarding intellectual property rights exists in each of the market segments in which we participate. We expect that the optical networking industry may be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlaps. In addition, we believe that many of our competitors have filed or intend to file patent applications covering aspects of their technology on which they may claim our technology infringes. We are currently defending a claim brought against us by U.S.A. Kaifa Technology, Inc., which was recently acquired by E-Tek Dynamics, Inc., which has been acquired by JDS Uniphase, alleging, among other things, that we have infringed some of their intellectual property rights. We cannot make any 47 50 assurances that additional third parties in the future will not claim infringement by us with respect to our products and our associated technology. The Kaifa claim and other claims of this kind in the future, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources, result in injunctions against us, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements of this kind, if required, may not be available on terms acceptable to us, if at all. A successful claim of product infringement against us and failure or inability by us to license the infringed or similar technology could harm our business. EMPLOYEES At July 2, 2000, we had a total of 888 employees located in both the United States and the People's Republic of China. Of the total, 656 were in manufacturing, 119 were in research and development, 32 were engaged in sales and marketing, 81 were in administration. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our employees are good. FACILITIES Our corporate headquarters facility, of approximately 55,000 square feet, is located in Santa Clara, California. We lease our corporate headquarters facility pursuant to a lease agreement that expires in April 2005. We also have a facility of 52,000 square feet in San Jose. In May 2000 we entered into a lease with Lincoln-RECP Hellyer Opco, LLC for an additional facility of 130,000 square feet, also in San Jose. Under this lease we have obligations of approximately $25.0 million in lease payments over the seven year term. We also have facilities in Wisconsin. We lease approximately 2,000 square feet of space in Madison, Wisconsin under a lease agreement that expires December 2000. We are also leasing approximately 2,500 square feet in Middleton, Wisconsin, pursuant to a lease agreement that expires November 2000 or, upon our occupation of a 14,000 square foot facility, pursuant to a new lease agreement that expires in 2007. We have established a manufacturing facility in Shenzhen, China located on land leased from China's government by the Shenzhen New and High-Tech Village Development Co. under land use certificates and agreements with terms of 50 years. We lease this manufacturing facility from the Shenzhen New and High-Tech Village Development Co. under a lease agreement that will expire in November 2002, subject to our option to renew for an additional three-year period. The size of this facility in Shenzhen, China is approximately 20,000 square feet. In addition, in July 2000 we acquired a second facility in Shenzhen, China. We purchased approximately 43% of this facility in Shenzhen and will lease the remainder of the facility for a term of five years from the Shenzhen Libaoyi Industry Development Co., Ltd. with an option to purchase the leased portion of the facility during the first three years of the lease term. The size of this facility is approximately 250,000 square feet. LEGAL PROCEEDINGS On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, recently acquired by E-Tek Dynamics, Inc., which was recently acquired by JDS Uniphase, filed a complaint against us for patent infringement in the United States District Court, Northern District of California. On December 30, 1999, Kaifa filed a first amended complaint adding state law claims against us and adding as defendants ten individuals currently employed by us. In addition to maintaining its original claim of patent infringement against us, Kaifa asserted claims of intentional and negligent interference with contract against us, trade secret misappropriation against all of the defendants, unfair competition against all of the defendants, and breach of contract against several of the individual defendants. Kaifa seeks a declaratory judgment, damages, preliminary and permanent injunctive relief, and specific enforcement of the individual defendants' alleged contractual obligations. Kaifa alleges that our infringement is willful and seeks enhanced damages and attorneys fees. 48 51 On April 28, 2000, Kaifa voluntarily dismissed its claims against two of the individual defendants. On May 3, 2000, the court dismissed Kaifa's claim of negligent interference with contract against us and both of Kaifa's claims for trade secret misappropriation and unfair competition against an individual defendant. On June 2, 2000, we answered the complaint, denying any liability, asserting various affirmative defenses and seeking a declaration that the patent is not infringed by us, is invalid and/or is enforceable. Currently, the parties are engaged in fact discovery. We intend to defend the action vigorously. A claim construction hearing regarding the asserted patent claims is scheduled for January 2001, and trial is scheduled for October 2001. If we are unsuccessful in defending this action, any remedies awarded to Kaifa may harm our business. Furthermore, defending this action will be costly and divert management's attention regardless of whether we successfully defend the action. A former employee filed a lawsuit against us in Santa Clara Superior Court on March 10, 2000 alleging three causes of action of wrongful termination in violation of public policy, breach of the covenant of good faith and fair dealing, and fraud. The former employee's claims stem from the termination of his employment with us in February 2000. The former employee seeks unspecified general and special damages, punitive damages, attorneys' fees and costs in the form of cash and shares of our common stock. We plan to vigorously defend against these claims. 49 52 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to our executive officers and directors as of July 2, 2000.
NAME AGE POSITION ---- --- -------- Kenneth E. Westrick.................. 43 President and Chief Executive Officer, Director William L. Potts, Jr................. 53 Chief Financial Officer Dr. Timothy Day...................... 36 Chief Technical Officer and Vice President, Engineering, Telecom Nicola Pignati....................... 51 Chief Operating Officer Paul G. Smith........................ 42 Vice President, General Manager, Telecom Dr. Bao-Tong Ma...................... 50 Vice President, General Manager, New Focus Pacific Co. Dr. Robert A. Marsland............... 36 Vice President, Focused Research, Inc. George Yule.......................... 61 Vice President, Supply Chain Management Dr. Milton Chang..................... 57 Chairman of the Board of Directors Dr. David L. Lee..................... 50 Director John Dexheimer(1).................... 45 Director Dr. Winston S. Fu(1)................. 34 Director R. Clark Harris(1)(2)................ 63 Director Robert D. Pavey(2)................... 58 Director
------------------------- (1) Member of the audit committee. (2) Member of the compensation committee. Kenneth E. Westrick has served as our President, Chief Executive Officer and director since November 1997. Prior to joining us, Mr. Westrick spent nine years at Cornerstone Imaging, Inc. where he held positions such as Senior Vice President, General Manager Display Division and Managing Director Europe. Mr. Westrick has nearly 20 years experience managing different aspects of technology start-up companies, generally in the computer industry. Mr. Westrick holds a B.S. in economics from Northwestern University and an M.B.A. from Stanford University. William L. Potts, Jr. has served as our Chief Financial Officer since February 2000. Prior to joining us, Mr. Potts worked at Komag, Incorporated from July 1987 to February 2000. For ten years he served as Komag's chief financial officer and most recently held the position of Executive Vice President, Chief Financial Officer and Secretary. Prior to joining Komag in 1987, Mr. Potts held financial management positions in the computer, medical and entertainment industries. Early in his career he served on the consulting staff of Arthur Andersen & Co. Mr. Potts holds a B.S. in industrial engineering from Lehigh University and an M.B.A. from Stanford University. Dr. Timothy Day is one of our co-founders and has served as our Chief Technical Officer since July 1990 and as our acting Vice President of Engineering, Telecom since November 1998. Since our founding, Dr. Day has served us in various other positions, including acting General Manager, acting Vice President, Operations and as the former Vice President, Focused Research. Dr. Day received both a B.S. and an M.S. in physics from San Diego State University and a Ph.D. in electrical engineering from Stanford University. Dr. Day is a member of IEEE Lasers and Electro-Optics Society, Optical Society of America and the Society of Photo-Instrumentation Engineers. Nicola Pignati joined us in April 2000 as our Chief Operating Officer. Prior to joining us, Mr. Pignati was President, Chief Executive Officer, and Founder of MMC Technology, Incorporated since April 1996. From September 1994 to April 1996, Mr. Pignati was Vice President of Operations at Conner Peripherals, which was subsequently acquired by Seagate Technology, Incorporated. Mr. Pignati received both a B.S. and an M.S. in mechanical engineering from San Jose State University. 50 53 Paul G. Smith joined us in May 1998 as Vice President, General Manager, Telecom. From April 1997 to May 1998, Mr. Smith was Senior Vice President of Marketing and Sales and from May 1995 to April 1997 he was Vice President of Marketing at Asante Technologies, Inc. From May 1994 to May 1995, Mr. Smith was CEO of Holosoft, Inc. Mr. Smith received a B.S. in engineering from the University of Alabama and a M.S.E.E. from Purdue University. Dr. Bao-Tong Ma joined us in November 1999 as Vice President, General Manager, New Focus Pacific Co. From November 1990 to November 1999, Dr. Ma was employed by IBM's Microelectronics Division. From 1993 to 1999, Dr. Ma was involved in setting up and running an IBM subsidiary in China, holding various positions, including Vice General Manager and Deputy General Manager. Dr. Ma holds a B.S. in metallurgy from Shanghai Metallurgy Institute and a Ph.D. in materials science from University of Pennsylvania. Dr. Robert A. Marsland is one of our co-founders and has served as our Vice President, Focused Research, since July 1997. From July 1994 to July 1997, Dr. Marsland was employed as a Senior Scientist at Focused Research, Inc. Dr. Marsland received his B.S. in electrical engineering from Arizona State University and studied at Stanford University on an Office of Naval Research fellowship. Dr. Marsland received a Ph.D. in engineering from Stanford. Dr. Marsland is a member of IEEE Microwave Theory and Techniques Society, the Lasers and Electro-optics Society and the Optical Society of America. George Yule our Vice President of Supply Chain Management joined us in January 1998. From October 1997 to January 1998, he served as Vice President and General Manager of the Display Division of Cornerstone Imaging, Inc. and from February 1993 to October 1997 as its Vice President, Operations. Mr. Yule received a B.S. in electronic engineering from Worcester Polytechnic Institute and an M.B.A. from Stanford University. Dr. Milton Chang is one of our co-founders and has served as one of our directors since our inception in April 1990. Dr. Chang has also served as the chairman of our board of directors since May 1996. From 1990 to 1997, Dr. Chang served as our President and Chief Executive Officer and continues to perform research and marketing activities for us. From 1996 to 1998, Dr. Chang served on the Visiting Committee for Advanced Technology of the National Institute of Standards and Technology. He has also served in various positions at Newport Corporation, including as its President and Chief Executive Officer. Currently, Mr. Chang is a member of the board of directors for Agility Communications, Inc., Acturus Engineering, LightConnect, Inc., Lightwave Electronics, Inc., Yesvideo.com and Gadzoox Networks, Inc. Dr. Chang holds a B.S. in electrical engineering from the University of Illinois and a M.S. and Ph.D. both in electrical engineering from the California Institute of Technology. Dr. David L. Lee has served as one of our directors since April 2000. Since July 2000, Dr. Lee has served as a general managing partner at Clarity Partners, a private equity firm. He has also been a managing director of Pacific Capital Group since 1989. Dr. Lee was President and Chief Operating Officer and a director of Global Crossing Ltd. from its inception in March 1997 until June 2000. Prior to joining Pacific Capital Group, Dr. Lee was Group Vice President of Finance and Acquisitions at TRW Information Systems Group. Dr. Lee is a graduate of McGill University and holds a Ph.D. in Physics and a Ph.D. in Economics from the California Institute of Technology. Dr. Lee is a Certified Public Accountant. John Dexheimer has served as one of our directors since July 1998. Since January 1999, he has served as President of Lightwave Advisors, Inc., a venture capital and business development advisor to firms in optical communications, software and Internet companies. From March 1990 through December 1998, Mr. Dexheimer was a managing director and partner at C.E. Unterberg Towbin, an investment banking and venture capital firm, and its predecessor, Unterberg Harris. Mr. Dexheimer holds a B.S. from the University of Minnesota Institute of Technology and an M.B.A. from Harvard University. Dr. Winston S. Fu has served as one of our directors since June 1999. Dr. Fu is the non-managing member of Presidio Management Group VI, LLC, the general partner of U.S. Venture Partners, a venture capital firm. Prior to joining U.S. Venture Partners in August 1997, Dr. Fu was enrolled in the MBA 51 54 program at Northwestern University. Prior to that, Dr. Fu served as the director of product marketing and various other positions at Vixel Corporation. Dr. Fu holds a B.S. in physics from Massachusetts Institute of Technology, an M.B.A. from Northwestern University and a Ph.D. in applied physics from Stanford University. R. Clark Harris has served as one of our directors since December 1998. Mr. Harris is a partner in NorthEast Ventures, a venture capital firm. Prior to joining NorthEast Ventures in June 1998, Mr. Harris served as the president of a major division of Uniphase, now JDS Uniphase, from May 1995 to May 1998. Before joining JDS Uniphase in 1995, Mr. Harris spent 19 years at United Technologies Corporation in various operating positions, including Senior Vice President of Sikorsky Aircraft Division. Mr. Harris received a B.A. in engineering from Georgia Tech and holds an M.B.A. from Massachusetts Institute of Technology. Robert D. Pavey has served as one of our directors since June 1999. Mr. Pavey is a partner at Morgenthaler Venture Partners, a venture capital firm, which he joined in 1969. Mr. Pavey also sits on the board of directors of BlueGill Technologies, Inc., Endgate Corporation, LightChip, Inc., Lightwave Microsystems Corporation, and Think & Do Software, Inc. Mr. Pavey is also a Trustee of the Commonfund, an educational firm for non-profit endowments. Mr. Pavey holds a B.S. in physics from The College of William & Mary, an M.S. in metallurgy from Columbia University, and an M.B.A. from Harvard University. BOARD OF DIRECTORS Our board of directors currently consists of seven authorized members. Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. This classification of the board of directors may delay or prevent a change in control of our company or in our management. See "Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions." Our board of directors appoints our executive officers on an annual basis to serve until their successors have been elected and qualified. There are no family relationships among any of our directors or officers. COMMITTEES Our board of directors has an audit committee and a compensation committee. The audit committee consists of Messrs. Fu, Dexheimer and Harris. The audit committee reviews our internal accounting procedures, consults with and reviews the services provided by our independent accountants and makes recommendations to the board of directors regarding the selection of independent accountants. The compensation committee consists of Messrs. Harris and Pavey. The compensation committee reviews and recommends to the board of directors the salaries, incentive compensation and benefits of our officers and employees other than our chief executive officer, and administers our stock plans and employee benefit plans. Compensation Committee Interlocks and Insider Participation With the exception of Milton Chang, who served as our President and Chief Executive Officer from 1990 to 1997, and continues to perform research and marketing activities for us, none of the members of our board who are members of the compensation committee or who has served on our compensation committee during our last fiscal year is currently, or has ever been at any time since our formation, one of our officers or employees. Dr. Chang served on our compensation committee during the nine-month period ended December 31, 1999. No member of the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more officers serving as a member of our board of directors or compensation committee. 52 55 Compensation Our non-employee directors are reimbursed for expenses incurred in connection with attending board and committee meetings but are not compensated for their services as board or committee members. We have in the past granted non-employee directors options to purchase our common stock pursuant to the terms of our 1990 Incentive Stock Option Plan and 1998 Stock Plan. We may also grant non-employee directors options to purchase our common stock pursuant to the terms of our 2000 Director Option Plan. See "-- Stock Plans." EXECUTIVE OFFICERS Our executive officers are appointed by our board of directors and serve until their successors are elected or appointed. Compensation The following table sets forth all compensation paid or accrued during our nine-month period ended December 31, 1999, to our President and Chief Executive Officer and each of our four next most highly compensated officers whose compensation exceeded $100,000 for the same period. In accordance with the rules of the Securities and Exchange Commission, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which do not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for these officers.
LONG TERM COMPENSATION ANNUAL COMPENSATION FOR NINE-MONTH --------------------------------------- PERIOD ENDED DECEMBER 31, 1999 SECURITIES ------------------------------------ RESTRICTED UNDER- ALL OTHER STOCK LYING ALL OTHER NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION ---------------------------- -------- ------- ------------ ---------- ---------- ------------ Kenneth E. Westrick.............. $144,127(1) $15,600 -- -- -- -- President and Chief Executive Officer George Yule...................... $135,852(2) $18,307 -- -- -- -- Vice President, Supply Chain Management Paul G. Smith.................... $133,538(3) $23,072 -- -- -- -- Vice President, General Manager, Telecom Laurie Conner(4)................. $119,231(5) $ -- -- -- -- -- Dr. Timothy Day.................. $111,007(6) $18,499 -- -- -- -- Chief Technical Officer, Vice President, Engineering, Telecom
------------------------- (1) Kenneth Westrick's annual compensation for the twelve months ended December 31, 1999, was $227,869. (2) George Yule's annual compensation for the twelve months ended December 31, 1999, was $192,580. (3) Paul Smith's annual compensation for the twelve months ended December 31, 1999, was $193,533. (4) We entered into a separation release agreement with Laurie Conner on December 16, 1999, pursuant to which Ms. Conner's employment relationship with us terminated as of February 15, 2000, and she continued to receive salary through her termination date. (5) Laurie Conner's annual compensation for the twelve months ended December 31, 1999, was $155,000. (6) Dr. Day's annual compensation for the twelve months ended December 31, 1999, was $167,814. 53 56 Option grants in the nine-month period ended December 31, 1999 There were no grants of stock options to any of the executive officers named in the table above during the nine-month period ended December 31, 1999. Aggregate option exercises in the nine-month period ended December 31, 1999, and values at December 31, 1999 The following table sets forth information concerning exercisable and unexercisable stock options held by the executive officers named in the summary compensation table at December 31, 1999. The value of unexercised in-the-money options is based on a fair market value of $105.00 per share based on the closing price of our common stock on July 27, 2000 as reported on the Nasdaq National Market minus the actual exercise prices. All options were granted under our 1990 Incentive Stock Option Plan, as amended, or our 1999 Stock Plan. These options vest over five years and otherwise generally conform to the terms of our 1990 Incentive Stock Option Plan and our 1999 Stock Plan.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999 ----------------------------------- ---------------------------- EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE -------------- ------------- ----------- ------------- Kenneth E. Westrick................ 833,334 1,166,666 $87,114,653 $121,960,347 George Yule........................ 103,334 196,666 $10,793,632 $ 20,541,368 Paul G. Smith...................... 133,334 266,666 $13,916,736 $ 27,833,264 Laurie Conner...................... 85,000 215,000 $ 8,871,875 $ 22,440,625 Dr. Timothy Day.................... 527,334 162,666 $55,305,224 $ 16,992,276
------------------------- (1) The options vest according to the following vesting schedule: one-fifth of the shares subject to the option vest twelve months after the vesting commencement date and one-sixtieth of the shares subject to the option vest each month thereafter. Pursuant to an amendment to the 1990 Incentive Stock Option Plan and the 1999 Stock Plan, our executives may, at any time, exercise options which are unvested, subject to our right of repurchase which lapses on the same vesting schedule. LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION Our amended and restated certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability associated with any of the following: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemption; or - any transaction from which the director derived an improper personal benefit. The limitation of our directors' liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation and bylaws also provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in the capacity as an officer, director, employee or other agent, regardless of whether our bylaws would permit indemnification. 54 57 We entered into indemnification agreements with each of our officers and directors containing provisions that require us to, among other things, indemnify those officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to cover our directors and officers under any of our liability insurance policies applicable to our directors and officers. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. STOCK PLANS 1990 Incentive Stock Option Plan Our 1990 Incentive Stock Option Plan provided for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of nonstatutory stock options and stock purchase rights to employees, directors and consultants. As of July 2, 2000, options to purchase 1,574,441 shares of common stock issued pursuant to this plan were outstanding. Options. Options granted under the 1990 Incentive Stock Option Plan must generally be exercised within 30 days after the end of the optionee's status as an employee, director or consultant of ours, or within 12 months after the optionee's termination by death or disability, but in no event later than the expiration of the option's term. Transferability of Options. Options and stock purchase rights granted under the 1990 Incentive Stock Option Plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Adjustments upon Merger or Asset Sale. The 1990 Incentive Stock Option Plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option and stock purchase right shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options and stock purchase rights are not assumed or substituted for by the successor corporation, the options will terminate as of the closing date of the merger. Termination of the 1990 Incentive Stock Option Plan. The 1990 Incentive Stock Option Plan expired in July 2000. Any shares reserved for issuance under the 1990 Incentive Stock Option and any shares returned to the plan as of the date of our initial public offering were added to the shares reserved for issuance under our 2000 Stock Plan following the completion of our initial public offering. 1998 Stock Plan Our 1998 Stock Plan provided for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of nonstatutory stock options and stock purchase rights to employees, directors and consultants. As of July 2, 2000, options to purchase 290,035 shares of common stock under this plan were outstanding. Options granted under the 1998 Stock Plan must generally be exercised within 30 days after the end of the optionee's status as an employee, director or consultant of ours, or within 12 months after the optionee's termination by death or disability, but in no event later than the expiration of the option's term. Transferability of Options. Options and stock purchase rights granted under the 1998 Stock Plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Adjustments upon Merger or Asset Sale. The 1998 Stock Plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option and stock purchase right shall be assumed or an equivalent option substituted for by the successor corporation. If the 55 58 outstanding options and stock purchase rights are not assumed or substituted for by the successor corporation, the options shall terminate as of the date of merger. Termination of the 1998 Stock Plan. As of May 17, 2000, the date of our initial public offering, the 1998 Stock Plan was rolled into the 2000 Stock Plan. Any shares reserved for issuance under the 1998 Stock Plan and any shares returned to the plan were added to the shares reserved for issuance under our 2000 Stock Plan following the completion of our initial public offering. 1999 Stock Plan Our 1999 Stock Plan provided for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of nonstatutory stock options and stock purchase rights to employees, directors and consultants. As of July 2, 2000, options to purchase 2,094,809 shares of common stock issued pursuant to this plan were outstanding. Options. Options granted under the 1999 Stock Plan must generally be exercised within 30 days after the end of the optionee's status as an employee, director or consultant of ours, or within 12 months after the optionee's termination by death or disability, but in no event later than the expiration of the option's term. Transferability of Options. Options and stock purchase rights granted under the 1999 Stock Plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Adjustments upon Merger or Asset Sale. The 1999 Stock Plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option and stock purchase right shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options and stock purchase rights are not assumed or substituted for by the successor corporation, the optionees will become fully vested in and have the right to exercise the options or stock purchase rights. If an option or stock purchase right becomes fully vested and exercisable in the event of a merger or sale of assets, the administrator must notify the optionee that the option or stock purchase right is fully exercisable for a period of 15 days from the date of the notice, and the option or stock purchase right will terminate upon the expiration of the 15-day period. Termination of the 1999 Stock Plan. As of May 17, 2000, the date of our initial public offering, the 1999 Stock Plan was rolled into the 2000 Stock Plan. Any shares reserved for issuance under the 1999 Stock Plan and any shares returned to the 1999 Stock Plan were reserved for issuance under the 2000 Stock Plan following the completion of our initial public offering. 2000 Stock Plan Our 2000 Stock Plan provides for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of nonstatutory stock options and stock purchase rights to employees, directors and consultants. The 2000 Stock Plan was adopted by our board of directors in February 2000 and approved by our stockholders in April 2000. As of July 2, 2000, a total of 1,000,000 shares of our common stock were reserved for issuance pursuant to our 2000 Stock Plan, plus any shares reserved for issuance under the 1998 and 1999 Stock Plans and any shares returned to the 1998 and 1999 Stock Plans. As of July 2, 2000, options to purchase 1,290,625 shares of common stock under this plan were outstanding. The number of shares reserved for issuance under our 2000 Stock Plan will increase annually on the first day of our fiscal year beginning in 2001 by an amount equal to the lesser of six percent of the outstanding shares of our common stock on the first day of the year, 9,000,000 shares or a lesser amount as our board of directors may determine. 56 59 Administration. Our board of directors or a committee of our board of directors administers the 2000 Stock Plan. The administrator of our 2000 Stock Plan has the power to determine, among other things: - the terms of the options or stock purchase rights granted, including the exercise price of the option or stock purchase right; - the number of shares subject to each option or stock purchase right; - the exercisability of each option or stock purchase right; and - the form of consideration payable upon the exercise of each option or stock purchase right. Options. The exercise price of all incentive stock options granted under the 2000 Stock Plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of nonstatutory stock options and stock purchase rights granted under the 2000 Stock Plan is determined by the administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must be at least equal to the fair market value of our common stock on the date of grant. With respect to any participant who owns stock representing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must be at least equal 110% of the fair market value on the grant date and the term of the incentive stock option must not exceed five years. The term of all other options granted under the 2000 Stock Plan may not exceed 10 years. During any fiscal year, each optionee may be granted options to purchase a maximum of 1,000,000 shares. In addition, in connection with an optionee's initial employment with us, the optionee may be granted an option covering an additional 1,000,000 shares. Options granted under the 2000 Stock Plan must generally be exercised within three months after the end of the optionee's status as an employee, director or consultant of ours, or within 12 months after the optionee's termination by death or disability, but in no event later than the expiration of the option's term. Transferability of Options. Options and stock purchase rights granted under the 2000 Stock Plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Stock Purchase Rights. In the case of stock purchase rights, unless the administrator determines otherwise, the restricted stock purchase agreement shall grant us a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment or consulting relationship with us for any reason, including death or disability. The purchase price for shares repurchased under the restricted stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The repurchase option shall lapse at a rate determined by the administrator. Adjustments upon Merger or Asset Sale. The 2000 Stock Plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option and stock purchase right shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options and stock purchase rights are not assumed or substituted for by the successor corporation, the optionees will become fully vested in and have the right to exercise the options or stock purchase rights. If an option or stock purchase right becomes fully vested and exercisable in the event of a merger or sale of assets, the administrator must notify the optionee that the option or stock purchase right is fully exercisable for a period of 15 days from the date of the notice, and the option or stock purchase right will terminate upon the expiration of the 15-day period. Amendment and Termination of the 2000 Stock Plan. The administrator will have the authority to amend, suspend or terminate the 2000 Stock Plan, as long as this action does not affect any shares of common stock previously issued and sold or any option previously granted under the 2000 Stock Plan. 57 60 Unless earlier terminated, the 2000 Stock Plan will terminate automatically 10 years from the date of obtaining stockholder approval of the plan in April 2000. 2000 Employee Stock Purchase Plan Our 2000 Employee Stock Purchase Plan was adopted by our board of directors in February 2000 and approved by our stockholders in April 2000, and became effective in May 2000. A total of 1,000,000 shares of our common stock has been reserved for issuance under the 2000 Employee Stock Purchase Plan, plus automatic annual increases beginning on January 1, 2001 equal to the lesser of 1,000,000 shares, 1.25% of the outstanding shares on that date or an amount determined by our board of directors. As of July 2, 2000, no shares have been issued pursuant to this plan. Structure of the 2000 Employee Stock Purchase Plan. The 2000 Employee Stock Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains consecutive, six-month offering periods. The offering periods generally start on the first trading day on or after January 31 and July 31 of each year, except for the first offering period, which commenced on the first trading day on or after the effective date of this offering and ends on the last trading day on or before July 30, 2002. Eligibility. All of our employees except those employed by New Focus Pacific Co. are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, no employee shall be granted an option to purchase stock under the plan if that employee: - immediately after the grant of the option owns stock possessing five percent or more of the total combined voting power or value of all classes of our capital stock, or - whose rights to purchase stock under all of our employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock for each calendar year. Purchases. The 2000 Employee Stock Purchase Plan permits participants to purchase our common stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings and commissions, exclusive of payments for shift premium, bonuses, incentive compensation, incentive payments and other compensation. The maximum number of shares a participant may purchase during each purchase period is 5,000 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each offering period. The price of stock purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the lower of the fair market value of the common stock either: - at the beginning of the offering period; or - at the end of the offering period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. Transferability of Rights. Rights granted under the 2000 Employee Stock Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution or as otherwise provided under the 2000 Employee Stock Purchase Plan. Merger or Asset Sale. The 2000 Employee Stock Purchase Plan provides that, in the event we merge with or into another corporation or if there is a sale of substantially all of our assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. Amendment and Termination of the 2000 Employee Stock Purchase Plan. The 2000 Employee Stock Purchase Plan will terminate in 2010. Our board of directors has the authority to amend or terminate the 58 61 2000 Employee Stock Purchase Plan, except that no action may impair any outstanding rights to purchase stock under the 2000 Employee Stock Purchase Plan. 2000 Director Option Plan Our 2000 Director Option Plan provides for automatic grants of stock options to our non-employee directors. The 2000 Director Option Plan was adopted by our board of directors in February 2000 and approved by our stockholders in April 2000. A total of 200,000 shares of our common stock have been reserved for issuance under the 2000 Director Option Plan. As of July 2, 2000, no shares had been issued pursuant to this plan. Option Grants. The 2000 Director Option Plan generally provides for an automatic initial grant of an option to purchase 25,000 shares of our common stock to each non-employee director on the date when the person first becomes a non-employee director, whether through election by our stockholders or appointment by our board of directors to fill a vacancy. After the initial grant, each non-employee director will automatically be granted subsequent options to purchase 5,000 shares of our common stock each year on the date of our annual stockholders' meeting, if on that date he or she has served on our board of directors for at least six months. Each initial option grant and each subsequent option grant shall have a term of 10 years. Each initial option grant will vest as to 25% of the shares subject to the option on the anniversary of its date of grant and 1/36 of the shares shall vest each month thereafter, provided the individual remains our outside director on this date. Each subsequent option grant will fully vest on the anniversary of its date of grant. The exercise price of all options will be 100% of the fair market value per share of our common stock on the date of grant. Options granted under the 2000 Director Option Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within 12 months after the director's termination by death or disability, but in no event later than the expiration of the option's 10 year term. Transferability of Options. No option granted under the 2000 Director Option Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by the optionee. Merger, Asset Sale and Change of Control. The 2000 Director Option Plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, the successor corporation shall assume each option or substitute an equivalent option. If outstanding options are not assumed or substituted for by the successor corporation, each option will become fully exercisable for a period of thirty days from the date our board of directors notifies the optionee of the option's full exercisability, after which period the option shall terminate. In the event of a change of control each outstanding option will become fully vested and exercisable. Amendment and Termination of the 2000 Director Option Plan. The administrator will have the authority to amend, suspend or terminate the 2000 Director Option Plan, so long as no action affects any shares of common stock previously issued and sold or any option previously granted under the 2000 Director Option Plan. Unless terminated sooner, the 2000 Director Option Plan will terminate automatically 10 years from the effective date of the plan. 401(k) PLAN In April, 1993, we adopted a 401(k) Profit Sharing Plan and Trust covering our employees who (a) are age 21 as of the 401(k) Profit Sharing Plan and Trust effective date, and (b) have at least six months of service with us. The 401(k) Profit Sharing Plan and Trust excludes nonresident alien employees. Our 401(k) Profit Sharing Plan and Trust is intended to qualify under Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k) Profit Sharing Plan and Trust by employees or by us and the investment earnings thereon are not taxable to the employees until withdrawn. If our 401(k) Profit Sharing Plan and Trust qualifies under Section 401(k) of the Internal Revenue Code, our contributions will be deductible by us when made. Our employees may elect to reduce their current 59 62 compensation by up to the statutorily prescribed annual limit of $10,500 in 2000 and to have those funds contributed to the 401(k) Profit Sharing Plan and Trust. The 401(k) Profit Sharing Plan and Trust permits us, but does not require us, to make additional matching contributions on behalf of all participants. To date, we have not made any contributions to the 401(k) Profit Sharing Plan and Trust. EMPLOYMENT AND CHANGE-OF-CONTROL AGREEMENTS From time to time, we have entered into employment agreements with our executive officers, including the executive officers listed in the "Summary Compensation Table." Laurie Conner. In June 1998, Laurie Conner accepted our offer of employment. The terms of Ms. Conner's employment with us provided that if her employment with us were to be terminated as a result of a change of control, Ms. Conner would continue to receive her salary for the earlier of three months or attaining subsequent employment. On December 16, 1999, we entered into a separation and general release agreement with Laurie Conner under which Laurie Conner's employment relationship with us terminated as of February 15, 2000, at which time Ms. Conner's salary and benefits terminated and her unvested options ceased to vest. Dr. Bao-Tong Ma. In October 1999, Dr. Bao-Tong Ma accepted our offer of employment. The terms of Dr. Ma's employment provide that if we terminate his employment without cause prior to the first anniversary of employment, Dr. Ma would receive his salary until the earlier of 24 months or new employment. Dr. Ma's stock options would cease to vest upon termination. If Dr. Ma's employment is terminated after the first anniversary of employment, but prior to the second anniversary, Dr. Ma would continue to receive his salary for 12 months. If Dr. Ma's employment is terminated after the second anniversary, but prior to the third anniversary, Dr. Ma would continue to receive his salary for six months. If Dr. Ma's employment is terminated following the third anniversary of employment, he will not receive any severance. In January 2000, we amended our stock option agreements with Kenneth E. Westrick, George Yule, Paul G. Smith, Dr. Robert A. Marsland and Dr. Timothy Day to give these officers the right to purchase both vested and unvested shares and to pay for the shares with a promissory note. In addition, we amended the stock option agreements to provide that if the employment or consulting relationship of these officers is terminated involuntarily within 18 months of a change in control then 50% of their unvested options shall vest. In April 2000, we hired Nicola Pignati and pursuant to the terms of his employment granted him an option to purchase 500,000 shares of our common stock and to pay for the shares with a promissory note. The option vests in accordance with our standard 5-year vesting schedule, except that 100,000 of the shares subject to the option will vest on November 13, 2000. In addition, in the event Mr. Pignati is terminated without cause, provided that he signs a full waiver and release of claims, he will receive a severance pay amount equal to twelve months' salary plus any scheduled bonuses. 60 63 CERTAIN TRANSACTIONS Other than compensation agreements and other arrangements, which are described as required in "Management," and the transactions described below, for the last three years, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: - in which the amount involved exceeded or will exceed $60,000, and - in which any director, executive officer, holder of more than 5% of our common stock on an as-converted basis or any member of their immediate family had or will have a direct or indirect material interest. We believe that each of the transactions described below were on terms no less favorable than could have been obtained from unaffiliated third parties. All future transactions between us and any director or executive officer will be subject to approval by a majority of the disinterested members of our board of directors. SERIES D PREFERRED STOCK. On July 31, 1998, and August 6, 1998, we sold 3,977,000 shares of our Series D preferred stock at a price of $1.00 per share. The purchasers of the Series D preferred stock included, among others:
AS CONVERTED SHARES OF SHARES OF PURCHASER SERIES D STOCK COMMON STOCK --------- -------------- ------------ George Yule.............................................. 44,000 44,000 John Dexheimer........................................... 125,000 125,000
George Yule is our Vice President of Supply Chain Management and John Dexheimer is one of our directors. SERIES E PREFERRED STOCK. On June 14, 1999, we sold 10,857,616 shares of our Series E preferred stock at a price of $1.20 per share. The purchasers of the Series E preferred stock included, among others:
AS CONVERTED SHARES OF SHARES OF PURCHASER SERIES E STOCK COMMON STOCK --------- -------------- ------------ Kenneth E. Westrick...................................... 416,668 416,668 Morgenthaler Venture Partners V, L.P. ................... 5,000,000 5,000,000 U.S. Venture Partners VI, L.P............................ 5,000,000 5,000,000
Kenneth E. Westrick is our President, Chief Executive Officer and one of our directors. Morgenthaler Venture Partners V, L.P. is a venture capital firm that holds in excess of 5% of our common stock and of which Mr. Pavey, one of our directors, is a partner. U.S. Venture Partners VI, L.P. is a venture capital firm that together with its affiliated entities holds in excess of 5% of our common stock and of which Dr. Winston Fu, one of our directors is the non-managing member of Presidio Management Group VI, LLC, the general partner of U.S. Venture Partners VI, L.P. SERIES G PREFERRED STOCK. On November 23, 1999, December 7, 1999 and December 28, 1999 we sold 9,230,728 shares of our Series G preferred stock at a price of $3.25 per share. The purchasers of the Series G preferred stock included, among others:
AS CONVERTED SHARES OF SHARES OF PURCHASER SERIES G STOCK COMMON STOCK --------- -------------- ------------ R. Clark Harris.......................................... 40,000 40,000 Morgenthaler Venture Partners, V, L.P.................... 1,384,614 1,384,614 Entities Affiliated with U.S. Venture Partners........... 1,384,614 1,384,614
61 64 R. Clark Harris is one of our directors. Morgenthaler Venture Partners V, L.P. is a venture capital firm that holds in excess of 5% of our common stock and of which Mr. Pavey, one of our directors, is a partner, and U.S. Venture Partners is a venture capital firm that together with its affiliated entities holds in excess of 5% of our common stock and of which Dr. Winston Fu, one of our directors, is the non managing member of Presidio Management Group VI, LLC, the general partner of U.S. Venture Partners VI, L.P. LOANS FROM SHAREHOLDER From April 1991 to September 1997, Dr. Milton Chang loaned us a total of $1,815,000. On July 7, 1999, we repaid all of the outstanding principal and interest owing under the promissory note, which totaled approximately $2,400,000, however, Dr. Chang agreed to loan us up to $2,424,000 upon thirty days written request. This agreement was terminated in December 1999. LOANS TO OFFICERS The following is a list of loans made by us to certain of our officers, in connection with the purchase of shares of our stock. Each of these loans were made pursuant to a full recourse promissory note secured by a stock pledge. Each of these loans was issued in connection with the exercise of stock options which had previously been granted by the board of directors pursuant to our stock option plans at the fair market value of our common stock on the date of grant, as determined in good faith by our board of directors, based upon market conditions, results of operations and recent sales of our preferred stock to third party investors. The notes bear no interest but interest will be imputed and reported annually as compensation on the officer's W-2. All unvested shares purchased by the officers are subject to repurchase by us at the original exercise price if the officer's employment is terminated. On January 12, 2000, we loaned $1,044,208 to Kenneth E. Westrick, our President and Chief Executive Officer, secured by a stock pledge, in connection with the purchase of 2,000,000 shares of our common stock pursuant to the exercise of a stock option granted to him on September 30, 1997 at $.4625 per share and associated costs. The note is interest-free and is due and payable on January 11, 2005. The entire principal amount on this note remains outstanding. On January 12, 2000, we loaned $375,000 to Paul G. Smith, our Vice President, General Manager, Telecom, secured by a stock pledge, in connection with the purchase of 400,000 shares of our common stock pursuant to the exercise of a stock option granted to him on May 4, 1998 at $.625 per share and the purchase on the same date of 200,000 shares of our common stock pursuant to the exercise of a stock option granted to him on January 11, 2000 at $.625 per share. The note is interest-free and is due and payable on January 11, 2005. The entire principal amount on this note remains outstanding. On January 12, 2000, we loaned $312,500 to Dr. Bao-Tong Ma, our Vice President, General Manager, New Focus Pacific Co., secured by a stock pledge, in connection with the purchase of 500,000 shares of our common stock pursuant to the exercise of a stock option granted to him on January 11, 2000 at $.625 per share. The note is interest-free and is due and payable on January 11, 2005. The entire principal amount on this note remains outstanding. On January 12, 2000, we loaned $173,134 to George Yule, our Vice President, Supply Chain Management, secured by a stock pledge, in connection with the purchase of 200,000 shares of our common stock pursuant to the exercise of a stock option granted to him on January 28, 1998 at $.5125 and 100,000 shares of our common stock pursuant to the exercise of a stock option granted to him on July 17, 1998 at $.625 per share and associated costs. The note is interest-free and is due and payable on January 11, 2005. The entire principal amount on this note remains outstanding. On January 12, 2000, we loaned $137,232 to Dr. Robert A. Marsland, our Vice President, Focused Research, Inc. secured by a stock pledge, in connection with the purchase of 400,000 shares of our common stock pursuant to the exercise of a stock option granted to him on July 29, 1990 at $.0025 per share and 70,000 shares of our common stock pursuant to the exercise of a stock option granted to him on 62 65 October 8, 1998 at $.625 per share and associated costs. The note is interest-free and is due and payable on January 11, 2005. The entire principal amount on this note remains outstanding. On January 12, 2000, we loaned $255,483 to Dr. Timothy Day, our Chief Technology Officer and Vice President, Engineering, Telecom, secured by a stock pledge, in connection with the purchase of 400,000 shares of our common stock pursuant to the exercise of a stock option granted to him on July 29, 1990 at $.0025 per share, 100,000 shares of our common stock pursuant to the exercise of a stock option granted to him on November 21, 1996 at $.4625 per share, 120,000 shares of our common stock pursuant to the exercise of a stock option granted to him on January 28, 1998 at $.5125 per share and 70,000 shares of our common stock pursuant to the exercise of a stock option granted to him on October 8, 1998 at $.625 per share and associated costs. The note is interest-free and is due and payable on January 11, 2005. The entire principal amount on this note remains outstanding. On February 9, 2000 we loaned $375,000 to Kenneth E. Westrick, our President and Chief Executive Officer, secured by a stock pledge, in connection with the purchase of 300,000 shares of our common stock pursuant to the exercise of a stock option granted to him on February 9, 2000 at $1.25 per share. The note is interest-free and is due and payable on February 8, 2005. The entire principal amount on this note remains outstanding. On February 18, 2000 we loaned $125,000 to Paul G. Smith, our Vice President, General Manager, Telecom, secured by a stock pledge, in connection with the purchase of 100,000 shares of our common stock pursuant to the exercise of a stock option granted to him on February 9, 2000 at $1.25 per share. The note is interest-free and is due and payable on February 17, 2005. The entire principal amount on this note remains outstanding. On February 9, 2000 we loaned $125,000 to Dr. Robert A. Marsland, our Vice President Focused Research Inc., secured by a stock pledge, in connection with the purchase of 100,000 shares of our common stock pursuant to the exercise of a stock option granted to him on February 9, 2000 at $1.25 per share. The note is interest-free and is due and payable on February 8, 2005. The entire principal amount on this note remains outstanding. On February 9, 2000 we loaned $375,000 to Dr. Timothy Day, our Chief Technical Officer and Vice President Engineering, secured by a stock pledge, in connection with the purchase of 300,000 shares of our common stock pursuant to the exercise of a stock option granted to him on February 9, 2000 at $1.25 per share. The note is interest-free and is due and payable on February 8, 2005. The entire principal amount on this note remains outstanding. On February 9, 2000 we loaned $750,000 to William L. Potts, Jr., our Chief Financial Officer, secured by a stock pledge, in connection with the purchase of 600,000 shares of our common stock pursuant to the exercise of a stock option granted to him on February 9, 2000 at $1.25 per share. The note is interest-free and is due and payable on February 9, 2005. The entire principal amount on this note remains outstanding. OTHER MATTERS From 1990 to 1997, Dr. Chang served as our President and Chief Executive Officer. Since 1997, we have employed Dr. Chang in a research and marketing capacity. Dr. Chang received compensation of $84,770, $110,000 and $110,000 for the nine-month period ended December 31, 1999, fiscal year ended March 31, 1999 and fiscal year ended March 31, 1998, respectively. On March 3, 1999 and November 1, 1999, we entered into consulting agreements with John Dexheimer, one of our directors, for services to be rendered in connection with our Series E, Series F and Series G Preferred Stock financings. Pursuant to these agreements, Mr. Dexheimer received a cash payment of $618,731 and warrants to purchase 111,972 shares of Series E Preferred Stock at an exercise price of $1.20 per share. 63 66 INDEMNIFICATION We have entered into indemnification agreements with each of our directors and officers. These indemnification agreements require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. For a description of the limitation of our directors' liability and our indemnification of officers, see "Management -- Limitations on Directors' and Officers' Liability and Indemnification." EMPLOYMENT AGREEMENTS We have entered into employment arrangements, compensation arrangements and severance arrangements with certain of our executive officers, see "Management -- Employment and Change-of-Control Agreements" and "-- Executive Officers -- Compensation." For information regarding stock options, see "Management -- Stock Plans." FUTURE TRANSACTIONS All future transactions, including any loans from us to our officers, directors, principal stockholders or affiliates, will be approved by a majority of the board of directors, including a majority of the independent and disinterested members of the board of directors or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 64 67 PRINCIPAL STOCKHOLDERS The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of July 2, 2000, and as adjusted to reflect the sale of common stock offered hereby by the following: - each stockholder known by us to own beneficially more than 5% of our common stock; - each of our current executive officers named in the compensation table above; - each of our directors; and - all directors and executive officers as a group. As of July 2, 2000, there were 59,621,717 shares of our common stock outstanding. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on the information furnished by the owners, have sole voting power and investment power with respect to their shares. Beneficial ownership is determined in accordance with the rules of the Securities Exchange Commission. In computing the number of shares beneficially owned by a person and the percent ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after July 2, 2000 are deemed outstanding, while the shares are not deemed outstanding for purposes of computing percent ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
PERCENT OF SHARES OUTSTANDING SHARES -------------------------- BENEFICIALLY PRIOR TO NAME OR GROUP OF BENEFICIAL OWNERS OWNED OFFERING AFTER OFFERING ---------------------------------- ------------ -------- -------------- DIRECTORS AND EXECUTIVE OFFICERS Kenneth E. Westrick(1)................................... 2,597,334 4.4% 4.1% Dr. Timothy Day(2)....................................... 1,010,000 1.7 1.6 Dr. Robert A. Marsland(3)................................ 670,400 1.1 1.1 Nicola Pignati(4)........................................ 500,000 * * Paul G. Smith(5)......................................... 700,000 1.2 1.1 Dr. Bao-Tong Ma(6)....................................... 500,000 * * William L. Potts, Jr.(7)................................. 600,100 * * George Yule(8)........................................... 327,400 * * Dr. Milton Chang(9)...................................... 10,471,856 17.6 16.6 John Dexheimer(10)....................................... 265,639 * * Dr. Winston S. Fu(11).................................... 6,386,614 10.7 10.1 R. Clark Harris(12)...................................... 64,000 * * Robert Pavey(13)......................................... 6,388,614 10.7 10.1 Dr. David L. Lee(14)..................................... -- -- -- All directors and officers as a group (14 persons)(15)... 30,573,057 51.1 48.3 5% STOCKHOLDERS Dr. Milton Chang(9)...................................... 10,471,856 17.6 16.6 Morgenthaler Ventures Partners V, L.P. .................. 6,388,614 10.7 10.1 Entities associated with U.S. Venture Partners(11)....... 6,384,614 10.7 10.1 London Pacific Life & Annuity Company.................... 4,615,386 7.7 7.3
------------------------ * Denotes less than one percent of the outstanding stock. (1) Includes 1,266,665 shares subject to our right of repurchase which lapses over time. Also includes 21,080 shares held by Mr. Westrick's minor daughter and 22,600 shares held by Mr. Westrick's minor son. (2) Includes 433,667 shares subject to our right of repurchase, which lapses over time. 65 68 (3) Includes 146,667 shares subject to our right of repurchase, which lapses over time. (4) Includes 500,000 shares subject to an option exercisable within 60 days of July 2, 2000. (5) Includes 483,333 shares subject to our right of repurchase, which lapses over time. (6) Includes 500,000 shares subject to our right of repurchase, which lapses over time. (7) Includes 600,000 shares subject to our right of repurchase, which lapses over time. (8) Includes 166,667 shares subject to our right of repurchase, which lapses over time. (9) Includes 800,000 shares held by Chang Partners, a California limited partnership, of which Dr. Chang is a general partner. (10) Includes 29,333 shares subject to an option, which is exercisable within 60 days of July 2, 2000. (11) Includes 5,937,690 shares held by U.S. Venture Partners VI, L.P., 185,154 shares held by USVP VI Entrepreneurs Partners, L.P., 166,000 shares held by USVP VI Affiliates Fund, L.P. and 95,770 shares held by 2180 Associates Fund VI, L.P. Dr. Fu is a non-managing member of Presidio Management Group VI, LLC, the general partner of U.S. Venture Partners entities. Dr. Fu disclaims beneficial ownership of shares held by these entities, except to the extent of his pecuniary interest in these entities. (12) Includes 5,334 shares subject to an option exercisable within 60 days of July 2, 2000. (13) Includes 6,388,614 shares held by Morgenthaler Ventures Partners V, L.P. Mr. Pavey is a partner at Morgenthaler Ventures. Mr. Pavey disclaims beneficial ownership of shares held by this entity, except to the extent of his pecuniary interest in this entity. (14) Dr. Lee was appointed to our board of directors on April 19, 2000, and granted an option to purchase 25,000 shares of our common stock at an exercise price of $5.00 per share. (15) Includes an aggregate of 534,667 shares subject to options exercisable within 60 days of July 2, 2000 and 3,596,999 shares subject to our right of repurchase, which lapses over time. 66 69 DESCRIPTION OF CAPITAL STOCK We are authorized to issue 260,000,000 shares, $0.001 par value per share, divided into two classes designated common stock and preferred stock. Of the shares authorized, 250,000,000 shares are designated as common stock and 10,000,000 shares are designated as preferred stock. The following description of our capital stock is only a summary. You should refer to our certificate of incorporation and bylaws as in effect upon the closing of this offering, which are incorporated by reference into this registration statement, of which this prospectus forms a part, from our registration statement on Form S-1, Registration No. 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000 and by the provisions of applicable Delaware law. COMMON STOCK As of July 2, 2000, there were 59,621,717 shares of common stock outstanding which were held of record by in excess of 400 stockholders. There will be 63,121,717 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options after July 2, 2000, after giving effect to the sale of our common stock in this offering. In addition there are an aggregate of 2,855,000 shares reserved for issuance under our 2000 Stock Plan, 2000 Employee Stock Purchase Plan and 2000 Director Option Plan. See "Management -- Stock Plans" for a description of our stock plans. The holders of our common stock are entitled to one vote per share held of record on all matters submitted to a vote of the stockholders. Our amended and restated certificate of incorporation does not provide for cumulative voting in the election of directors. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of our common stock are entitled to receive ratably any dividends, as may be declared from time to time by our board of directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. Holders of our common stock have no preemptive or other subscription or conversion rights. There are no redemption or sinking fund provisions applicable to our common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon the completion of this offering will be fully paid and non- assessable. PREFERRED STOCK Our certificate of incorporation provides that our board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series. The rights, preferences and privileges of each series of preferred stock may be greater than the rights of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until the board of directors determines the specific rights of the holders of any preferred stock that may be issued. However, the effects might include, among other things: (1) restricting dividends on the common stock, (2) diluting the voting power of the common stock, (3) impairing the liquidation rights of the common stock and (4) delaying or preventing a change in our control without further action by the stockholders. Upon the closing of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to a registration rights agreement we entered into with holders of shares of our preferred stock, the holders of 35,196,140 shares, assuming conversion of all outstanding shares of preferred stock, are entitled to certain registration rights regarding these shares. The registration rights provide that if we propose to register any securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, they are entitled to notice of the registration and are 67 70 entitled to include shares of their common stock in the registration. This right is subject to conditions and limitations, including the right of the underwriters in an offering to limit the number of shares included in the registration. The holders of these shares may also require us to file up to two registration statements under the Securities Act at our expense with respect to their shares of common stock. We are required to us our best efforts to effect this registration, subject to conditions and limitations. Furthermore, the holders of these shares may require us to file additional registration statements on Form S-3, subject to conditions and limitations. These rights terminate on the earlier of five years after the effective date of this offering, or when a holder is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90-day period. The Company has received a waiver from holders of the requisite majority of shares subject to registration rights on behalf of all holders of registration rights, waiving the holders' rights to have their shares of the Company's Common Stock registered in this offering. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of our company by means of a tender offer, a proxy contest or otherwise and the removal of incumbent officers and directors. These provisions, summarized below, may discourage certain types of coercive takeover practices and inadequate takeover bids and encourage persons seeking to acquire control of our company to first negotiate with our company. We believe that the benefits of increased protection of our company's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging proposals of this kind because, among other things, negotiation of proposals of this kind could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless, with certain exceptions, the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Our bylaws eliminate the right of stockholders to act by written consent without a meeting and require a majority of stockholders to call a special meeting. Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors. The authorization of undesignated preferred stock makes it possible for the board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of our company. The amendment of any of these provisions would require approval by holders of at least 66 2/3% of our outstanding common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is EquiServe LP. NASDAQ STOCK MARKET NATIONAL MARKET LISTING Our common stock is quoted on The Nasdaq Stock Market's National Market under the symbol "NUFO." 68 71 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of our common stock in the public market following this offering or the possibility of sales of this kind occurring could adversely affect market prices for our common stock or could impair our ability to raise capital through an offering of equity securities. Furthermore, since a majority of our shares are subject to contractual and legal restrictions on resale as described below, sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have 63,121,717 shares of common stock outstanding, based on shares outstanding as of July 2, 2000, assuming the issuance of 3,500,000 of common stock offered by us in this offering and assuming no exercise of the underwriters' over-allotment option. All of the 3,500,000 shares sold in this offering will be freely tradable without restriction or registration under the Securities Act. However, the sale of any of these shares if purchased by "affiliates" as that term is defined in Rule 144 are subject to certain limitations and restrictions that are described below. In addition, in our recent initial public offering 5,750,000 shares of our common stock were sold and these shares are also freely tradable without restriction except for the "affiliate" restrictions described below. Of the outstanding shares of common stock following this offering, 44,113,061 shares are subject to "lock-up agreements" with the underwriters. These lock-up agreements provide that, except under limited exceptions, the stockholder may not offer, sell, contract to sell or otherwise dispose of any of our common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, our common stock until November 13, 2000. The underwriters, however, may in their sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. An additional 9,230,728 shares which were issued in our Series G Preferred Stock financing will not be tradable until December 2000 pursuant to Rule 144. In addition, holders of stock options could exercise such options and sell certain of the shares upon exercise as described below. As of July 2, 2000, there were a total of 5,250,000 shares of common stock subject to outstanding options under our 1990 Incentive Stock Option Plan, 1998 Stock Plan, 1999 Stock Plan, and 2000 Stock Plan all of which are subject to lock up agreements or will not be vested prior to the expiration of the lock up agreements. The Company has filed a registration statement on Form S-8 to register all of the shares of common stock issued or reserved for issuance under our 1990 Incentive Stock Plan, 1998 Stock Plan, 1999 Stock Plan, 2000 Stock Plan, 2000 Employee Stock Purchase Plan and 2000 Director Plan. On November 13, 2000, the date that the lock-up agreements expire, a total of 1,384,380 shares of our common stock subject to outstanding options will be vested and generally available for resale in the public market. Rule 144 In general, under Rule 144 as currently in effect, beginning August 15, 2000, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell shares. An affiliate who has owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately 631,217 shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq Stock Market's National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to certain other requirements regarding the manner of sale, notice filing and the availability of current public information about us. 69 72 Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our "affiliates" at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, generally including the holding period of any prior owner other than an "affiliate," is entitled to sell such shares without complying with the manner of sale, notice filing, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Rule 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to resell those shares beginning August 15, 2000 in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of those options (including exercises after May 17, 2000). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning August 15, 2000 may be sold by persons other than "affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144. Securities issued in reliance on Rule 701 may be sold by "affiliates" under Rule 144 without compliance with its one year minimum holding period requirement. 70 73 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2000 we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc., CIBC World Markets Corp., U.S. Bancorp Piper Jaffray Inc., Dain Rauscher Incorporated and Epoch Securities, Inc. are acting as representatives, the following respective numbers of shares of common stock:
Number Underwriter of Shares ----------- --------- Credit Suisse First Boston Corporation...................... Chase Securities Inc........................................ CIBC World Markets Corp..................................... U.S. Bancorp Piper Jaffray Inc.............................. Dain Rauscher Incorporated.................................. Epoch Securities, Inc. ..................................... --------- Total............................................. 3,500,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 525,000 additional shares from us at the offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ------------------------------- ------------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us................... $ $ $ $ Expenses payable by us..................... $ $ $ $
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof or pursuant to options granted under our option plans. Our officers and directors and substantially all of our stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that 71 74 transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such aforementioned transaction is to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation until November 13 2000. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. Our common stock is listed on The Nasdaq Stock Market's National Market under the symbol "NUFO". In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares which they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option -- a naked short position -- that position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. - In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. 72 75 Epoch Securities, Inc. is an investment banking firm formed in November 1999. In addition to this offering, Epoch Securities, Inc. has engaged in the business of public and private equity investing and financing and financial advisory services since its inception. The five senior members of the Epoch Securities, Inc. investment banking team have in the aggregate in excess of 40 years of investment banking and related experience in the securities industry. Epoch Securities, Inc. does not have any material relationship with us or any of our officers, directors or other controlling persons, except for its contractual relationship with us under the terms of the underwriting agreement entered into in connection with this offering. The corporate parents of Charles Schwab & Co., Inc., Ameritrade (Inc.) and TD Waterhouse Investor Services, Inc. are equity investors in Epoch's corporate parent. Under the terms of Epoch's distribution agreement, Charles Schwab, Ameritrade and TD Waterhouse are entitled to receive an allocation of any shares allocated in the offering to Epoch on a free retention basis. Until they accept this allocation, however, they are not obligated to take any shares. If they do take shares, they are obligated to try to sell those shares to brokerage customers who buy shares through the Internet, a computerized system or other automated system, but they otherwise are entitled to allocate shares following their customary practices. Charles Schwab, Ameritrade and TD Waterhouse are not underwriters under the underwriting agreement. Because of their current relationship to Epoch and their role in the distribution of securities, however, they may be deemed to be underwriters as that term is defined in the Securities Act in connection with this offering. They believe their activities fall within the selling dealer exception to the definition and, therefore, believe that they are not "underwriters" under the Securities Act. 73 76 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions". RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 74 77 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Legal matters will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS Ernst & Young LLP, independent auditors have audited our consolidated financial statements and schedule at March 31, 1999 and December 31, 1999 and for each of the two years in the period ended March 31, 1999, and for the nine months ended December 31, 1999 as described in their report. We have included our financial statements and schedule in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and our common stock, reference is made to the registration statement and to the exhibits and schedules filed therewith. A copy of the registration statement may be inspected by anyone without charge at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the registration statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Commission maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 75 78 NEW FOCUS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)............................................... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 79 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders New Focus, Inc. We have audited the accompanying consolidated balance sheets of New Focus, Inc. as of March 31, 1999 and December 31, 1999, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the two years in the period ended March 31, 1999, and for the nine-month period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Focus, Inc. at March 31, 1999 and December 31, 1999, and the consolidated results of its operations and its cash flows for each of the two years in the period ended March 31, 1999, and for the nine-month period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Jose, California February 25, 2000, except as to Note 12, as to which the date is May 8, 2000 F-2 80 NEW FOCUS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
MARCH 31, DECEMBER 31, JULY 2, 1999 1999 2000 --------- ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 51 $ 28,067 $ 94,998 Accounts receivable, less allowance for doubtful accounts of $135 at March 31, 1999 $160 at December 31, 1999 and $454 at July 2, 2000.................................... 2,064 3,102 5,755 Unbilled receivables...................................... 192 121 131 Inventories............................................... 3,654 6,217 13,294 Prepaid expenses and other current assets................. 141 243 1,575 ------- -------- -------- Total current assets.................................. 6,102 37,750 115,753 Property and equipment, net................................. 1,880 6,895 19,381 Other assets, net of accumulated amortization of $29 at March 31, 1999, $56 at December 31, 1999 and $110 at July 2, 2000................................................... 258 207 5,105 ------- -------- -------- Total assets.......................................... $ 8,240 $ 44,852 $140,239 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Loans payable to bank..................................... $ 1,755 $ -- $ -- Accounts payable.......................................... 1,788 5,658 8,278 Accrued expenses.......................................... 1,567 2,540 3,678 Deferred research and development funding................. 250 250 343 Current portion of long-term debt......................... 263 276 288 ------- -------- -------- Total current liabilities............................. 5,623 8,724 12,587 Notes payable to stockholder/director....................... 2,305 -- -- Accrued interest to stockholder/director.................... 117 -- -- Long-term debt, less current portion........................ 588 368 239 Deferred rent............................................... 790 747 1,022 Commitments and contingencies Stockholders' equity (net capital deficiency): Preferred stock, $0.001 par value......................... -- -- -- Authorized shares -- 10,000,000 at July 2, 2000 Issued and outstanding shares -- none Convertible preferred stock, $0.001 par value: Authorized shares -- 22,760,000 at March 31, 1999 and 44,083,326 December 31, 1999 and none at July 2, 2000 Issued and outstanding shares -- 20,737,000 at March 31, 1999, 41,939,144 at December 31, 1999 and none at July 2, 2000................................................ 21 42 -- Common stock, $0.001 par value: Authorized shares -- 80,000,000 at March 31, 1999 and December 31, 1999 and 250,000,000 at July 2, 2000 Issued and outstanding shares -- 2,410,380 at March 31, 1999, 2,578,824 at December 31, 1999, 59,621,717 at July 2, 2000........................................... 2 2 60 Additional paid-in capital................................ 6,627 51,168 212,951 Notes receivable from stockholders........................ -- -- (7,378) Deferred compensation..................................... -- (689) (37,144) Accumulated deficit....................................... (7,833) (15,510) (42,098) ------- -------- -------- Total stockholders' equity (net capital deficiency)... (1,183) 35,013 126,391 ------- -------- -------- Total liabilities and stockholders' equity (net capital deficiency).................................. $ 8,240 $ 44,852 $140,239 ======= ======== ========
See accompanying notes. F-3 81 NEW FOCUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS SIX MONTHS ENDED YEARS ENDED MARCH 31, ENDED -------------------------- ---------------------- DECEMBER 31, JUNE 30, JULY 2, 1998 1999 1999 1999 2000 --------- --------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Net revenues....................... $15,482 $17,285 $18,101 $ 9,322 $ 24,233 Cost of net revenues(1)............ 8,186 9,225 12,525 5,421 23,842 ------- ------- ------- ------- -------- Gross profit....................... 7,296 8,060 5,576 3,901 391 Operating expenses: Research and development(2)...... 6,188 9,115 8,386 4,622 9,217 Less funding received from research and development contracts..................... (2,467) (1,736) (1,034) (901) (716) ------- ------- ------- ------- -------- Net research and development..... 3,721 7,379 7,352 3,721 8,501 Sales and marketing(3)........... 2,193 2,987 2,982 1,800 2,565 General and administrative(4).... 1,355 2,360 2,704 1,241 3,792 Deferred compensation............ -- -- 132 9 13,056 ------- ------- ------- ------- -------- Total operating expenses...... 7,269 12,726 13,170 6,771 27,914 ------- ------- ------- ------- -------- Operating income (loss)............ 27 (4,666) (7,594) (2,870) (27,523) Interest income.................... -- -- 208 3 1,019 Interest expense................... (328) (327) (176) (202) (143) Other income (expense), net........ 25 24 (113) 8 59 ------- ------- ------- ------- -------- Loss before provision for income taxes............................ (276) (4,969) (7,675) (3,061) (26,588) Provision for income taxes......... 10 2 2 2 -- ------- ------- ------- ------- -------- Net loss...................... $ (286) $(4,971) $(7,677) $(3,063) $(26,588) ======= ======= ======= ======= ======== Historical basic and diluted net loss per share................... $ (0.25) $ (2.18) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======== Shares used to compute historical basic and diluted net loss per share............................ 1,148 2,284 2,468 2,413 19,546 ======= ======= ======= ======= ======== Pro forma basic and diluted net loss per share................... $ (0.24) $ (0.13) $ (0.52) ======= ======= ======== Shares used to compute pro forma basic and diluted net loss per share............................ 32,223 24,191 51,000 ======= ======= ========
------------------------- (1) Excluding $62 and $2,464 in amortization of deferred stock based compensation for the nine months ended December 31, 1999 and six months ended July 2, 2000, respectively (2) Excluding $54 and $3,296 in amortization of deferred stock based compensation for the nine months ended December 31, 1999 and six months ended July 2, 2000, respectively (3) Excluding $10 and $755 in amortization of deferred stock based compensation for the nine months ended December 31, 1999 and six months ended July 2, 2000, respectively (4) Excluding $6 and $6,541 in amortization of deferred stock based compensation for the nine months ended December 31, 1999 and six months ended July 2, 2000, respectively See accompanying notes. F-4 82 NEW FOCUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE -------------------- ------------------- PAID-IN FROM DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION ----------- ------ ---------- ------ ---------- ------------ ------------ Balance at March 31, 1997.......... 16,160,000 $ 16 1,127,180 $ 1 $ 2,128 $ -- $ -- Issuance of common stock from exercise of options............ -- -- 157,716 -- 16 -- -- Repurchase of common stock....... -- -- (8,996) -- (1) -- -- Net loss......................... -- -- -- -- -- -- -- ----------- ---- ---------- --- -------- ------- -------- Balance at March 31, 1998.......... 16,160,000 16 1,275,900 1 2,143 -- -- Issuance of Series C preferred stock, net of issuance cost of $16............................ 600,000 1 -- -- 493 -- -- Issuance of Series D preferred stock, net of issuance cost of $54............................ 3,977,000 4 -- -- 3,919 -- -- Issuance of common stock from exercise of options............ -- -- 1,443,444 1 187 -- -- Repurchase of common stock....... -- -- (308,964) -- (193) -- -- Warrant issued to long-term creditor....................... -- -- -- -- 78 -- -- Net loss......................... -- -- -- -- -- -- -- ----------- ---- ---------- --- -------- ------- -------- Balance at March 31, 1999.......... 20,737,000 21 2,410,380 2 6,627 -- -- Issuance of Series E preferred stock, net of issuance cost of $489........................... 10,857,616 11 -- -- 12,526 -- -- Issuance of Series F preferred stock, net of issuance cost of $28............................ 1,113,800 1 -- -- 1,307 -- -- Issuance of Series G preferred stock, net of issuance cost of $160........................... 9,230,728 9 -- -- 29,832 -- -- Issuance of common stock from exercise of options............ -- -- 168,444 -- 55 -- -- Deferred compensation............ -- -- -- -- 821 -- (821) Amortization of deferred compensation................... -- -- -- -- -- -- 132 Net loss......................... -- -- -- -- -- -- -- ----------- ---- ---------- --- -------- ------- -------- Balance at December 31, 1999....... 41,939,144 42 2,578,824 2 51,168 -- (689) Issuance of common stock from exercise of options (unaudited).................... -- -- 9,716,609 10 8,346 (7,690) -- Issuance of stock in connection with business acquisition (unaudited).................... -- -- 116,000 -- 1,508 -- (1,300) Issuance of warrants for rent (unaudited).................... -- -- -- -- 279 -- -- Repurchase of common stock (unaudited).................... -- -- (500,000) -- (312) 312 -- Issuance of preferred stock from exercise of warrants (unaudited).................... 121,140 -- -- -- 145 -- -- Conversion of preferred stock into common stock (unaudited).................... (42,060,284) (42) 42,060,284 42 -- -- -- Issuance of common stock (unaudited).................... -- -- 5,650,000 6 103,606 -- -- Deferred compensation (unaudited).................... -- -- -- -- 48,211 -- (48,211) Amortization of deferred compensation (unaudited)....... -- -- -- -- -- -- 13,056 Net loss (unaudited)............. -- -- -- -- -- -- -- ----------- ---- ---------- --- -------- ------- -------- Balance at July 2, 2000 (unaudited)...................... -- $ -- 59,621,717 $60 $212,951 $(7,378) $(37,144) =========== ==== ========== === ======== ======= ======== ACCUMULATED DEFICIT TOTAL ----------- -------- Balance at March 31, 1997.......... $ (2,576) $ (431) Issuance of common stock from exercise of options............ -- 16 Repurchase of common stock....... -- (1) Net loss......................... (286) (286) -------- -------- Balance at March 31, 1998.......... (2,862) (702) Issuance of Series C preferred stock, net of issuance cost of $16............................ -- 494 Issuance of Series D preferred stock, net of issuance cost of $54............................ -- 3,923 Issuance of common stock from exercise of options............ -- 188 Repurchase of common stock....... -- (193) Warrant issued to long-term creditor....................... -- 78 Net loss......................... (4,971) (4,971) -------- -------- Balance at March 31, 1999.......... (7,833) (1,183) Issuance of Series E preferred stock, net of issuance cost of $489........................... -- 12,537 Issuance of Series F preferred stock, net of issuance cost of $28............................ -- 1,308 Issuance of Series G preferred stock, net of issuance cost of $160........................... -- 29,841 Issuance of common stock from exercise of options............ -- 55 Deferred compensation............ -- -- Amortization of deferred compensation................... -- 132 Net loss......................... (7,677) (7,677) -------- -------- Balance at December 31, 1999....... (15,510) 35,013 Issuance of common stock from exercise of options (unaudited).................... -- 666 Issuance of stock in connection with business acquisition (unaudited).................... -- 208 Issuance of warrants for rent (unaudited).................... -- 279 Repurchase of common stock (unaudited).................... -- -- Issuance of preferred stock from exercise of warrants (unaudited).................... -- 145 Conversion of preferred stock into common stock (unaudited).................... -- -- Issuance of common stock (unaudited).................... -- 103,612 Deferred compensation (unaudited).................... -- -- Amortization of deferred compensation (unaudited)....... -- 13,056 Net loss (unaudited)............. (26,588) (26,588) -------- -------- Balance at July 2, 2000 (unaudited)...................... $(42,098) $126,391 ======== ========
See accompanying notes. F-5 83 NEW FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED NINE MONTHS -------------------------- MARCH 31, ENDED ------------------ DECEMBER 31, JUNE 30, JULY 2, 1998 1999 1999 1999 2000 ------- ------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net loss........................................ $ (286) $(4,971) $(7,677) $(3,063) $(26,588) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of fixed assets.................. 475 588 756 340 1,414 Amortization of intangibles................... 41 10 27 12 54 Amortization of deferred compensation......... -- -- 132 9 13,056 Deferred rent................................. 184 -- (43) (11) 275 Changes in operating assets and liabilities: Accounts receivable and unbilled receivables.............................. (1,231) 372 (967) (210) (2,663) Inventories................................. (1,515) 184 (2,563) (145) (7,077) Prepaid expenses and other current assets... (78) 93 (102) 234 (1,332) Accounts payable............................ 1,137 (884) 3,870 937 2,620 Accrued expenses and accrued interest to stockholder.............................. 440 697 856 (101) 1,138 Deferred research and development funding... 250 -- -- -- 93 ------- ------- ------- ------- -------- Net cash used in operating activities........... (583) (3,911) (5,711) (1,998) (19,010) INVESTING ACTIVITIES Acquisition of property and equipment........... (396) (1,359) (5,771) (1,190) (13,900) Decrease (increase) in other assets............. 17 2 24 (221) (4,465) ------- ------- ------- ------- -------- Net cash used in investing activities........... (379) (1,357) (5,747) (1,411) (18,365) FINANCING ACTIVITIES Proceeds from notes payable to stockholders..... 400 200 -- -- -- Proceeds from issuance of preferred stock....... -- 4,217 43,686 12,568 -- Proceeds from equipment loan.................... -- 800 -- 800 -- Proceeds from capital lease obligations......... -- 35 -- -- -- Payments on notes payable....................... (19) (21) (2,305) -- -- Payments on bank loan........................... (828) (1,772) (3,000) (2,700) -- Proceeds from bank loans........................ 1,395 1,755 1,245 1,055 -- Payments on equipment loan...................... -- (50) (195) (41) (117) Payments under capital lease obligations........ (55) (36) (12) (3) -- Proceeds from issuance of common stock.......... 16 188 55 53 104,423 Repurchase of common stock...................... (1) (193) -- -- -- ------- ------- ------- ------- -------- Net cash provided by financing activities....... 908 5,123 39,474 11,732 104,306 ------- ------- ------- ------- -------- Increase (decrease) in cash..................... (54) (145) 28,016 8,323 66,931 Cash at beginning of period..................... 250 196 51 164 28,067 ------- ------- ------- ------- -------- Cash at end of period........................... $ 196 $ 51 $28,067 $ 8,487 $ 94,998 ======= ======= ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest.......................... $ 174 $ 155 $ 188 $ 202 $ 143 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES Promissory note payable converted to equity..... $ -- $ 200 $ -- $ -- $ -- Interest on note converted to principal......... $ -- $ 680 $ -- $ -- $ -- Warrant issued to long-term creditor/lessor..... $ -- $ 78 $ -- $ 78 $ 279 Stock issued in business acquisition............ $ -- $ -- $ -- $ -- $ 208
See accompanying notes. F-6 84 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business New Focus, Inc. (the Company) was incorporated in California on April 17, 1990 and reincorporated in Delaware on May 8, 2000. The Company is engaged in developing, manufacturing, and marketing telecommunications equipment and photonics products primarily for use in the telecommunications and research markets. Basis of Presentation The consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. During 1999, the Company changed its year end to December 31, 1999 from March 31, 2000. Beginning in 2000, the Company maintains a fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to December 31. The six-month periods ended June 30, 1999 and July 2, 2000 contained 181 days and 184 days, respectively. As of July 2, 2000, the Company had working capital of $103,166,000. For the nine-month period ended December 31, 1999 and the six-month period ended July 2, 2000, the Company used cash of $5,711,000 and $19,010,000, respectively in its operating activities. In addition for the nine-month period ended December 31, 1999 and the six-month period ended July 2, 2000 the Company used cash for the acquisition of property and equipment of $5,771,000 and $13,900,000, respectively. Management believes that, to the extent existing resources and anticipated revenues are insufficient to fund the Company's planned activities, additional debt or equity financing will be available. Cash Equivalents Cash equivalents consist of a money market fund. For purposes of the accompanying statements of cash flows, the Company considers all liquid instruments with an original maturity date of three months or less to be cash equivalents. The fair value, based on quoted market prices of the cash equivalents, is substantially equal to their carrying value at March 31, 1999, December 31, 1999, and July 2, 2000. Inventories Inventories are stated at the lower of cost or market on a first-in, first-out basis. Inventories consist of the following:
MARCH 31, DECEMBER 31, JULY 2, 1999 1999 2000 --------- ------------ --------- (IN THOUSANDS) Raw Materials............................. $1,994 $3,247 $ 6,059 Work in Progress.......................... 372 1,283 5,847 Finished Goods............................ 1,288 1,687 1,388 ------ ------ ------- Total..................................... $3,654 $6,217 $13,294 ====== ====== =======
Fixed Assets The Company records its property and equipment at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. F-7 85 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) Amortization is computed on leasehold improvements using the straight-line method over the shorter of the estimated useful lives of the assets or the term of the lease. Other Assets Other assets consist primarily of deposits as well as intangible assets. Intangible assets, consisting of goodwill and debt issuance costs from warrants relating to the Company's equipment line are amortized over their estimated useful lives of approximately three years. At July 2, 2000 the Company had a $2,500,000 advance to a supplier to be applied against future purchases. In connection with the Company's acquisition in July 1996 of Palo Alto Research Corporation, the Company issued a $110,000 note payable, bearing interest at 6.74%, to the former owner of the business in exchange for $48,000 in fixed assets and $9,000 in inventory. The remaining $53,000 in the purchase price was classified as goodwill and is being amortized over four years. The terms of the note require the Company to repay this debt over four years with annual installments of $25,000 including interest. At December 31, 1999, the Company owed $23,400 in principal on this note. The note was repaid during the six-month period ended July 2, 2000. Advertising Expenses The cost of advertising is expensed as incurred. The Company's advertising costs for the fiscal years ended March 31, 1998 and 1999, the nine-month period ended December 31, 1999 and for the six-month periods ended June 30, 1999 and July 2, 2000 were approximately $316,000, $342,000, $257,000, $150,000 and $220,000, respectively. Revenue Recognition Product revenue is recorded upon shipment provided there are no significant remaining obligations and collectibility is probable. The Company provides an allowance for estimated returns of defective products. Research and Development Company-sponsored research and development costs as well as costs related to research and development contracts are currently expensed. Total expenditures for research and development in fiscal years ended March 31, 1998 and 1999, the nine-month period ended December 31, 1999 and the six-month periods ended June 30, 1999 and July 2, 2000 were $6,188,000, $9,115,000, $8,386,000, $4,622,000 and $9,217,000, respectively. Funding earned under the contractual terms of the research and development contracts is netted against research and development costs, which were $2,467,000, $1,736,000, $1,034,000, $901,000 and $716,000 for the fiscal years ended March 31, 1998 and 1999, the nine-month period ended December 31, 1999, and for the six-month periods ended June 30, 1999 and July 2, 2000, respectively. The funding relates to various arrangements, primarily with government agencies, whereby the Company is reimbursed for substantially all of its costs incurred under the related project. Unbilled receivables reflect the costs incurred under these contracts that have yet to be billed at the balance sheet date. Stock-Based Compensation The Company accounts for stock-based awards to employees under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to F-8 86 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) Employees" (APB 25), and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Comprehensive Income Effective April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 established rules for reporting and displaying comprehensive income. The Company's comprehensive net loss was the same as its net loss for the years ended March 31, 1998 and 1999, the nine-months ended December 31, 1999, and the six-months ended June 30, 1999 and July 2, 2000. Interim Financial Information The interim financial information at July 2, 2000 and for the six-month periods ended June 30, 1999 and July 2, 2000 is unaudited but, in the opinion of management, includes all adjustments, consisting only of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and results of operations for the interim periods. The results of operations for the six-month period ended July 2, 2000 are not necessarily indicative of the results to be expected for the full fiscal year. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. In June 1999, the Board issued FAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", which deferred the effective date of FAS 133 until fiscal years beginning after June 15, 2000. The Company believes that the adoption of FAS 133 will not have a significant impact on the Company's operating results or cash flows. In December 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, ("SAB 101") "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB 101 is effective for years beginning after December 15, 1999 and is required to be reported beginning in the quarter ended December 31, 2000. SAB 101 is not expected to have a significant effect on the Company's consolidated results of operations, financial position, or cash flows. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but F-9 87 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not expect the application of FIN 44 to have a material impact on the Company's results of operations, financial position, or cash flows. 2. CONCENTRATION OF REVENUE AND CREDIT AND OTHER RISKS The Company sells to a large number of companies in the telecommunications and photonics research markets. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company provides reserves for potential credit losses, and such losses have been within management's expectations. Financial instruments that potentially subject the Company to significant concentrations of credit risks consist principally of cash, cash equivalents and accounts receivable. The Company places its cash equivalents in high-credit quality financial institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. As of December 31, 1999 and July 2, 2000 all funds are invested in a single money market fund. For the six-month period ended July 2, 2000, Agilent Technologies and Corvis Corporation accounted for 14.3% and 14.2% of net revenues, respectively. There were no customers which accounted for more than 10% of net revenues for the years ended March 31, 1998 and 1999, the nine-month period ended December 31, 1999 and the six-month period ended June 30, 1999. The Company currently purchases several key components and materials used in the manufacturing process from a single or limited source supplier. Any interruption or delay in the supply of any of these components or materials, or the ability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time would impair the Company's ability to meet scheduled product deliveries and could cause customers to cancel orders. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MARCH 31, DECEMBER 31, JULY 2, 1999 1999 2000 --------- ------------ ------- (IN THOUSANDS) Building........................................... $ -- $ -- $ 3,750 Manufacturing and development equipment............ 2,250 6,404 12,871 Computer software and equipment.................... 1,282 1,787 2,938 Office equipment................................... 166 259 659 Leasehold improvements............................. 213 1,120 3,049 Construction in Progress........................... -- 91 294 ------- ------- ------- 3,911 9,661 23,561 Less accumulated depreciation and amortization..... (2,031) (2,766) (4,180) ------- ------- ------- $ 1,880 $ 6,895 $19,381 ======= ======= =======
4. DEBT Note payable to stockholder/director The Company had unsecured promissory notes payable to Dr. Milton Chang, one of the founders and a member of the Board of Directors. On July 21, 1998, the principal and interest outstanding was rolled F-10 88 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) over into a new promissory note issued with interest at 7.35% per annum. At March 31, 1999, the Company had borrowings outstanding under this arrangement of $2,305,000 and owed interest of $117,000. The promissory note and its related interest were repaid during the nine-month period ended December 31, 1999. Loan Payable to Bank On October 19, 1998, the Company entered into a revolving line of credit agreement with a bank. At March 31, 1999, the Company had borrowings under this arrangement amounting to $1,755,000 at an interest rate of 8.625%. The line was repaid during the nine-month period ended December 31, 1999. At December 31, 1999, the line of credit agreement had expired. Equipment Loan Payable On February 9, 1999, the Company entered into an agreement for an equipment loan facility for a maximum of $2,000,000, under which the right to borrow expired on December 31, 1999. The loan facility charges interest at 8.4% per annum and has a termination payment for 10% of the original principal amount. Certain equipment of the Company secures the loan facility. The Company had borrowed $800,000 under this loan facility of which $750,000, $598,000, and $526,000 was outstanding at March 31, 1999, December 31, 1999, and July 2, 2000 respectively. Future minimum payments on this facility at December 31, 1999 are as follows:
(IN THOUSANDS) 2000........................................... $231 2001........................................... 265 2002........................................... 102 ---- Total.......................................... $598 ====
The Company will pay $45,000 in 2000 and $1,000 in 2001 in relation to other long-term debt facilities outstanding at December 31, 1999. 5. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its facilities and certain equipment under noncancelable operating lease agreements that expire at various dates from fiscal 2000 through fiscal 2007. Net rental expense for these leases aggregated $444,000, $440,000, $383,000, $198,000 and $766,000 for the fiscal years ended March 31, 1998 and 1999, the nine-month period ended December 31, 1999, and the six-month periods ended June 30, 1999 and July 2, 2000 respectively. These amounts are net of $230,000, $255,000, $91,000, $136,000 and $0 of sublease income for the fiscal years ended March 31, 1998 and 1999, the nine-month period ended December 31, 1999 and the six-month periods ended June 30, 1999 and July 2, 2000. In the six-month period ended July 2, 2000 the Company entered into new leases in Wisconsin, California and China. F-11 89 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) Future minimum lease payments under noncancelable operating leases are as follows (in thousands):
DECEMBER 31, JULY 2, 1999 2000 ------------ ------- 2000.................................. $ 1,405 $ 2,232 2001.................................. 1,964 5,779 2002.................................. 2,016 5,962 2003.................................. 2,061 6,145 2004.................................. 2,132 6,358 Thereafter............................ 3,340 14,336 ------- ------- Total minimum payments................ $12,918 $40,812 ======= =======
Litigation On December 8, 1999, U.S.A. Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., which was recently acquired by JDS Uniphase Corporation, filed a complaint against the Company for patent infringement in the United States District Court, Northern District of California. On December 30, 1999, Kaifa filed a first amended complaint adding state law claims against the Company and adding as defendants ten individuals currently employed by the Company. In addition to maintaining its original claim of patent infringement against the Company, Kaifa asserted claims of intentional and negligent interference with contract against the Company, trade secret misappropriation against all of the defendants, unfair competition against all of the defendants, and breach of contract against several of the individual defendants. Kaifa seeks a declaratory judgment, damages, preliminary and injunctive relief and specific enforcement of the individual defendants' alleged contractual obligations. Kaifa alleges that the Company's infringement is willful and seeks enhanced damages and attorneys fees. On April 28, 2000, Kaifa voluntarily dismissed its claim against two individual defendants. On May 3, 2000, the court dismissed Kaifa's claim of negligent interference with contract against the Company and both of Kaifa's claims for trade secret misappropriation and unfair competition against an individual defendant. On June 2, 2000, the Company answered the complaint, denying any liability, asserting various affirmative defenses and seeking a declaration that the patent is not infringed by the Company, is invalid and/or is unenforceable. Currently the parties are engaged in fact discovery. A claim construction hearing regarding the asserted patent claims is scheduled for January 2001, and trial is scheduled for October 2001. The Company intends to defend the action vigorously. If the Company is unsuccessful in defending this action, any remedies awarded to Kaifa may have a material adverse effect on the Company. Furthermore, defending this action will be costly and divert management's attention regardless of whether the action is successfully defended. In addition, the Company is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate disposition of these claims will not have a material adverse effect on the position of the Company. 6. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) Profit Sharing Plan that allows voluntary contributions by employees who have six months or more of service. Eligible employees may elect to contribute up to the maximum allowed under the Internal Revenue Service regulations. The Company made matching contributions of a participant's salary deferral of 10%, 25%, and 25% and recognized costs of $26,000, $131,000 and $125,000 related to this plan in the fiscal years ended March 31, 1998 and 1999 and the nine-month period ended December 31, 1999, respectively. F-12 90 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) 7. INCOME TAXES The difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate (34%) to loss before provision for income taxes is explained below (in thousands):
YEARS ENDED NINE MONTHS MARCH 31, ENDED --------------- DECEMBER 31, 1998 1999 1999 ---- ------- ------------ Tax (benefit) at federal statutory rate..................... $(94) $(1,689) $(2,609) Loss for which no tax benefit is currently recognizable..... 94 1,689 2,609 State taxes................................................. 2 2 2 Alternate minimum taxes..................................... 8 -- -- ---- ------- ------- Total provision............................................. $ 10 $ 2 $ 2 ==== ======= =======
Significant components of the Company's deferred tax assets are as follows:
MARCH 31, ------------------ DECEMBER 31, 1998 1999 1999 ------- ------- ------------ (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards......................... $ 121 $ 1,469 $ 4,363 Tax credit carryforwards................................. 788 1,044 1,428 Capitalized research and development..................... 340 390 786 Other individually immaterial items...................... 735 1,097 501 ------- ------- ------- Total deferred tax assets.................................. 1,984 4,000 7,078 Valuation allowance........................................ (1,984) (4,000) (7,078) ------- ------- ------- Net deferred tax assets.................................... $ -- $ -- $ -- ======= ======= =======
The valuation allowance increased by $557,000, $2,016,000 and $3,078,000 for the years ended March 31, 1998 and 1999, and the nine-month period ended December 31, 1999, respectively. Approximately $260,000 of the valuation allowance for deferred tax assets relates to benefits of stock option deductions which, when recognized, will be allocated directly to additional paid in capital. Financial Accounting Standards Board Statement No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which included the Company's historical operating performance and the reported cumulative net losses in all prior years, the Company has provided a full valuation allowance against its net deferred tax assets. As of December 31, 1999 the Company had federal and state net operating loss carryforwards of approximately $12,000,000 and $400,000, respectively. As of December 31, 1999, the Company also had federal and state research and development tax credit carryforwards of approximately $900,000 and $700,000, respectively. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2004 through 2019, if not utilized. Utilization of the net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating losses and tax credit carryforwards before utilization. F-13 91 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) 8. STOCKHOLDERS' EQUITY Stock Split On August 20, 1999 the Company's Board of Directors and stockholders approved a two-for-one stock split of the Company's common and preferred stock. On February 9, 2000 the Company's Board of Directors and stockholders approved another two-for-one stock split of the Company's common and preferred stock. All preferred stock, common stock, common equivalent shares, and per share amounts have been adjusted retroactively to give effect to the stock splits. Convertible Preferred Stock Prior to the initial public offering in May 1999, the Company had authorized 44,083,326 shares of preferred stock. All issued and outstanding shares of preferred stock were converted into shares of common stock upon the closing of the public offering. Preferred stock was as follows:
MARCH 31, DECEMBER 31, 1999 1999 ---------- ------------ Series A: Authorized, issued and outstanding shares................. 15,160,000 15,160,000 ========== ============ Series B: Authorized, issued, and outstanding shares................ 1,000,000 1,000,000 ========== ============ Series C: Authorized, issued, and outstanding shares................ 600,000 600,000 ========== ============ Series D: Authorized shares......................................... 6,000,000 6,000,000 ========== ============ Issued and outstanding shares............................. 3,977,000 3,977,000 ========== ============ Series E: Authorized shares......................................... 10,978,756 ============ Issued and outstanding shares............................. 10,857,616 ============ Series F: Authorized shares......................................... 1,113,800 ============ Issued and outstanding shares............................. 1,113,800 ============ Series G: Authorized shares......................................... 9,230,770 ============ Issued and outstanding shares............................. 9,230,728 ============
Stock Option Plans Under its 1990 Incentive Stock Option Plan, the Company may grant incentive stock options and nonstatutory stock options to employees, directors, and consultants. Under its 1998 Stock Plan, the Company may grant options and stock purchase rights to employees and consultants provided that incentive stock options may only be granted to employees. During the nine months ended December 31, 1999, the Company established the 1999 Stock Option Plan. Under its 1999 Stock Plan, the Company may grant options and stock purchase rights to employees and consultants provided that incentive stock options may only be granted to employees. Options may be granted to purchase common stock at an F-14 92 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) exercise price of not less than 100% of the fair value of the stock at the date of grant as determined by the Board of Directors. Generally, options vest ratably over five years and expire after ten years. The following table summarizes activity under the 1990, 1998, 1999, 2000 and Director Stock Option Plans:
WEIGHTED OPTIONS AVERAGE AVAILABLE OPTIONS EXERCISE FOR GRANT OUTSTANDING PRICE ---------- ----------- -------- Balance at March 31, 1997................................ 1,944,000 5,230,000 $0.21 Granted................................................ (2,948,000) 2,948,000 $0.48 Exercised.............................................. -- (158,000) $0.10 Canceled............................................... 1,220,000 (1,220,000) $0.37 Repurchased............................................ 8,000 -- $0.15 ---------- ---------- Balance at March 31, 1998................................ 224,000 6,800,000 $0.30 Authorized............................................. 3,200,000 -- $ -- Granted................................................ (2,984,000) 2,984,000 $0.62 Exercised.............................................. -- (1,443,000) $0.13 Canceled............................................... 208,000 (208,000) $0.41 Repurchased............................................ 308,000 -- $0.63 ---------- ---------- Balance at March 31, 1999................................ 956,000 8,133,000 $0.44 Authorized............................................. 5,400,000 -- -- Granted................................................ (692,000) 692,000 $0.63 Exercised.............................................. -- (168,000) $0.33 Canceled............................................... 218,000 (218,000) $0.55 ---------- ---------- Balance at December 31, 1999............................. 5,882,000 8,439,000 $0.45 Authorized............................................. 1,200,000 -- $ -- Granted................................................ (6,215,000) 6,215,000 $8.04 Exercised.............................................. -- (8,916,000) $0.94 Cancelled.............................................. 488,000 (488,000) $0.92 Repurchased............................................ 500,000 -- $0.63 ---------- ---------- ----- Balance at July 2, 2000.................................. 1,855,000 5,250,000 $8.57 ========== ========== ===== Options exercisable at March 31, 1998.................... 3,076,000 $0.10 ========== Options exercisable at March 31, 1999.................... 2,660,000 $0.22 ========== Options exercisable at December 31, 1999................. 3,881,000 $0.33 ==========
The weighted average fair value of options granted in the fiscal years ended March 31, 1998 and 1999 and for the nine-month period ended December 31, 1999 was $0.48, $0.55, and $0.56, respectively. F-15 93 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) The following summarizes option information relating to outstanding options under the plans as of December 31, 1999:
OPTIONS OUTSTANDING ------------------------------------ OPTIONS EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ----------------- ----------- ----------- -------- ----------- -------- $0.0025 - $0.0125 1,236,000 .88 years $0.01 1,236,000 $0.01 $0.025 - $0.0625 165,000 4.93 years $0.04 156,000 $0.04 $0.375 - $0.4625 2,927,000 7.48 years $0.45 1,445,000 $0.45 $0.5125 715,000 8.09 years $0.51 269,000 $0.51 $0.625 3,396,000 8.79 years $0.63 775,000 $0.63 --------- --------- $0.0025 - $0.625 8,439,000 7.04 years $0.45 3,881,000 $0.33 ========= =========
In addition, non-plan options to purchase 800,000 shares of common stock at an exercise price of $0.0025 per share were granted to the Company's founder and Chairman of the Board in fiscal 1991 and are fully exercisable. These options were exercised during the six-month period ended July 2, 2000. Deferred Compensation During the nine-month period ended December 31, 1999, and the six-month period ended July 2, 2000 the Company recorded aggregate deferred compensation of $821,000 and $48,211,000 representing the difference between the exercise price of stock options granted and the then deemed fair value of the Company's common stock. These amounts are being amortized as charges to operations, using the graded method, over the vesting periods of the individual stock options, generally five years. Under the graded method, approximately 51.53%, 24.62%, 14.16%, 7.37% and 2.32%, respectively, of each options compensation expense is recognized in each of the five years following the date of grant. For the nine- month period ended December 31, 1999, and the six-month periods ended June 30, 1999 and July 2, 2000 the Company amortized $132,000, $9,000 and $13,056,000, respectively, of deferred compensation. Pro Forma Disclosure of the Effect of Stock-Based Compensation The Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, there is no compensation expense recognized. Pro forma information regarding net loss is required by FAS 123 which also requires that the information be determined as if the Company has accounted for its employee stock options granted during the fiscal periods ended March 31, 1998 and 1999 and the nine-month periods ended December 31, 1999 F-16 94 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) under the fair value method of FAS 123. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted average assumptions:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ---------------------- DECEMBER 31, 1998 1999 1999 --------- --------- ----------------- Risk-free interest rate...................... 5.9% 5.14% 6.0% Dividend yield............................... 0% 0% 0% Expected option life......................... 5.0 years 5.0 years 5.0 years
The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period, under the graded method. Because FAS 123 is applicable only to options granted subsequent to March 31, 1995, its pro forma effect will not be fully reflected until calendar year 2000 and thereafter. If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value at the grant dates for awards under this plan consistent with the method provided for under FAS 123, then the Company's net loss would have been as indicated in the pro forma amount below:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------------------------ DECEMBER 31, 1998 1999 1999 --------- ----------- ----------------- Net loss as reported............................. $(286,000) $(4,971,000) $(7,677,000) Pro forma net loss............................... $(349,000) $(5,116,000) $(7,845,000) Net loss per share as reported, basic and diluted........................................ $ (0.25) $ (2.18) $ (3.11) Pro forma net loss per share, basic and diluted........................................ $ (0.30) $ (2.24) $ (3.18)
Warrants During the year ended March 31, 1999 the Company issued a warrant for the purchase of 140,000 shares of the Company's Series D preferred stock at $1.00 per share in connection with entering into an equipment loan agreement. The fair value of the warrant was determined using the Black-Scholes method and the following assumptions: expected life 5 years, exercise price $1.00, stock price on date of grant $1.00, expected dividend yield of 0%, risk free rate of 5%, and expected volatility of 0.30 to be $78,000. This amount was capitalized as debt issuance costs and is being amortized over the life of the loan. The warrant expires not earlier than December 31, 2004. The warrant incorporates antidilution protection. During the nine-month period ended December 31, 1999 the Company committed to issue a warrant for the purchase of 112,000 shares of the Company's Series E preferred stock at a price of $1.20 per share in return for fees associated with issuance of Series E preferred stock. The fair value of the warrant was determined using the Black-Scholes method and the following assumptions: expected life 5 years, exercise price $1.20, stock price on date of grant $1.20, expected dividend yield of 0%, risk free rate of 6%, and F-17 95 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) expected volatility of 0.27 to be $48,000. This amount was offset against the proceeds of the Series E preferred stock. The warrant was exercised during the six-month period ended July 2, 2000. During the nine-month period ended December 31, 1999 the Company committed to issue a warrant to purchase 9,000 shares of the Company's Series E preferred shares at a price of $1.20 per share. The fair value of the warrant was determined using the Black-Scholes method and the following assumptions: expected life 5 years, exercise price $1.20, stock price on date of grant $1.20, expected dividend yield of 0%, risk free rate of 6%, and expected volatility of 0.27 to be $4,000. This amount was expensed in the current period. The warrant was exercised during the six-month period ended July 2, 2000. Common Stock Common stock reserved for future issuance is as follows:
DECEMBER 31, JULY 2, 1999 2000 ------------ --------- Stock option plan: Outstanding options................................. 8,439,000 5,250,000 Reserved for future grants.......................... 5,882,000 1,855,000 ---------- --------- 14,321,000 7,105,000 Employee Stock Purchase Plan.......................... -- 1,000,000 Warrants for Series D preferred/common stock.......... 140,000 170,000 Warrants for Series E preferred stock................. 121,000 -- Nonplan stock options granted......................... 800,000 -- Convertible preferred stock........................... 41,939,000 -- ---------- --------- 57,321,000 8,275,000 ========== =========
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Through March 31, 1998, the Company operated as one segment. For the year ended March 31, 1999, the Company had two reportable segments: Telecom and Commercial Photonics Group (CPG). The telecom segment performs research and development, manufacturing, marketing and sales of fiber amplified products, wavelength management products, high-speed opto-electronics and tunable laser modules, which are primarily sold to manufacturers of networking and test equipment in the optical telecommunications markets. The CPG segment performs research and development, manufacturing, marketing and sales of photonic tools, which are primarily used for commercial and research applications. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, excluding gains and losses on the Company's investment portfolio. The accounting policies for the reportable segments are consistent with those described in the summary of significant accounting policies. There were no intercompany sales or transfers. F-18 96 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) The Company does not segregate assets or interest expense by segment.
YEAR ENDED MARCH 31, 1999 ----------------------------- TELECOM CPG TOTAL ------- ------- ------- (IN THOUSANDS) Revenues from external customers............................ $ 45 $17,240 $17,285 Depreciation expense........................................ $ 102 $ 486 $ 588 Operating segment profit (loss)............................. $(6,658) $ 1,992 $(4,666)
NINE MONTHS ENDED DECEMBER 31, 1999 ----------------------------- TELECOM CPG TOTAL ------- ------- ------- (IN THOUSANDS) Revenues from external customers............................ $ 5,002 $13,099 $18,101 Depreciation expense........................................ $ 289 $ 467 $ 756 Operating segment profit (loss)............................. $(9,087) $ 1,625 $(7,462)
SIX MONTHS ENDED JUNE 30, 1999 ---------------------------- TELECOM CPG TOTAL ------- ------ ------- (IN THOUSANDS) Revenues from external customers............................ $ 495 $8,827 $ 9,322 Depreciation expense........................................ $ 89 $ 251 $ 340 Operating segment profit (loss)............................. $(3,910) $1,049 $(2,861)
SIX MONTHS ENDED JULY 2, 2000 ------------------------------- TELECOM CPG TOTAL -------- ------- -------- (IN THOUSANDS) Revenues from external customers............................ $ 13,350 $10,883 $ 24,233 Depreciation expense........................................ $ 978 $ 436 $ 1,414 Operating segment profit (loss)............................. $(16,564) $ 2,097 $(14,467)
Operating segment profit and loss excludes amortization of deferred stock based compensation. F-19 97 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED)
NINE MONTHS SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED ENDED MARCH 31, DECEMBER 31, JUNE 30, JULY 2, 1999 1999 1999 2000 ----------- ------------ ---------- ---------- (IN THOUSANDS) LOSS Total loss for reportable segments......... $(4,666) $(7,462) $(2,861) $(14,467) Other income (expense), net................ (303) (81) (191) 935 Amortization of deferred compensation...... -- (132) (9) (13,056) ------- ------- ------- -------- Loss before income taxes................... $(4,969) $(7,675) $(3,061) $(26,588) ======= ======= ======= ======== GEOGRAPHIC INFORMATION REVENUES United States.............................. $12,445 $13,214 $ 6,463 $ 16,886 Asia....................................... 2,247 1,629 1,422 1,074 Europe..................................... 2,593 3,258 1,437 6,273 ------- ------- ------- -------- Consolidated total....................... $17,285 $18,101 $ 9,322 $ 24,233 ======= ======= ======= ========
Revenues are attributed to countries based on the location of customers. 10. NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period less outstanding nonvested shares. Outstanding nonvested shares are not included in the computation of basic net loss per share until the time-based vesting restrictions have lapsed.
NINE MONTHS SIX MONTHS SIX MONTHS YEARS ENDED ENDED ENDED ENDED MARCH 31, DECEMBER 31, JUNE 30, JULY 2, ---------------- ------------ ---------- ---------- 1998 1999 1999 1999 2000 ------ ------- ------------ ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss (numerator)........................ $ (286) $(4,971) $(7,677) $(3,063) $(26,588) ====== ======= ======= ======= ======== Shares used in computing historical basic and diluted net loss per share (denominator): Weighted average common shares outstanding............................... 1,148 2,284 2,468 2,413 22,500 Less shares subject to repurchase........... -- -- -- -- (2,954) ------ ------- ------- ------- -------- Denominator for basic and diluted net loss per share................................. 1,148 2,284 2,468 2,413 19,546 Conversion of preferred stock (pro forma)... 29,755 21,778 31,454 ------- ------- -------- Denominator for pro forma basic and diluted net loss per share........................ 32,223 24,191 51,000 ======= ======= ======== Historical basic and diluted net loss per share..................................... $(0.25) $ (2.18) $ (3.11) $ (1.27) $ (1.36) ====== ======= ======= ======= ======== Pro forma basic and diluted net loss per share..................................... $ (0.24) $ (0.13) $ (0.52) ======= ======= ========
The Company has excluded the impact of all convertible preferred stock, common shares subject to repurchase, warrants for convertible preferred stock and common stock and outstanding stock options from the calculation of historical diluted loss per common share because all such securities are antidilutive for F-20 98 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) all periods presented. The total number of shares, including options and warrants to purchase shares, excluded from the calculations of historical diluted net loss per share was 22,960,000, 27,351,000, 38,193,000, 41,139,000 and 5,420,000 for the years ended March 31, 1998, 1999, the nine-month period ended December 31, 1999, the six month periods ended June 30, 1999, and July 2, 2000, respectively. 11. INTERIM FINANCIAL RESULTS (UNAUDITED) The following table provides financial information for the nine-month period ended December 31, 1998, (in thousands, except per share amount) and presents comparable information to the Company's nine-month period ended December 31, 1999. Net revenues................................................ $12,544 Gross profit................................................ $ 5,919 Net loss.................................................... $(3,375) Historical basic and diluted net loss per share............. $ (1.50) Shares used to compute historical basic and diluted net loss per share................................................. 2,245
12. SUBSEQUENT EVENTS For the three-month period ended April 2, 2000 the Company made full recourse loans aggregating approximately $4,500,000 to certain employees in connection with their purchase of shares of common stock. Each of these loans were made pursuant to a full recourse promissory note secured by a stock pledge. The notes bear no interest but interest will be imputed and reported annually as compensation on the officer's W-2. All unvested shares purchased by officers are subject to repurchase by the Company at the original exercise price if the officer's employment is terminated. At April 2, 2000, $4,100,000 of this amount is included in stockholders' equity and the remaining $400,000 has been included in "Other Assets". In February 2000, the Board of Directors adopted the 2000 Stock Plan (2000 Plan), which was approved by the stockholders in April 2000. The Plan provides for the grant of stock options to purchase shares of common stock to employees, directors and consultants. A total of 1,000,000 shares of common stock has been reserved for issuance plus any shares reserved for issuance under the 1998 and 1999 Stock Plans and any shares returned to the 1998 and 1999 Stock Plans. The number of shares of common stock reserved for issuance will increase annually beginning in fiscal 2001. In February 2000, the Board of Directors adopted the 2000 Director Option Plan (Directors' Plan), which was approved by the stockholders in April 2000, to provide for the automatic grant of options to purchase shares of common stock to non-employee directors who are not employees or consultants of the Company's affiliates. The Directors' Plan is administered by the Board of Directors, and may be delegated to a committee. A total of 200,000 shares of common stock have been reserved for issuance. The Director's Plan generally provides for an automatic initial grant of an option to purchase 25,000 shares of common stock to each non-employee director on the date when the person first becomes a non-employee director on, or after the closing of the initial public offering, whether through election by the Company's stockholders or appointment by the Company's Board of Directors to fill a vacancy. In addition, upon the date of each annual stockholders' meeting subsequent to the date of each non-employee director's initial grant under the directors' plan, each person who is then serving as a non-employee director automatically shall be granted an option to purchase 5,000 shares of common stock. In February 2000, the Company's Board of Directors approved the 2000 Employee Stock Purchase Plan (Purchase Plan), which was approved by the Company's stockholders in April 2000. A total of F-21 99 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) 1,000,000 shares of common stock have been reserved for issuance. The number of shares of common stock reserved for issuance will increase annually beginning in fiscal 2001. Under the Purchase Plan, the Board of Directors may authorize participation by eligible employees in periodic offerings following the adoption of the Purchase Plan. The offering period for any offering will be no more than 24 months except for the first purchase period for which the offering period will be no more than 27 months. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the relevant purchase date. On February 9, 2000, the Company's Board of Directors, subject to approval of the Amended and Restated Certificate of Incorporation by the state of Delaware, authorized the reincorporation of the Company in Delaware. On May 8, 2000 the Company's reincorporation in the state of Delaware was completed. The par value of the preferred and common stock is $0.001 per share. The Company's Certificate of Incorporation was amended to authorize 10,000,000 shares of preferred stock and 250,000,000 shares of common stock. The Board of Directors has the authority to fix or alter the designations, powers, preferences, and rights of the shares of each series of preferred stock. The Company's reincorporation has been reflected in the consolidated financial statements for all periods presented. On February 28, 2000, the Company issued 116,000 shares of the Company's common stock in connection with a business acquisition. A shareholder/employee of the acquired company received approximately 100,000 of the shares which vest 20% after one year and 1/60 each month thereafter provided the shareholder/employee is an employee of the Company. The unvested shares are subject to repurchase by the Company at $5.00 per share if the employee is terminated. Under Emerging Issues Task Force No. 95-8, "Accounting for Contingent Consideration Paid to Shareholders of an Acquired Enterprise in a Purchase Business Combination," this arrangement is, in substance, compensation for post-combination services rather than additional purchase price. The $1,300,000 value of approximately 100,000 shares issued was recorded in deferred compensation and is being amortized into expenses over the vesting period. The purchase price of $208,000, which is the fair market value of the remaining approximately 16,000 shares resulted in intangible assets. The acquisition was accounted for under the purchase method. On March 10, 2000, a former employee filed a lawsuit against the Company in Santa Clara Superior Court alleging three causes of action for wrongful termination in violation of public policy, breach of the covenant of good faith and fair dealing and fraud. The claims stem from the termination of his employment with the Company in February 2000. The former employee seeks unspecified general and special damages, punitive damages, attorneys' fees and costs in the form of cash and shares of the Company's common stock. The Company filed a motion to dismiss two of the causes of action for breach of contract and fraud. The Company plans to vigorously defend against these claims. The Company has not accrued any liability related to this lawsuit. In April 2000, the Company entered into an agreement to acquire a manufacturing facility in Shenzhen, China. Pursuant to the agreement, the Company purchased approximately 43% of the facility in Shenzhen for approximately US$3.7 million and leased the remainder of the facility for a term of five years from the Shenzhen Libaoyi Industry Development Co., Ltd. with an option to purchase the leased portion of the facility during the first three years of the lease term. In April 2000, the Company entered into negotiations for a senior term loan facility with Credit Suisse First Boston, New York branch and paid a nonrefundable arrangement fee of $125,000. The facility was to provide for a maximum borrowing of $10,000,000. The loan facility was never completed. F-22 100 NEW FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JULY 2, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JULY 2, 2000 IS UNAUDITED) In April 2000 the Company granted options to purchase 811,475 shares of common stock. The deferred stock compensation related to these option grants was approximately $8,900,000. In May 2000, the Company entered into a three-year supply agreement with Fuzhou Koncent Communication, Inc. ("Koncent"), formerly Fuzhou Conet Communication, Inc., to supply the Company with yttrium vanadate crystals. Under the agreement, the Company will purchase a portion of its requirements for this crystal from Koncent and Koncent will commit specified production capacity to the manufacture of the Company's orders. Additionally, the Company agreed to advance a total of U.S.$3,500,000 (of which $2,500,000 had been advanced as of July 2, 2000) to Koncent against future orders. 13. SUBSEQUENT EVENTS (UNAUDITED) For the three-month period ended July 2, 2000 the Company made full recourse loans aggregating approximately $4,300,000 to certain employees in connection with their purchase of shares of common stock. Each of these loans were made pursuant to a full recourse promissory note secured by a stock pledge. The notes bear no interest but interest will be imputed and reported annually as compensation on the officer's W-2. All unvested shares purchased by officers are subject to repurchase by the Company at the original exercise price if the officer's employment is terminated. At July 2, 2000, $3,300,000 of this amount is included in stockholders' equity and the remaining $1,000,000 has been included in "Other Assets". In May 2000, the Company granted options to purchase 1,185,625 shares of common stock. The deferred stock compensation related to these option grants was approximately $6,020,000. In May 2000, the Company entered into a lease for an additional 130,000 square feet of space. Future minimum lease payments under the lease will be approximately $25,000,000 over the seven year lease term. In addition, under the terms of the lease, the Company will provide an irrevocable letter of credit for $4,000,000 as collateral for the performance of the Company's obligations under the lease. In connection with the lease, the Company issued a two-year warrant to the lessor to purchase 30,000 shares of the Company's common stock with an exercise price of $20.00 per share. The warrant is non-forfeitable and immediately exercisable. The fair value of the warrant was determined using the Black-Scholes method and the following assumptions: expected life 2 years, exercise price $20.00, stock price on date of grant $20.00, expected dividend yield of 0%, risk free interest rate of 6%, and expected volatility 0.8 to be $279,000. This amount was capitalized and is being amortized over the life of the lease. F-23 101 [NewFocus Logo] 102 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by New Focus, Inc. in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $ 124,527 NASD filing fee............................................. 30,500 Nasdaq National Market listing fee.......................... 17,500 Printing and engraving costs................................ 300,000 Legal fees and expenses..................................... 250,000 Accounting fees and expenses................................ 200,000 Blue Sky fees and expenses.................................. 3,000 Transfer Agent and Registrar fees........................... 30,000 Miscellaneous expenses...................................... 44,473 ---------- Total....................................................... $1,000,000 ==========
------------------------- * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Registrant's Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. The Registrant's Bylaws provides for the indemnification of officers, directors and third parties acting on behalf of the Registrant if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Registrant, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. The Registrant has entered into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception, we have issued unregistered securities to a limited number of persons as described below: None of these transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. ------------------------- (1) On April 18, 1990, we sold 400,000 shares of common stock to Dr. Milton Chang at a purchase price of $.005 per share. On April 18, 1990, the Board of Directors granted Dr. Chang an option II-1 103 outside of our Stock Option Plan for 800,000 shares of our Common Stock at an exercise price of $.0025. Dr. Chang exercised this option on January 19, 2000. Each transaction was exempt from registration in reliance on Section 4(2) of the Securities Act. (2) From February 28, 1997 through May 17, 2000, (the most recent applicable date) we granted stock options to acquire an aggregate of 6,438,000, 422,000 and 4,925,125 shares of our common stock at prices ranging from $.46 to $1.25, $0.62 to $0.62 and from $0.62 to $20.00 to employees, consultants and directors pursuant to our 1990 Incentive Stock Option Plan, 1998 Stock Plan and 1999 Stock Plan, respectively. Each transaction pursuant to our 1990 Incentive Stock Option Plan and our 1999 Stock Plan, was exempt from registration requirements in reliance on Rule 701 promulgated under Section 3(b) under the Securities Act. Each transaction pursuant to our 1998 Stock Plan was exempt from registration in reliance on Section 4(2) of the Securities Act. (3) From April, 1991 through February, 1992, we issued 8,640,000 shares of Series A preferred stock to Dr. Milton Chang pursuant to a series of put-option agreements at a price of $0.1250. This transaction was exempt from registration requirements in reliance on Section 4(2) of the Securities Act. (4) From May, 1990 through January 1991 we sold 15,160,000 shares of Series A Preferred Stock for $0.125 per share to a group of private investors for an aggregate purchase price of $1,895,000. This transaction was exempt from registration in reliance on Section 4(2) of the Securities Act. (5) On December 10, 1993, we sold 1,000,000 shares of Series B Preferred Stock for $0.25 per share to a group of private investors for an aggregate purchase price of $250,000. This transaction was exempt from registration in reliance on Section 4(2) of the Securities Act. (6) On July 24, 1998, we sold 600,000 shares of Series C Preferred Stock pursuant to a compensatory stock option plan established for the Company's employees for $0.85 per share for an aggregate purchase price of $510,000. This transaction was exempt from registration in reliance on Rule 701 promulgated under Section 3(b) under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation. (7) On July 31, 1998, and August 6, 1998, we sold 3,977,000 shares of Series D Preferred Stock for $1.00 per share to a group of private investors for an aggregate purchase price of $3,977,000. This transaction was exempt from registration in reliance on Section 4(2) of the Securities Act. (8) On February 9, 1999, in connection with a Loan and Security Agreement, we issued a warrant to purchase 140,000 shares of Series D Preferred Stock at an exercise price of $1.00 to Venture Lending and Leasing II, Inc. The issuance of this warrant was exempt from registration in reliance on Section 4(2) of the Securities Act. (9) On June 14, 1999, we sold 10,857,616 shares of Series E Preferred Stock for $1.20 per share to a group of private investors for an aggregate purchase price of $13,029,139.20. This transaction was exempt from registration in reliance on Regulation D promulgated under the Securities Act. (10) We entered into a Technology Transfer Agreement dated June 24, 1999, with Peter Chen pursuant to which we purchased certain technology from Mr. Chen in consideration for options to purchase 230,000 shares of our common stock at the fair market value and the sum of $220,000. Additional terms and conditions are set forth in such Technology Transfer Agreement. The issuance of the shares was exempt from registration in reliance on Rule 701 promulgated under Section 3(b) under the Securities Act as shares issued pursuant to a compensatory benefit plan or a written contract relating to compensation. (11) On October 15, 1999, we sold 1,113,800 shares of Series F Preferred for $1.20 per share to a group of private investors for an aggregate purchase price of $1,336,560. This transaction was exempt from registration requirements in reliance on Regulation D promulgated under the Securities Act. (12) On November 23, 1999, we sold 9,350,728 shares of Series G Preferred for $3.25 per share to a group of private investors for an aggregate purchase price of $30,389,866. This transaction was II-2 104 exempt from registration requirements in reliance on Regulation D promulgated under the Securities Act. (13) On March 3, 1999 and November 1, 1999, we entered into consulting agreements with John Dexheimer, one of our directors, for services rendered in connection with the Series E, Series F and Series G Preferred Stock financings. Pursuant to these agreements, Mr. Dexheimer received warrants to purchase 111,792 shares of Series E Preferred Stock at a price per share of $1.20. The issuance of the warrants were exempt from registration requirements in reliance on Section 4(2) of the Securities Act. (14) On February 28, 2000, we issued 116,000 shares of our common stock to six persons in connection with the acquisition of UBU Communications, Inc. This transaction was exempt from registration requirements in reliance on Section 4(2) of the Securities Act. (15) On May 17, 2000 we issued a warrant to purchase 30,000 shares of our common stock at a price per share of $20.00 to Lincoln-RECP Hellyer Opco, LLC. The issuance of the warrant was exempt from registration requirements in reliance on Section 4(2) of the Securities Act. (16) For additional information concerning these equity investment transactions, reference is made to the information contained under the caption "Certain Transactions" in the form of prospectus included herein. The sales of the above securities were deemed to be exempt from registration in reliance on Rule 701 promulgated under Section 3(b) under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation, or in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about New Focus, Inc. or had access, through employment or other relationships, to such information. II-3 105 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement 3.1** Amended and Restated Certificate of Incorporation of the Registrant 3.2** Bylaws of the Registrant 4.1** Form of stock certificates 4.2** Warrant to Purchase Series D Preferred Stock dated February 1999, between Registrant and Venture Lending and Leasing, see Exhibit 10.15. 4.3** Warrant to Purchase Series E Preferred Stock dated February 9, 2000, between Registrant and John Dexheimer. 4.4** Warrant to Purchase Series E Preferred stock dated February 9, 2000, between Registrant and Pamela York. 4.5** Form of warrant to Purchase Common Stock between Registrant and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1** Form of Indemnification Agreement between the Registrant and each of its directors and officers 10.2** 2000 Stock Plan 10.3** 2000 Employee Stock Purchase Plan 10.4** 2000 Director Option Plan and form of agreement thereunder 10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock Option Agreement, Restated Stock Purchase Agreement, including Security Agreement and Promissory Note between Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma, George Yule, Robert Marsland, Timothy Day, William L. Potts, dated January 12, 2000. 10.6** Premises Lease Contract between Registrant and Shenzhen New and High-tech Village Development Company dated September 23, 1999. 10.7** Lease Agreement between Registrant and Silicon Valley Properties dated December 23, 1999. 10.8+** Agreement on Terms and Conditions of Purchase and Sale of Optical Components between Registrant and Corning, Incorporated dated January 1, 2000. 10.9** Lease Agreement between Focused Research Inc. and University Science Center Partnership, dated May 22, 1996, as amended, June 19, 1997. 10.10** Fifth Amended and Restated Registration Rights Agreement 10.11+** Development Agreement between Registrant and Hewlett-Packard GmbH dated December 23, 1996. 10.12+** Addendum to the Development Agreement between Registrant and Hewlett-Packard GmbH dated November 6, 1997. 10.13+** Addendum No. 2 to the Development Agreement of December 23, 1996 between Registrant and Agilent Technologies Deutschland GmbH dated December 10, 1999. 10.14+** Memorandum of Agreement between Registrant and Alcatel USA Sourcing, L.P. dated January 7, 2000. 10.15** Loan and Security Financing Agreement between Registrant and Venture Lending and Leasing II, Inc. 10.16** Shenzhen Real Estate Sales and Purchase Contract by and between the Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated April 6, 2000. 10.17** Shenzhen Futian Free Trade Zone Premises lease by and between Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated April 6, 2000. 10.18+** Supply Contract by and between the Registrant and Fuzhou Koncent Communication, Inc. (formerly Fuzhou Conet Communications, Inc.) 21.1** List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Counsel (see Exhibit 5.1) 24.1 Power of Attorney (See page II-6) 27.1** Financial Data Schedules
------------------------- + The Registrant has requested confidential treatment with respect to certain portions of this Exhibit. The omitted portions have been separately filed with the Commission. ** Incorporated by reference from our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000. II-4 106 (b) FINANCIAL STATEMENT SCHEDULES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS:
ADDITIONS- BALANCES AT CHARGED TO BALANCES BEGINNING COSTS AND DEDUCTIONS- AT END OF OF PERIOD EXPENSES WRITE-OFFS PERIOD ----------- ---------- ----------- --------- Year ended March 31, 1998...................... $ 70 $ 63 -- $$133 Year ended March 31, 1999...................... $133 $ 40 $(38) $135 Nine months ended December 31, 1999............ $135 $ 39 $(14) $160
Schedules other than that listed above have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 107 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on the 27th day of July, 2000. NEW FOCUS, INC. By: /s/ KENNETH E. WESTRICK ------------------------------------ Kenneth E. Westrick President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kenneth E. Westrick and William L. Potts, Jr. and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ KENNETH E. WESTRICK President, Chief Executive July 27, 2000 -------------------------------------------------------- Officer and Director Kenneth E. Westrick (Principal Executive Officer) /s/ WILLIAM L. POTTS, JR. Chief Financial Officer July 27, 2000 -------------------------------------------------------- (Principal Financial and William L. Potts, Jr. Accounting Officer) /s/ DR. DAVID L. LEE Director July 27, 2000 -------------------------------------------------------- Dr. David L. Lee /s/ DR. MILTON CHANG Director July 27, 2000 -------------------------------------------------------- Dr. Milton Chang /s/ JOHN DEXHEIMER Director July 27, 2000 -------------------------------------------------------- John Dexheimer /s/ DR. WINSTON FU Director July 27, 2000 -------------------------------------------------------- Dr. Winston Fu /s/ R. CLARK HARRIS Director July 27, 2000 -------------------------------------------------------- R. Clark Harris /s/ ROBERT D. PAVEY Director July 27, 2000 -------------------------------------------------------- Robert D. Pavey
II-6 108 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement 3.1** Amended and Restated Certificate of Incorporation of the Registrant 3.2** Bylaws of the Registrant 4.1** Form of stock certificates 4.2** Warrant to Purchase Series D Preferred Stock dated February 1999, between Registrant and Venture Lending and Leasing, see Exhibit 10.15. 4.3** Warrant to Purchase Series E Preferred Stock dated February 9, 2000, between Registrant and John Dexheimer. 4.4** Warrant to Purchase Series E Preferred stock dated February 9, 2000, between Registrant and Pamela York. 4.5** Form of warrant to Purchase Common Stock between Registrant and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1** Form of Indemnification Agreement between the Registrant and each of its directors and officers 10.2** 2000 Stock Plan 10.3** 2000 Employee Stock Purchase Plan 10.4** 2000 Director Option Plan and form of agreement thereunder 10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock Option Agreement, Restated Stock Purchase Agreement, including Security Agreement and Promissory Note between Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma, George Yule, Robert Marsland, Timothy Day, William L. Potts, dated January 12, 2000. 10.6** Premises Lease Contract between Registrant and Shenzhen New and High-tech Village Development Company dated September 23, 1999. 10.7** Lease Agreement between Registrant and Silicon Valley Properties dated December 23, 1999. 10.8+** Agreement on Terms and Conditions of Purchase and Sale of Optical Components between Registrant and Corning, Incorporated dated January 1, 2000. 10.9** Lease Agreement between Focused Research Inc. and University Science Center Partnership, dated May 22, 1996, as amended, June 19, 1997. 10.10** Fifth Amended and Restated Registration Rights Agreement 10.11+** Development Agreement between Registrant and Hewlett-Packard GmbH dated December 23, 1996. 10.12+** Addendum to the Development Agreement between Registrant and Hewlett-Packard GmbH dated November 6, 1997. 10.13+** Addendum No. 2 to the Development Agreement of December 23, 1996 between Registrant and Agilent Technologies Deutschland GmbH dated December 10, 1999. 10.14+** Memorandum of Agreement between Registrant and Alcatel USA Sourcing, L.P. dated January 7, 2000. 10.15** Loan and Security Financing Agreement between Registrant and Venture Lending and Leasing II, Inc. 10.16** Shenzhen Real Estate Sales and Purchase Contract by and between the Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated April 6, 2000. 10.17** Shenzhen Futian Free Trade Zone Premises lease by and between Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated April 6, 2000. 10.18+** Supply Contract by and between the Registrant and Fuzhou Koncent Communication, Inc. (formerly Fuzhou Conet Communications, Inc.) 21.1** List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Counsel (see Exhibit 5.1) 24.1 Power of Attorney (See page II-6) 27.1** Financial Data Schedules
------------------------- + The Registrant has requested confidential treatment with respect to certain portions of this Exhibit. The omitted portions have been separately filed with the Commission. ** Incorporated by reference from our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000.