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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL |
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REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES |
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EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2002
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¨ TRANSITION |
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REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES |
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EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-31861
OPTICAL COMMUNICATION PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware |
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95-4344224 |
| (State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification
No.) |
20961 Knapp Street
Chatsworth, California 91311
(Address of principal executive offices, including zip code)
Registrant’s Telephone Number, Including Area Code: (818) 701-0164
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class
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Name of each exchange on which
registered
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| Class A Common Stock, $0.001 par value |
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The Nasdaq National Market |
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ¨
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ
As of March 29, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, the approximate aggregate market value of voting and non-voting common stock held by non-affiliates of the
registrant was $101,277,800 (based upon the last closing price for shares of the registrant’s common stock as reported by The National Market System of the National Association of Securities Dealers Automated Quotation System as of that date).
Shares of common stock held by each officer, director, and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The registrant has two classes of common stock authorized, Class A
Common Stock and Class B Common Stock. The rights, preferences and privileges of each class of common stock are substantially identical except for voting rights. The holders of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled to ten votes per share on matters to be voted on by stockholders. As of November 30, 2002, there were approximately 43,885,900 shares of Class A Common Stock outstanding and 66,000,000 shares of Class B Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III hereto is incorporated by reference to the Proxy Statement for the Registrant’s 2003 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
OPTICAL COMMUNICATION PRODUCTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
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This Annual Report on Form 10-K, including information incorporated herein by
reference, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to expectations concerning matters that are
not historical facts. Words such as “projects,” “believes,” “anticipates,” “will,” “estimate,” “plans,” “expects,” “intends,” and similar words and expressions are
intended to identify forward-looking statements. Although we believe that such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Important language regarding factors which could cause
actual results to differ materially from such expectations are disclosed in this Report, including without limitation under the caption “Risk Factors” beginning on page 14 of this Report, and the other documents we file with the Securities
and Exchange Commission (“SEC”), including our most recent reports on Form 8-K and Form 10-Q, and amendments thereto. All forward-looking statements attributable to Optical Communication Products are expressly qualified in their entirety
by such language. We do not undertake any obligation to update any forward-looking statements.
PART I.
We design, manufacture and sell a comprehensive line of high performance,
highly reliable fiber optic subsystems and modules for the metropolitan area, local area and storage area markets. Subsystems and modules are preassembled components that are used to build network equipment. Our subsystems and modules are integrated
into systems that address the bandwidth limitations in metropolitan area networks, or MANs, local area networks, or LANs and storage area networks, or SANs. Our products include optical transmitters, receivers, transceivers and transponders that
convert electronic signals into optical signals and back to electronic signals, enabling high-speed communication of voice and data traffic over public and private fiber optic networks. Our products support a wide range of network applications,
transmission speeds, distances and standards, including international transmission standards.
The Company was
founded in October 1991 with initial funding from The Furukawa Electric Company, Ltd. of Japan (“Furukawa”). We offer a comprehensive line of high performance, cost-effective solutions to our customers supported by volume production
capabilities. We believe that our close working relationship with leading fiber optic communication equipment manufacturers allows us to quickly design and build advanced fiber optic subsystems and modules, enabling our customers to focus on their
core competencies in designing and building overall systems. Our customers include communication equipment manufacturers, such as Acterna Corporation, Alcatel, Canoga Perkins, CIENA, Cisco Systems, ECI Telecom, Huawei Technologies, Lucent
Technologies, Marconi Communications, and Nortel Networks, some of whom purchase through contract manufacturers such as, Jabil Circuits, Plexus, Sanmina, and Solectron.
Industry Background
Increased network traffic
During the past several years, the amount of voice and data transmitted over communication networks has
increased significantly. This growth is primarily attributed to the rapid growth and popularity of data intensive applications, such as Internet access, distance learning, web hosting, real-time data backup, e-mail, video conferencing, multimedia
file transfers and the movement of large blocks of stored data across networks. To meet this demand, communication service providers upgraded their communication networks to expand capacity, which greatly reduced transmission costs per bit. This
cost reduction has, in turn, further increased the demand for and usage of communication networks. This cycle, increased demand fueling increased capacity at reduced costs and increasing demand further, has enabled the growth in voice and data
traffic across networks.
Evolution of network infrastructure
Communication networks were originally designed to handle voice traffic. The infrastructure of existing prior generation, or legacy,
networks consists of copper cabling along which voice communications are
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transmitted in the form of electronic signals. While copper cabling is generally a reliable transmission medium, its ability to transmit large volumes of data at high speed is limited, and it is
prone to electromagnetic interference, or EMI, from nearby electronic equipment and other sources. EMI interferes with the transmission of a signal and degrades signal quality.
To overcome the limitations of the legacy copper cable infrastructure and meet increasing demand for high capacity and high-speed voice and data transmission, communication
service providers have adopted optical fiber optic technology in their networks. Fiber optic technology involves the transmission of data over fiber optic cable via digital pulses of light, which allows for greater bandwidth over longer distances
than copper cable and higher quality transmissions that are not subject to EMI.
Widespread deployment of fiber
optic technology initially occurred in the long-haul network. Long-haul networks connect the communications networks of metropolitan areas around the world and facilitate the transport of large amounts of voice and data traffic over long distances,
up to thousands of miles. Companies designing equipment for this segment have typically focused on providing as much bandwidth as possible between any two locations. The long-haul market was the first to face increasing network congestion as data,
aggregated from expanding MAN, LAN, and SAN infrastructures, began to overload long-haul networks. Long-haul network managers, focused on maintaining network performance, were the first to adopt advanced subsystems and modules to increase the
capacity of existing fiber. Long-haul network managers have typically been concerned more about network performance than transmission equipment cost because the cost of increasing the capacity of long-haul networks through adding fiber is expensive
relative to upgrading the transmission equipment to higher data transmission rates.
The build-out of optical
long-haul networks through the adoption of advanced subsystems and modules to increase capacity represents an important step in improving network infrastructure to support increased demand for new services and greater traffic volumes. While optical
fiber continues to be deployed, and its transmission capacity expanded in long-haul networks, fiber optic technologies are increasingly being adopted to support high data rate connections to link end-users to the long-haul networks.
Metropolitan area networks, local area networks, storage area networks
Metropolitan area networks consist of metro core and access networks. Metro core networks are the distribution points between long-haul
networks and metro access networks. In a typical system, a long-haul network connects to a city-wide MAN through which long-haul data is aggregated by network managers, such as Internet service providers, or ISP, and distributed to local users via
an access network. Metro core networks enable enterprises and service providers to interconnect network systems over areas from as small as a city block or corporate campus to a wider geographic area.
Metro access networks connect business and residential end-users to metro core networks. These end-users have increasingly demanded
higher-speed connections to take advantage of new data-intensive, multimedia-centric applications. Access networks traditionally have used relatively slow copper cable based connections. A number of high-speed transmission technologies have been
developed to improve the speed of access networks, including digital technologies such as digital subscriber line, or DSL, and cable modem technologies. DSL technology utilizes the legacy copper-based infrastructure to provide users with increased
bandwidth at low cost. Cable modems, which connect computers to local cable TV lines, also provide users with access to high bandwidth at low cost. As these high data rates and new services become more widely available to end-users, legacy copper
cable connections are expected to become increasingly insufficient to meet demand. Consequently, service providers are beginning to deploy fiber optic cable directly to end-users or to neighborhood distribution points, enabling the business or
residential end-user to obtain a wide range of current and future services.
Local area networks connect users
within a building or groups of buildings. Storage area networks connect computers and data storage sites within buildings or groups of buildings. These networks were originally
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developed as copper cable networks using standards such as Ethernet and Fast Ethernet. As performance requirements surpassed the limitations of copper-based deployments, these networks were
upgraded to support multimode fiber optic solutions to address the expanding application needs of the end-user. As the data rate and transmission distance requirements of these networks increase further, they are being upgraded with single mode
fiber optics technology to support the next-generation of high-speed networking standards, such as Fibre Channel (single and double speed), Gigabit Ethernet, and 10 Gigabit Ethernet.
Market Opportunity
With
increasing volumes of digitally-based data being transmitted across long-haul networking infrastructures, the MAN topology is often viewed as the limiting factor in overall network performance. In addition, LAN and SAN segments are also requiring
greater bandwidth and performance capabilities to address data traffic congestion. As a result, network managers have been upgrading their LAN and SAN infrastructures to higher speeds using optical transmission technologies and high-speed networking
standards such as Gigabit Ethernet, Fibre Channel (single and double speed) and the recently adopted 10 Gigabit Ethernet protocol.
As demand for bandwidth grows, service providers will require increasingly sophisticated systems to support metro, local and storage networks applications. Systems must meet the unique requirements of these networks, such as
cost-effectiveness and reliability in harsh environmental conditions. Historically, the MAN, LAN and SAN optical infrastructures have been supplied by large vertically integrated fiber optic communication equipment manufacturers, which manufactured
their own components such as lasers and photodiodes. The demand for optical networking equipment has led to the expansion of production by existing optical component manufacturers, as well as the creation of new companies offering cost-effective
fiber optic systems. These new companies are typically not vertically integrated and do not employ system design teams to create mixed analog/digital circuits required for laser and photodiode interfaces.
The market demands on fiber optic communication equipment manufacturers to produce optical networking solutions for the MAN, LAN and SAN
markets have given rise to a number of significant technical challenges, including the following:
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Providing solutions which balance performance and cost. The metropolitan market requires optical subsystems and modules that are designed specifically to meet
the unique performance and cost requirements of this market. |
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Providing long distance operation in MAN applications where interconnection distances can range from a few kilometers (km) up to 120km. Systems that are unable
to transmit over long distances require expensive repeaters to boost and regenerate signals, raising the overall cost of the solution to the end-customer. |
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Providing wide operating temperature range in metro networks where equipment is located in remote locations with no environmental control. Products that operate
from -40 to 85 degrees Celsius are a necessity in this market. This is in contrast to the long-haul network and local area networks where equipment is deployed within temperature controlled buildings. |
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Delivering products that address the demand for increasingly smaller packages to provide higher port density requires greater component miniaturization, thermal
and EMI engineering design expertise. |
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Supporting a wide range of data rates, transmission distance requirements, network standards, optical interfaces and packaging options requires that fiber optic
communication equipment manufacturers offer a broad range of products. |
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Producing increasingly integrated products requires cross-disciplinary expertise in optics, circuit design, packaging, software, microwave and radio frequency
engineering. |
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Responding to demands for shorter lead times requires manufacturers to design products and scale production rapidly. |
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Producing systems to handle increasingly higher data rates in compliance with Federal Communications Commission standards for EMI emissions requires advanced
fiber optic subsystem and module design. |
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Responding to customer requirements for “customized” standard products requires scalable base-line designs. |
Current Industry Environment
Since early 2001, the telecommunications sector, and in particular the fiber optic networking sector, has suffered a severe downturn. System providers have scaled back on deployment and have
dramatically slowed their purchases of systems from equipment manufacturers. As a result, equipment manufacturers have also slowed purchases of components and modules from our competitors and from us. Moreover, as equipment manufacturers’ sales
declined, they have relied on their excess component inventories to meet reduced demand and have moved to reduce their overall component and module inventory levels. Consequently, the slowdown continues to have a negative impact on our business as
we face declining sales as the result of our customers’ declining business and the resulting adjustment to their inventory levels. See “Business—Risk Factors—Unfavorable current economic and market conditions have resulted in
decreased sales and increased difficulty predicting our future operating results.” and “—General economic factors could negatively impact our growth plan.”
However, despite the slowdown in the industry, we believe that the future market for optical components remains very promising. We believe that voice, data and Internet
traffic will continue to grow in future years with an increasingly large portion of this traffic expected to include the transfer of data intensive applications requiring expanded network capacity and transmission speed, such as distance learning,
full motion video, multi-channel high quality audio, video conferencing, and movement of large blocks of stored data across networks. We believe that once the industry recovers from its current downturn, service providers and equipment manufacturers
will focus on relieving the network congestion and limitations in overall network performance at the MAN, LAN, and SAN levels. Accordingly, we believe that specific sectors in the industry, such as the enterprise segment, will experience
particularly strong growth when the industry recovers. However, given our current lack of visibility, we cannot provide any assurance as to the timing or extent of any industry recovery or as to any increase in business or other benefits that we may
receive as a result thereof.
Our Solution
We design, manufacture and sell a comprehensive line of high performance, reliable fiber optic subsystems and modules that are used in fiber optic transmission systems. Our subsystems and modules are
integrated into systems, which address the bandwidth limitations in MAN, LAN, and SAN infrastructures. We provide communication equipment manufacturers with high-value, cost-effective optical solutions to meet the market requirements of the MAN,
LAN, and SAN industry segments, allowing them to focus on their core competencies of designing and building overall systems.
We provide our customers with the following key benefits:
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High-performance, high reliability, cost-effective products—Our portfolio of high performance subsystems and modules enables optical networks to
operate at high data transmission rates, transmit signals over a variety of distances up to 120km and operate in wide temperature ranges of between -40 to 85 degrees Celsius. Our products are engineered using advanced packaging technologies and
feature low levels of radiated EMI. Our products are qualified under requirements established by Telcordia (Bellcore), an engineering and administrative services consortium that establishes industry standards and specifications for the
telecommunications, wireless and fiber optic industries. The Telcordia requirements relate to the environmental, electrical and optical testing for fiber optic transmitters and receivers, to ensure that they offer the high reliability required for
critical applications. Our products are engineered to meet the specific distance, temperature and other performance requirements of the MAN, LAN, and SAN markets. |
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Comprehensive product line—Our comprehensive fiber optic product line provides communication equipment manufacturers with a broad range of solutions
for MAN, LAN, and SAN applications. Our subsystems and modules are available with all the common fiber optic interfaces, and are available in a wide variety of thru-hole and pluggable package styles. They support a wide range of data rates,
standards, wavelengths and transmission distances. |
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Innovative design capabilities—We believe that our expertise in high-speed electronic circuit design and packaging of fiber optic devices, enhanced
by our close working relationships with customers, enables us to provide innovative subsystems and modules for the MAN, LAN, and SAN markets. Our engineers work closely with Furukawa and other suppliers to integrate advanced semiconductor lasers and
custom fiber optic packaging techniques. We also have expertise in designing the complex transmitter circuitry that converts a digital logic signal into the proper signal for the laser or light emitting diode. We design and manufacture our own fiber
optic receiver subassemblies using our proprietary automated processes. As a result of our fiber optic device design expertise and our close customer relationships, we are able to quickly adapt our products to respond to new standards and our
customers’ requirements for subsystems and modules. |
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Reduced time to market—Our subsystems and modules allow communication equipment manufacturers to design and assemble fiber optic interfaces as
easily as standard electronic components by eliminating the need for complex setup of individual lasers or receivers. By working closely with our customer design teams, we are able to provide optimized solutions that are cost-effective and meet time
to market objectives. |
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Scalable manufacturing capabilities—Our broad portfolio of products use modular designs which enable us to rapidly configure and manufacture
subsystems and modules to meet each customers specifications and to rapidly scale our production to deliver these products in volume. We can easily customize our products for example by implementing different electrical connections, or pin
configurations, voltages and package sizes as requested by our customers, without impairing the functionality of our products. |
Products
We offer a comprehensive line of high-performance fiber optic subsystems
and modules, including fiber optic transmitters, receivers, transceivers and transponders, primarily for use in MAN, LAN, and SAN. Fiber optic subsystems and modules are preassembled components that are used to build network equipment. Our products
convert electronic signals into optical signals and back into electronic signals, thereby facilitating the transmission of information over fiber optic communication networks.
Our fiber optic products integrate advanced optical devices with mixed analog/digital integrated circuits. These circuits allow continuously varying signals and digital
data to be designed in the same circuit rather than separate circuits. Our products provide subsystem/module functionality over a wide variety of connectivity speeds, distances, standards and operating temperature ranges.
Our products are engineered with varying levels of integration to suit our customers. The lowest level of integration involves separate
transmitter and receiver modules, which provides our customers the greatest flexibility in product design by allowing them to place the transmitters and the receivers according to their design specifications. We believe our products’ technical
specifications meet or exceed industry standards for fiber optic subsystems and modules. Transceivers offer the next highest level of integration by placing both the transmitter and receiver in the same package with a dual fiber or connector
interface. Transponders provide the highest level of integration by combining the functionality of a transceiver with the addition of multiplexer and demultiplexer circuits in the same package.
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Current products
Transmitters and Receivers—Transmitters convert an electronic digital input signal into an optical output signal for transmission over a fiber optic
network. Receivers detect optical signals from a fiber optic network and convert them into an electronic signal in standard digital/logic format for further signal processing. We offer separate transmitter and receiver modules that provide our
customers with the greatest flexibility in product design by allowing them to place transmitters and receivers separately according to design specifications.
Our optical transmitter and receiver products support the SONET/SDH, Fast Ethernet, Gigabit Ethernet and Fibre Channel transmission standards and are offered in a wide range of data rates, transmission
distances and packaging options.
DWDM Transmitter—Dense wavelength division multiplexing, or DWDM,
transmitters allow the mixing of optical signals using different standards such as SONET/SDH, asynchronous transfer mode, or ATM, and Gigabit Ethernet, by utilizing different wavelengths. Our DWDM transmitters are available in a compact, low-profile
24-pin package along with two supply voltage options and will operate in the temperature range of -20°C to +70°C. Also, the transmitters are provided with additional functions such as disable inputs, LD degradation alarm, and wavelength
deviation alarm signals.
Transceivers—Optical transceivers are products that contain both a
transmitter and a receiver in a single device and serve as high data rate interconnects between network devices, such as hubs, switches, servers and storage elements. Our optical transceivers are available in a wide variety of fiber optic
interfaces, or form factors, and support a wide range of data rates, wavelengths, modes and transmission distances. Our transceivers support the SONET/SDH, Fast Ethernet, Gigabit Ethernet and Fibre Channel transmission standards.
CWDM Transceivers—Coarse wavelength division multiplexing, or CWDM, transceivers, allow the mixing of optical
signals by utilizing different wavelengths. The CWDM transceivers use lasers with a wide channel wavelength spacing, typically 20 nm, which allows the equipment to achieve a lower overall system cost. This lower cost is the result of a lower
transmitter cost since no temperature and wavelength control is needed, as well as a lower optical MUX/DMUX cost due to wider tolerance on the wavelength stability and bandwidth.
Our CWDM transceivers are available in all the common industry standard transceiver footprints of 1x9, 2x9, GBIC, SFF and SFP, and provide eight wavelength channels at
nominally 1470 nm, 1490nm, 1510 nm, 1530 nm, 1550 nm, 1570 nm, 1590 nm, and 1610 nm. They are available in a multi-rate format that allows operation at all speeds from 100 Mbd Ethernet up to Gigabit Ethernet.
SFP Transceivers—Small form-factor pluggable, or SFP, transceivers are “hot-pluggable” optical transceivers that can
be removed or inserted into the equipment without turning off the power of the system. This feature allows our customers to readily reconfigure their systems without interrupting their network services, thereby, eliminating system downtime during
upgrades and maintenance.
Our SFP transceiver is available in a variety of distances and speeds and uses the
popular small form factor LC fiber optic connector interface, allowing fiber optic equipment makers to increase their port density. They are also offered in speeds from 155 Mbd up to 1250 Mbd including multimode LED and 850nm VCSEL as well as single
mode 1310 and 1550nm lasers.
Transponders—Our optical transponders combine the functionality of a
transceiver with integrated circuits for electronic multiplexing and demultiplexing in the same package. We have provided samples of these products to customers for initial testing. Multiplexers are paired with transmitters and allow the system
designer to combine multiple low-speed electronic data streams onto a single optical wavelength, while demultiplexers and receivers reverse this process. The transmitter portion of the transponder accepts sixteen 155 Mb/s (or 622 Mb/s for OC-192)
electronic signals, multiplexes them together and provides at the output a single 2,488 Mb/s (or 9.95 Gb/s for OC-192) optical signal. The receiver portion of the transponder performs the reverse function, namely
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accepting a single optical signal and providing back sixteen 155 Mb/s (or 622 Mb/s for OC-192) electronic signals. The advantage of this product is the compact overall design that minimizes the
equipment size and the low speed electronic interface that simplifies our customer’s printed circuit design. As equipment speeds increase, this type of product is becoming widely used.
Products under development
Our product development efforts have, and will continue to be, focused on developing new products and technologies to support increased transmission speeds, distances and capacities. We have been developing products to support future
generations of fiber optic MAN, LAN, and SAN by utilizing coarse wavelength division multiplexing, or CWDM, dense wavelength division multiplexing, or DWDM, and 10 Gbp/s transmission standards.
Multiplexers are integrated circuits that combine signals from many inputs into a single output, and demultiplexers are integrated circuits that accomplish the
reverse, or create many outputs from a single input. Wavelength division multiplexing is a technology that allows multiple signals to be sent along the same optical fiber by using different colors of light for each signal.
We plan to introduce optical transmitters, receivers and transceivers using both DWDM and CWDM technologies. These are being designed to
allow the mixing of optical signals using different standards, such as SONET/SDH, asynchronous transfer mode, or ATM, and Gigabit Ethernet, by utilizing different wavelengths We also plan to develop a series of pluggable transceivers for
applications in the different standards.
In addition, in October 2002 we acquired certain assets of Cielo
Communications, Inc., a research and design company located in Broomfield, Colorado focused on creating VCSEL technology for fiber optic communication networks. The purchase price was $5 million and includes the acquisition of capital equipment,
inventory and intellectual property.
We believe the Cielo Communications’ technology will enhance our
ability to accelerate the integration of 1300 nm VCSEL sources into multi-channel optical modules. These parallel array optical modules will offer the advantages of high optical port density and low power consumption which are required by the next
generation optical networking applications.
We believe that some of our competitors are developing similar
products to those that we have under development. While we are currently developing products in all of the areas described above, we may choose to prioritize or redirect our development efforts in response to market demands. Therefore, it is not
certain that we will introduce products for all of the categories listed above.
Customers
We sell our products to communication equipment manufacturers, or CEMs, directly and through contract manufacturers who incorporate them
into systems they assemble for CEMs. Contract manufacturers assemble specific products for CEMs. We define our customers as CEMs who have purchased our products directly or ordered our products for incorporation into systems produced by contract
manufacturers, such as Jabil Circuits, Plexus, Sanmina, and Solectron. We typically do not enter into long-term contracts with our customers.
A small number of customers have historically accounted for a significant portion of our total revenue. For the fiscal year ended September 30, 2002, our 10 largest customers accounted for 57.9% of our
total revenue, with Cisco Systems, Alcatel, and Nortel Networks (including sales to each of their contract manufacturers) accounting for approximately 13.8%, 12.6%, and 10.0% of our total revenue, respectively. No other customer accounted for more
than 10.0% of our revenue during the fiscal year ended September 30, 2002.
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For financial reporting purposes, we consider our customers to be the contract
manufacturers and CEMs who place purchase orders with us or otherwise purchase our products directly. For the fiscal year ended September 30, 2002, no direct sales customer accounted for more than 10% of our total revenue. See
“Business—Risk Factors—We derive a significant portion of our total revenue from a few significant customers, and our total revenue may decline significantly if any of these customers cancels, reduces or delays purchases of our
products or extracts price concessions from us.”
Technology
The development and manufacture of high-performance fiber optic subsystems and modules for MAN, LAN, and SAN require diverse technical skills and expertise. We
believe that our understanding of fundamental optical devices, their packaging and high speed circuit design allows us to extend the performance of low cost packaging and technology, which we originally designed for smaller local area networks, to
provide the high-performance required for fiber optic MAN, LAN, and SAN. Key elements of our technological capabilities include:
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Optical device technology—We understand the performance requirements for optical devices in fiber optic systems. There is a wide range of optical
source and detector technologies available, and these must be optimized for each application. We have design expertise with six different types of light sources used to send light along a fiber, and three different types of detector technologies.
Each of these devices has performance characteristics that must be carefully chosen to meet specific system requirements. |
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Optical packaging/subassembly design—We work closely with Furukawa and other suppliers to combine advanced semiconductor laser designs and custom
optical packaging techniques to produce advanced optical subassemblies. Less than one micron tolerances, or variability in the alignment of components, are required in these laser packages and reliability specifications require us to hold these
mechanical tolerances over a wide range of temperatures and the specified life of our products. A micron is one thousandth of a millimeter. We believe these designs and technologies improve the performance of our products as well as enhance yields
and reduce material costs. We also design our receiver packages for automated assembly, and we design and manufacture our own optical subassemblies for our receivers. This allows us to provide design flexibility, high-performance, and the ability to
manufacture in volume. |
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Links with Furukawa—We have worked closely with Furukawa to develop new optical devices for our products using technology that they have developed.
Furukawa supplies us with the majority of the optical devices, such as lasers, needed for some of the optical subassemblies used in our products. |
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Electronic circuit design—We have the expertise to design complex transmitter circuitry that converts a digital logic signal into the proper signal
for the laser or light emitting diode. This circuit has compensation and feedback control loops that change the current to maintain constant optical power output. This electronic signal must also be modulated and the waveform of the modulation must
be carefully controlled to ensure that the optical output meets the fiber optic communications equipment manufacturer’s defined specifications. We also have considerable expertise in designing receivers to minimize the effects of external noise
that can significantly affect the performance of a receiver. Our products operate at speeds up to 2.5 Gb/s and we are working to develop future products to work at 10 Gb/s. At these speeds, microwave and radio frequency design techniques must be
used to ensure that the waveforms do not degrade and meet the parameters defined in standards. We believe our technical competencies in these areas enable us to produce fiber optic subsystems and modules with low electromagnetic interference
emission levels. |
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Fast product development cycle time—Our products are designed using a building block approach that allows us to combine different subassemblies in
different ways to provide a wide range of products. Our integrated subassemblies allow us to quickly adapt our products to respond to new standards and our customers’ requirements for special subsystems and modules. This ability, in combination
with our
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market knowledge, allows us to select the commercial opportunities we believe to be the best and provide samples and production volumes in very short time frames. |
Manufacturing
We assemble, burn in and test all of our products in our facility in Chatsworth, California. We also conduct all of our manufacturing engineering, quality assurance and documentation control at this facility.
We use a number of subcontractors and suppliers, including Furukawa, to supply subassemblies. We rely upon domestic and
international contract manufacturers for most of our printed circuit board assembly. Our manufacturing supply chain management team manages these relationships supported by our research and development group. We do not have any long-term contracts
with any of our contract manufacturers and none of them are obligated to perform assembly services for us for any specific period or at any specific price, except as may be provided in a particular purchase order.
We provide quality assurance through internal testing procedures throughout the entire manufacturing process. Our quality control
procedures include vendor inspection, incoming material inspection, in-process testing and outgoing inspection. We provide specialized training to assure the competency of our manufacturing personnel, and we maintain ISO 9001 certification.
We purchase several key components for our products from a limited number of suppliers. The components that we
purchase include integrated circuits, lasers, light emitting diodes, vertical cavity surface-emitting lasers, photodiode devices and other passive electronic components. We have periodically experienced shortages and delivery delays for these
materials. Because we operate in an industry where material supplies are constrained, we maintain an inventory of some limited source components to decrease the risk of shortage. As a result, we have excess inventory of these components that have
led to write downs of excess inventory.
Research and Development
In fiscal 2000, 2001, and 2002, our research and development expenses were $2.5 million, $3.0 million and $5.3 million, respectively. We also incurred development
costs of $84,000 paid to Furukawa in 2000 for the automation of our product testing procedure. We believe that our experienced optics engineers and the modular nature of our products allowed us to enjoy relatively low research and development
expenses in the past. In addition, Furukawa has developed a number of innovative components that we have integrated into our products and has assisted in the automation of key portions of our manufacturing process. We plan to continue to collaborate
with Furukawa as we expand our internal research and development capabilities.
We expect to increase our total
research and development expenses to provide resources to develop new product lines and fund development contracts with universities, research institutes and companies. During fiscal 2002, we continued to invest in our research and development
capabilities through the addition of personnel on our R&D team, including our recently-staffed European design center, and our October 2002 acquisition of the certain assets of Cielo Communications, a research and design company focused on
creating VCSEL technology for fiber optic communication networks. As a result, we expect our future research and development expenses to increase significantly in absolute dollars and as a percentage of revenue. We will continue to focus our
research and development activities on enhancing our existing products, developing new products to meet the evolving needs of our customers within our existing markets and supporting emerging standards that are consistent with our product
strategies.
Sales, Marketing and Technical Support
We sell our products primarily through our worldwide direct sales force supported by independent manufacturers’ representatives and distributors. Our direct sales
force maintains close contact with our customers
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and provides technical support to our manufacturers’ representatives and distributors. We maintain regional sales offices in Northern and Southern California, Texas, Canada and the United
Kingdom. In addition, we have direct sales representatives located on the east coast, working from home offices. Our corporate customer service department in Chatsworth, California provides day-to-day updates on orders and deliveries to our
customers in Asia, Australia, North America, and South America. We also have a satellite customer service operation in our United Kingdom facility to better address our growing European customer base.
We have established contractual relationships with manufacturers’ representatives and distributors in North America, Europe, Israel
and Asia. Manufacturers’ representatives and distributors are third parties who provide commercial and technical support in selling our products to customers. Manufacturers’ representatives represent us with customers, but customers place
orders directly with us. We pay the manufacturers’ representatives a fee for this service. Distributors perform the same function, but differ in that the distributor buys products from us and resells them at a profit to the end customer. We
have short-term contracts with our manufacturers’ representatives and distributors, which can be cancelled by either party upon 30 days notice. We intend to expand our indirect sales activity by establishing relationships with additional
independent manufacturer’s representatives and distributors. Please refer to Note 12 to our Notes to Financial Statements for further information about our sales to particular geographic areas.
We focus our marketing on CEMs in the fiber optic MAN, LAN, and SAN markets. Our intent is to become a market driven supplier that
provides cost-effective, value-add solutions to our customer base. Our efforts in the development of an effective branding campaign are to better position our strengths as customer-focused suppliers of a broad product portfolio that addresses
optical applications. Key elements of our marketing initiatives are as follows:
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Expansion of the overall marketing resources to provide more focus on industry segments, to identify and drive new product efforts, to position our company
strengths with our customers as well as the technical community, and to introduce new revenue opportunities into the company product portfolio. |
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The development of key marketing relationships at our identified strategic accounts with high-level decision makers to better position us for current and
next-generation opportunities during the product development and specification defining phases. |
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The expansion of our applications engineering group to provide our customers with complete pre- and post-sales technical support on our products, including
design and troubleshooting assistance. |
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The implementation of a marketing communications plan to focus efforts on strategic corporate branding and positioning initiatives in advertising, press
relations, tradeshow events, web site, speaking engagements, and publication opportunities. |
We
also interact with our customers in industry associations, standards committees and participation in multi-source agreements, to promote and further enhance our position within the technical community.
We provide extensive technical support to our customers during their design and qualification process through direct contact with our
application and design engineering teams. In addition, our web site provides product documentation and application notes. Our account managers and customer service personnel provide ongoing post-sales support.
Backlog
We
attempt to predict the demand for our products and the lead-time required to obtain the necessary components and materials. Lead times for components and materials vary significantly, depending on factors such as the specific supplier, the size of
the order, contract terms and demand for each component at a given time. Backlog consists of orders for shipments with release dates from our customers. As of September 30, 2002 and September 30, 2001, our backlog was approximately $3.7 million and
$7.3 million, respectively. Orders in
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backlog are firm, but are subject to cancellation or rescheduling by the customer. We do not believe that backlog comparisons on a year to year or quarter to quarter basis are meaningful as our
backlog is unpredictable and fluctuate monthly.
Competition
The MAN, LAN, and SAN markets for optical subsystems and modules for CEM applications are highly competitive and subject to rapidly changing technology. We believe the
primary competitive factors impacting our business are as follows:
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Breadth of product portfolio |
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Competitive with market-level pricing |
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Time to market of new product introductions |
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Established relationships with key customers |
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Capability to scale production requirements |
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Quality and reliability of products |
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Complete technical documentation for product lines |
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Financially stable supplier |
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Ability to provide technical design support |
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Scope and responsiveness of service and technical support |
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Compliance to industry standard specifications |
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Meeting the customer design phase timelines for product qualification |
We believe that we have established a favorable position in the MAN, LAN, and SAN markets by identifying and focusing on fiber optic subsystems and modules specifically for
these segments. We believe that we are focused on these markets with a combination of comprehensive product portfolios, management and design expertise, market understanding and manufacturing capabilities. We compete primarily with Agilent
Technologies, ExceLight Communications, Finisar, Infineon Technologies, JDS Uniphase, Molex Fiber Optics, MRV Communications, Picolight, and Stratos Lightwave. Many of our current and potential competitors have significantly greater financial,
technical, marketing, purchasing and other resources than we do. We have competitors for all of our current products. However, we believe that we do not have a single competitor that offers the same range of products as us.
Our products may also compete with technologies that provide alternatives to optical networking, including fixed and mobile radio, free
space point-to-point optical transmission and copper-based technologies such as digital subscriber line, or DSL, and cable modems. Most of these technologies provide lower speed and shorter distance capabilities than optical networking technologies,
but may provide certain advantages such as lower costs and mobile capabilities. However, in our primary market for high-speed communications, we do not expect to face significant competition from these technologies in the future. See
“Business—Risk Factors—Our markets are highly competitive, some of our customers are also our competitors, and our other customers may choose to purchase our competitors’ products rather than our products or develop internal
capabilities to produce their own fiber optic subsystems and modules.”
Intellectual Property
Our success and ability to compete is dependent in part on our proprietary technology. We rely primarily on patent, copyright,
trademark and trade secret laws, as well as confidentiality agreements and other methods, to
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establish and protect our proprietary technologies and processes. However, these measures afford only limited protection of our proprietary technology. We have filed 5 provisional United States
patents and 2 United States patent applications. In addition, as a result of our October 2002 acquisition of certain assets of Cielo Communications, we have added over 25 issued United States patents, over 30 filed United States patent applications,
over 10 issued foreign patents and over 25 foreign patent applications to our intellectual property portfolio. There can be no assurance that we will continue to seek the issuance of patents from the United States and foreign patent applications we
acquired from Cielo Communications. Furthermore, there can be no assurance that any of our patent applications will result in the issuance of any patents or that any patents issued will lead to commercially viable products or provide competitive
advantages for our products.
On April 12, 2002, the Company entered into a five-year license agreement
with Stratos Lightwave, Inc. covering Stratos’ portfolio of optoelectronic transceiver patents. In addition, we acquired two licenses related to VCSEL technology resulting from our acquisition of certain assets of Cielo Communications. We
currently do not license to or from any other third parties the technology used in the manufacture of our fiber optic subsystems and modules. In addition, no technology is transferred or licensed in connection with our supply relationship with
Furukawa. Accordingly, Furukawa owns the technology relating to the manufacture of its laser and other products we purchase for incorporation into our products and may license or sell this technology to other parties. We own the technology relating
to the manufacture of our fiber optic subsystems and modules. A disruption of our supply relationship with Furukawa would not have a material impact on our rights to the technology required to produce our products. We have not transferred to
Furukawa any intellectual property rights that would allow it to compete with us in the MAN, LAN, and SAN markets. However, there can be no assurance that Furukawa would not develop in the future internal capabilities to manufacture fiber optic
subsystems and modules similar to and competitive with our products.
Litigation may be necessary in the future to
enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could significantly harm our business. See
“Business—Risk Factors—If we are unable to protect our proprietary technology, this technology could be misappropriated, which would make it difficult for us to compete in our industry.” From time-to-time, third parties may
assert patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could significantly harm our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product
shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In addition,
our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us is successful, we could
be liable for significant monetary damages. If we cannot obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.
See “Business—Risk Factors—We could be subjected to additional litigation regarding intellectual property rights, which may divert management attention, cause us to incur significant costs or prevent us from selling our
products.”
Employees
As of September 30, 2002, we had 246 full-time employees and no part-time employees. On April 29, 2002, we announced the elimination of approximately 45 jobs, primarily in the manufacturing
area, effective during our third quarter. Positions in research and development and sales and marketing were not affected. Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage.
Notwithstanding the current economic downturn, we consider our employee relations to be generally good.
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Our Relationship with Furukawa
We were incorporated as a California corporation in October 1991 and we subsequently reincorporated as a Delaware corporation in October 2000 in connection with our initial
public offering. In November 1991, a wholly owned subsidiary of The Furukawa Electric Co., Ltd. provided our initial capital investment. Furukawa, a publicly held company incorporated under the laws of Japan, is one of the world’s leading
manufacturers of electric wire and cable, nonferrous metals and related products. It also provides engineering services, including the installation of power and telecommunications cables, and is a major manufacturer of fiber optic cable.
Furukawa’s stock is publicly traded on the Tokyo Exchange Nikkei in Japan. Furukawa beneficially owns all of our outstanding Class B common stock, which as of November 30, 2002 represented 60.1% of our outstanding shares of common stock and
93.8% of the combined voting power of all of our outstanding common stock.
Our relationship with Furukawa has
allowed us to benefit from the optical device and packaging technologies developed at its laboratories in Japan, which are incorporated into laser products, that we purchase from Furukawa for inclusion in our products. We have also established a
close working relationship with Furukawa’s research and development team through periodic meetings and discussions to understand our product and manufacturing requirements. Under these arrangements, Furukawa customizes to our specifications the
components that it supplies to us. For example, Furukawa has developed laser products with customized features in the areas of package design and power output. We have not licensed from Furukawa any of its optical devices or other technologies.
We currently purchase the majority of lasers from Furukawa using short-term purchase orders. These lasers are
critical parts in the manufacture of our subsystems and modules. We have enjoyed a reliable supply of these critical components from Furukawa in the past. However, we do not have a long-term supply contract with Furukawa.
From time to time our research and development team works closely with Furukawa’s team to assist in the development of our design and
manufacturing process. For example, in July 2000 we entered into a short-term development contract with Furukawa to assist us in the purchase, system design, operation, study, and execution of new equipment orders to automate our product testing
operations. We paid Furukawa $84,000 for these services under the development contract. We may enter into similar development agreements with Furukawa in the future. However we have no current commitments and currently have no development agreements
under negotiation with Furukawa. We believe that our prior business dealings with Furukawa and its subsidiaries and affiliates were on terms that were no less favorable than terms that would be available from unrelated third parties for similar
transactions.
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RISK FACTORS
This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about us and our industry. Our actual results could differ materially from
those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report. These forward-looking statements involve risks and uncertainties. You should carefully consider
the following risks before you decide to buy shares of our Class A common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report, may also adversely impact and impair our business. If any of the following risks actually occur, our business,
results of operations or financial condition would likely suffer. In such case, the trading price of our Class A common stock could decline, and you may lose all or part of the money you paid to buy our stock. We do not undertake to update publicly
any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Our
continued success in generating revenue depends on growth in construction of fiber optic MAN, LAN, and SAN.
Our fiber optic subsystems and modules are used primarily in MAN, LAN, and SAN. These markets are rapidly evolving, and it is difficult to predict their potential size or future growth rate. In addition, we are uncertain as to
the extent to which fiber optic technologies will be used in these markets. Our success in generating revenue will depend on the growth of these markets and their adoption of fiber optic technologies. A substantial portion of our revenue is derived
from sales of our product in the MAN market. Sales of our products for the MAN market represented approximately 86%, 91% and 84% of our revenue for the years ended September 30, 2002, 2001 and 2000, respectively.
The continuing downturn in our industry have caused communications service providers to reduced their capital spending on fiber optic
equipment and delayed the deployment of new and build-out of existing fiber optic networks. As a result, revenue during the fiscal year 2002 decreased 74.2%, from the preceding fiscal year.
As the result of currently unfavorable economic and market conditions, (a) our revenue may continue to decline, (b) we are unable to predict future revenue accurately, and
(c) we are currently unable to provide long-term guidance for future financial performance. The conditions contributing to this difficulty include:
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uncertainty regarding the capital spending plans of the major telecommunications carriers, upon whom our customers and, ultimately we, depend for revenue;
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the telecommunications carriers’ current limited access to the capital required for expansion; |
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lower near term revenue visibility; and |
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general market and economic uncertainty. |
Based on these and other factors, many of our major customers have reduced orders for our products and have expressed uncertainty as to their future requirements. As a result, our revenue in future
periods may continue to decline. In addition, our ability to meet financial expectations for future periods may be harmed.
We
derive a significant portion of our total revenue from a few significant customers, and our total revenue may decline significantly if any of these customers cancels, reduces or delays purchases of our products or extracts price concessions from us.
Our success depends on our continued ability to develop and maintain relationships with a limited
number of significant customers. We sell our products into markets dominated by a relatively small number of systems manufacturers, a fact that limits the number of our potential customers. Our dependence on orders from a relatively small number of
customers makes our relationship with each customer critical to our business.
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We do not have long-term sales contracts with our customers. Instead, sales to
our customers are made on the basis of individual purchase orders that our customers may cancel or defer on short notice without significant penalty. In the past, some of our major customers canceled, delayed or significantly accelerated orders in
response to changes in the manufacturing schedules for their systems, and they are likely to do so in the future. The reduction, cancellation or delay of individual customer purchase orders would cause our revenue to decline. Moreover, these
uncertainties complicate our ability to accurately plan our manufacturing schedule. Additionally, if any of our customers cancel or defer orders, our operating expenses may increase as a percentage of revenue.
In the past, our customers have sought price concessions from us, and they are likely to continue to do so in the future. In addition,
some of our customers may shift their purchases of products from us to our competitors. The loss of one or more of our significant customers, our inability to successfully develop relationships with additional customers or future price concessions
could cause our revenue to decline significantly.
We are dependent on a limited number of suppliers for most of our key components.
If these suppliers are unable to meet our manufacturing requirements, we may experience production delays leading to delays in shipments, increased costs and cancellation of orders for our products.
We purchase several key components that we incorporate into our products from a limited number of suppliers. We also purchase the
majority of lasers from Furukawa. We do not have long-term supply contracts with any of our key suppliers. Our dependence on a small number of suppliers and our lack of long-term supply contracts exposes us to several risks, including our potential
inability to obtain an adequate supply of quality components, price increases and late deliveries. We have experienced shortages and delays in obtaining key components in the past and expect to experience shortages and delays in the future.
In the past, industry capacity has been constrained and some of our component suppliers placed limits on the
number of components sold to us. If industry capacity becomes constrained in the future, our component suppliers may place similar limits on us. We do not have any control over these limits, and our suppliers may choose to allocate more of their
production to our competitors. In addition, our suppliers could discontinue the manufacture or supply of these components at any time.
A disruption in, or termination of, our supply relationship with Furukawa or any of our other key suppliers, or our inability to develop relationships with new suppliers would interrupt and delay the manufacturing of our
products, which could result in delays in our revenue, or the cancellation of orders for our products. We may not be able to identify and integrate alternative suppliers in a timely fashion, or at all. Any transition to alternative suppliers would
likely result in delays in shipment, quality control issues and increased expenses, any of which would limit our ability to deliver prod