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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 0-29811
NEW FOCUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN THE STATE OF DELAWARE
I.R.S. EMPLOYER IDENTIFICATION NUMBER 33-0404910
5215 HELLYER AVENUE, SAN JOSE, CALIFORNIA 95138-1001
TELEPHONE: (408) 284-4700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
On March 20, 2001, 75,864,202 shares of the Registrant's common stock,
$0.001 par value, were issued and outstanding.
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NEW FOCUS, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders....... 21
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 22
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 7A. Qualitative and Quantitative Disclosure of Market Risk...... 31
Item 8. Consolidated Financial Statements and Supplementary Data.... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 32
SIGNATURES............................................................ 58
POWER OF ATTORNEY..................................................... 58
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
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ITEM 1. BUSINESS
In addition to historical information, this Annual Report on Form 10-K
(Annual Report) contains predictions, estimates and other forward-looking
statements within the meaning of Section 27(a) of the Securities Act of 1933 and
Section 21(c) of the Securities and Exchange Act of 1934 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 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 Annual Report. 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 revenue outlook for future periods including the first and second
quarters of 2001 and fiscal year 2001;
- the effect of lower production volume on our gross margin performance;
- improvement of our manufacturing efficiencies;
- anticipated development and release of new products such as our tunable
laser for the network;
- anticipated sources of future revenues;
- anticipated expenditures for research and development, sales and
marketing and general and administrative expenses;
- the adequacy of our capital resources to fund our operations;
- the anticipated market trends and uncertainties; and
- the effectiveness of our current business strategy.
These statements are only predictions and are subject to risks and
uncertainties, including the following:
- the difficulty of forecasting anticipated revenues due to weakness and
uncertainties regarding overall demand within the telecommunications
industry, inventory levels within the industry, sudden order reductions
and cancellations by customers, lower backlog of customer orders, and
potential pricing pressures that may arise from supply-demand conditions
within the industry;
- the difficulty of minimizing the negative effect of lower unit volumes on
gross margin performance due to the level of fixed manufacturing
expenses;
- our ability to lower production output;
- our ability to predict manufacturing yields;
- the challenge of managing inventory levels during periods of weakening
demand;
- our ability to introduce and gain customer acceptance of new products on
a timely basis;
- the difficulty in anticipating the outcome of current litigation; and
- our ability to generate future revenue from new products commensurate
with prior investments in research and development activities.
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.
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OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks(TM) brand.
We have leveraged our extensive experience in advanced optics to develop optical
components and modules that enhance network performance by enabling higher
channel counts and data rates, longer reach lengths, new service capabilities,
and lower costs of ownership. Our high-performance products are compact, consume
less power and are designed to be manufacturable in high volumes.
On January 16, 2001, we acquired JCA Technology, Inc. JCA designs,
manufactures, and markets a full line of fiber optic products for OC-48 and
OC-192 modulators, including high-speed clock amplifiers and broadband data
driver amplifiers. This acquisition will add to our products and the
capabilities of our high-speed products. By combining our expertise in optics
and high-speed opto-electronics with JCA's expertise in microwave electronics
and packaging we plan to develop a family of hybrid products that will offer a
higher level of integration to our customers.
On February 15, 2001, we acquired Globe Y. Technology, Inc. Globe Y
manufactures fused fiber coupling machines, which will add to our line of
telecom manufacturing equipment and supplements our manufacturing capability for
telecom products.
INDUSTRY BACKGROUND
The growing volume of high-speed data traffic over communications networks
has dramatically increased the demand for high capacity, or high bandwidth,
communications networks. According to RHK, a leading market research and
consulting firm, North American Internet traffic will continue its aggressive
growth, increasing 200% annually through 2004. This growth is primarily
attributable to the increasing use of the Internet among consumer and business
users, easier and cheaper access to the Internet, widespread use of e-commerce
as a standard mode of business, and the large and growing number of personal
computers in the home and the workplace. Network service providers have had
difficulty in meeting this increased demand in bandwidth 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
that address the demand for high-speed communications.
Optical networks transmit data by pulses of light through an optical fiber.
Light through a glass medium can carry more information over longer distances
than electrical signals can carry over a copper medium. Optical signals are
generated by lasers that produce light at specific wavelengths. 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, 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. Until recently, optical
signals carried information on one wavelength. In the last several years,
however, components have been developed that are capable of separating light
into different specified wavelengths for transmission in an optical fiber, and
network systems vendors have used these components to develop enhanced
equipment, which have greatly increased network capacity, including wavelength
division multiplexing, or WDM systems, that are capable of transmitting data
simultaneously on a number of different wavelengths along the same optical
fiber.
In addition to increasing the number of wavelengths, component innovation
has also increased the amount of data that can be transmitted per wavelength, or
data rate. And as the technology has improved, network service providers have
been upgrading the data rates of their optical networks. Today, service
providers 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 capable of operating at these high speeds.
Component innovations have also led to the development of the fiber
amplifier. A fiber amplifier amplifies the optical signals, resulting in a
dramatic increase in the distance over which optical signals can be
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transmitted without regeneration. Regeneration 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 to approximately 70
kilometers. With fiber amplifiers, optical signals can be transmitted thousands
of kilometers. Improvements in fiber amplifiers enable network equipment
manufacturers to continue to develop longer reach capability that has led to,
among other things, all-optical networks that operate without any regeneration.
In order to address the growing requirements of communications networks,
there is a demand for increasingly sophisticated systems and components. The
fiber optic components market, including actives and passives, is one of the
fastest growing portions of the telecommunications sector. RHK estimates that
the market for fiber optic components for terrestrial dense wavelength
multiplexing, or DWDM, alone was approximately $5 billion in 2000 and is
expected to grow to over $24 billion by 2004. As a result of the rapid pace of
new product introductions and the difficulty of designing and producing the
requisite components, systems 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.
COMPANY 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, and strong management
experience in the optical and high technology manufacturing industries. Since
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 position as
a leading market innovator 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 intend to continue to expand the breadth of our product line by
developing and offering best-in-class products. We believe we can accomplish
this goal by continuing to aggressively invest in product development and by
leveraging our existing technological capabilities, including our intellectual
property and optical expertise. 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 right solutions, solve implementation problems
and aid in the design of future systems architecture. In 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.
Pursue strategic acquisitions. 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.
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PRODUCTS AND TECHNOLOGY
Our Smart Optics for Networks(TM) products enable our customers to develop
next-generation optical networks with increased channel counts, higher data
rates, longer reach lengths and new services, and which reduce overall network
cost of ownership. Our product offerings are grouped into three primary
categories: passives, actives, and photonics tools.
Passives
Our passive components are used in the following applications:
- fiber amplifiers, including erbium-doped fiber amplifiers ("EDFAs") and
Raman amplifiers;
- wavelength management, including optical add-drop and
multiplexing-demultiplexing, dispersion compensation; and
- other optical networking applications.
Our passive components include the following:
- C- and L-band optical circulators;
- polarization beam combiners and splitters;
- pump-pump combiners;
- pump-signal combiners;
- band splitters; and
- other products in development.
Our C- and L-band optical circulators are used to route signals to the
desired sections of a network, such as in EDFAs or wavelength management
applications. Polarization beam combiners and splitters, pump-pump combiners and
pump-signal combiners are used in Raman amplifiers and EDFAs for combining the
optical power from pump lasers and optical signals. Our band splitters are used
to split or combine C- and L-band signals in wavelength management applications.
Our passive components feature low loss, wide wavelength performance, compact
size, high optical power handling, and cost-effective design. These features
result in optical networks with longer reach lengths, increased channel counts,
new services, and more cost-effective systems. Our passive components are all
tested to Telcordia industry standards for high reliability.
Our passives components were developed utilizing our technical capabilities
in advanced crystal design, optics design and modeling, high power handling
design and test, passive athermalization, and advanced fiber optic packaging.
Our advanced crystal design technology allows us to tailor crystal materials for
novel optical components with high performance and wide wavelength operation,
such as for our optical circulators and polarization beam combiners. Our optics
design and modeling capabilities produce components with optimized performance
and low loss. Our capabilities in high power handling design and test ensure our
passive components operate under the highest optical power levels needed for new
applications such as Raman amplifiers. Our passive athermalization technology is
used to develop new passive components that require no electrical heating or
cooling for temperature stabilization. Finally, our advanced fiber optic
packaging platform is used in all of our passive components to ensure the
highest reliability to Telcordia requirements.
Actives
Our actives products include swept-wavelength lasers, test and measurement
tunable lasers, network tunable laser modules, and high-speed opto-electronics.
These and other actives products are in various stages of production and
development. Our high performance swept-wavelength and test and measurement
tunable lasers are used for testing and measuring fiber optic components and
systems in manufacturing, development and research environments. These lasers
provide rapid, precise, and wide tuning or wavelength scanning for efficient
testing. We are developing network tunable laser modules to replace conventional
fixed wavelength
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lasers in telecommunications networks. These network tunable laser modules are
designed for high output power and wide wavelength range to provide a high
degree of flexibility in next-generation networks. Our high-speed products
include modulator data drivers and clock drivers operating at OC-192 and OC-48,
as well as other products in development. These products are designed to
increase the data rate in optical networks.
Our actives products are based on our technologies in tunable lasers and
high-speed opto-electronics. Our tunable laser capabilities include advanced
laser design, development and manufacturing, advanced laser packaging for high
reliability, dynamic filter technology for wide tuning, advanced thin films for
extremely low optical reflections, 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. Our high-speed opto-electronics capabilities
include analog chip design, photodetector design and advanced manufacturing,
packaging and assembly. These capabilities have resulted in our 60 gigahertz
photodetector product and electronic amplifier products at speeds greater than
15 gigahertz, while allowing us to develop products that operate at data rates
of OC-192 or OC-768.
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
are used for advanced manufacturing of fiber optic components and for research
and development of high-speed network products. Our 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.
CUSTOMERS
We sell our fiber optic products to network equipment providers and our
advanced photonics tools to customers in the telecommunications, semiconductor,
and metrology industries. For the year ended December 31, 2000, Corvis
Corporation, Agilent Technologies, and Corning Incorporated accounted for 17.6%,
14.4%, and 10.6% of our net revenues, respectively. No single customer accounted
for more than 10% of our revenues for the nine-month period ended December 31,
1999.
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 for test and measurement applications that
would meet specifications established by Agilent. Pursuant to this development
agreement, as amended in November 1997, December 1999 and December 2000, 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 a base
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. Effective in the fourth quarter of 2000, we entered into a further
agreement with Agilent, whereby the base price is adjusted based upon the sales
and manufacturing performances of Agilent and New Focus, respectively. Agilent
does not have any minimum purchase obligations, and may stop placing orders with
us at any time, regardless of any forecast Agilent has previously provided.
Additionally, sales to our customers are generally made pursuant to purchase
orders that are subject to cancellation, modification or rescheduling without
significant penalties. Agilent has recently reduced its orders with us as a
result of the slowdown in the telecommunications industry. Pursuant to these
agreements, 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.
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In January 2000, we entered into a memorandum of agreement with Alcatel USA
in which Alcatel committed 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 upon 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 liabilities.
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 prospective 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 2001, unless we agree with Corning to extend
the term for another one-year period.
In August 2000, JCA, acquired by us in January 2001, entered into an
agreement with Corvis Corporation in which Corvis agreed to purchase one of
JCA's amplifier products. The agreement provides that Corvis will submit rolling
twelve-month forecasts to JCA. However, orders are not binding on Corvis until
Corvis places purchase orders with JCA. The agreement is for a two-year term,
with an option to renew the agreement upon mutual agreement of the parties.
SALES, MARKETING AND CUSTOMER SUPPORT
We focus our sales and marketing efforts on a select set of key customers.
We take a collaborative approach with our customers and establish relationships
at all levels -- engineering, procurement, and senior management. By actively
collaborating with world-class network system providers, we develop a clear
understanding of the needs in the marketplace. Our collaborative approach allows
us to rapidly respond to customer needs and to stay at the forefront of the
technology required for next-generation networks.
We sell and market our fiber optic products primarily through our direct
sales force. 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 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. We do, however, outsource on a
limited basis manufacturing of selected subcomponents, primarily for our
commercial photonics products. We have manufacturing operations in San Jose,
California, Santa Clara, California, Camarillo, California, Fremont, California,
Middleton, Wisconsin and Shenzhen, China. We are currently expanding our
manufacturing facilities in San Jose, California and Shenzhen, China. In
addition, in conjunction with our acquisition of JCA in January 2001, we are
expanding our manufacturing facilities in Camarillo, California. In March 2001,
we announced that we would slow the rate of production in our U.S. and China
factories to bring production in line with lower unit demand anticipated for the
first half of 2001. We will complete facility construction projects that are
currently underway but will not add production equipment in these new facilities
until demand merits.
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.
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Our products are designed to be fully compliant with standards for quality and
interoperability with existing installation and maintenance systems. As a result
of our continuing commitment to manufacturing high quality products, our
operations in San Jose and Santa Clara, California and Shenzhen, China are each
ISO certified.
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. We have developed automated precision processes
and proprietary tools to increase our manufacturing yields and capacity. For
example, we have developed robotics technology with pick-and-place capability at
the one micro-meter level. We will continue to seek opportunities for automation
to increase yields and capacity.
RESEARCH AND DEVELOPMENT
We have assembled a team of engineers, technicians and operators with
significant experience in highly specialized manufacturing industries such as
optical networking, semiconductor capital equipment, optical storage, and
communications. 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, excluding
funding received from research and development contracts, totaled $27.2 million
for the fiscal year ended December 31, 2000, $8.4 million for the nine-month
period ended December 31, 1999 and $9.1 million for the fiscal year ended March
31, 1999.
COMPETITION
Competition in the optical component and module market 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
support of their products. In addition, some 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. 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
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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 December 31, 2000 we have been granted 29 U.S. patents and one European
patent. As of December 31, 2000, we have 47 U.S. utility filings, of which three
have been allowed by the U.S. Patent and Trademark Office, 13 U.S. provisional
filings and 22 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 August 17, 2018.
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 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 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.
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EMPLOYEES
At December 31, 2000, we had a total of 1,622 employees located in both the
United States and the People's Republic of China. Of the total, 1,327 were in
manufacturing, 162 were in research and development, 33 were engaged in sales
and marketing, and 100 were in administration. None of our employees are subject
to a collective bargaining agreement.
During January and February 2001, we added approximately 230 employees as a
result of our acquisitions of JCA Technology, Inc. and Globe Y. Technology, Inc.
In March 2001, we announced that we would slow the rate of production in
our U.S. and China factories to bring production in line with anticipated lower
demand for the first half of 2001. To accomplish this goal, we furloughed
approximately 260 direct production employees in training at our China
operations and reduced our U.S. workforce by approximately 70 people,
predominantly direct labor employees.
As of March 20, 2001, we employ approximately 1,725 employees.
RISK FACTORS
You should carefully consider the risks described below and all of the
information contained in this Annual Report. If any of the following risks
actually occur, our business, financial condition and results of operations
could be harmed, the trading price of our common stock could decline, and you
may lose all or part of your investment in 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 $36.0 million for the fiscal year ended December
31, 2000, $7.7 million for the nine-month period ended December 31, 1999, and
$5.0 million for our fiscal year ended March 31, 1999. As of December 31, 2000,
we had an accumulated deficit of $51.5 million. In March 2001 we announced lower
net revenue guidance for our fiscal year ending December 30, 2001 from $240
million to $170-190 million due to the unanticipated widespread softening of the
U.S. economy and the telecommunications industry. We have experienced order
cancellations and extensions of product shipment dates by our customers who are
adjusting their inventory levels in response to slower industry growth. These
cancellations and extensions adversely impact our revenues and have resulted in
higher inventory levels than required to support our current sales forecast.
These conditions may significantly delay, and could prevent, our ability to
operate profitably. We 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. Additionally, the Company
has recently completed two acquisitions and will record significant intangible
assets based on the underlying book value of the assets of the two companies
acquired. Amortization of these intangible assets and other acquisition-related
charges will reduce the Company's 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.
ORDER CANCELLATIONS AND EXTENSIONS OF PRODUCT SHIPMENT DATES BY SOME OF OUR
CUSTOMERS WILL ADVERSELY IMPACT OUR OPERATING RESULTS.
Our sales are generally made pursuant to purchase orders that are subject
to cancellation, modification or rescheduling without significant penalties. We
have recently experienced order cancellations and extensions of product shipment
dates by some of our customers. If these or other current customers stop placing
orders, or further reduce 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. The loss of any of
our key customers or further significant reductions in sales to these customers
would reduce our net revenues from the levels currently expected.
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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. Moreover, our ability to accurately forecast
revenues is impacted by weaknesses and uncertainties regarding overall demand
within the telecommunications industry, inventory levels within the industry,
sudden order reductions and cancellations by customers, lower backlog of
customer orders, and potential pricing pressures that may arise from supply-
demand conditions within the industry. Because we have only recently begun to
sell these products, we have in the past and may in the future 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. In March 2001, we announced lower net revenue guidance for our fiscal
year ending December 30, 2001 from $240 million to $170-190 million due to the
unanticipated widespread softening of the U.S. economy and the
telecommunications industry. 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 fiscal year ended December 31, 2000, Corvis Corporation, Agilent
Technologies, and Corning Incorporated accounted for 17.6%, 14.4%, and 10.6% 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.
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 the
growth and upgrading of optical networks 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
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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, among
other things:
- 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 PRICES
OF OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.
We have experienced decreases in the average selling prices of some of our
products, including most of our passive component products. We anticipate that
as products in the optical component and module market become more commoditized,
the average selling prices of our products may decrease in response to
competitive pricing pressures, new product introductions by us or our
competitors or other factors. The optical component and module market is
experiencing extreme volatility as a result of lower product demand, which will
make our efforts to increase our sales volume difficult. 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.
RISKS RELATED TO OUR BUSINESS
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. We recently announced our plan to deliver samples of our new
tunable laser product to systems provider customers in April 2001, with
production to start in late 2001. 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.
WE HAVE RECENTLY ACQUIRED TWO BUSINESSES. IF WE EXPERIENCE DIFFICULTY IN
INTEGRATING THESE NEW ACQUISITIONS, OUR BUSINESS MAY BE ADVERSELY AFFECTED. ANY
ACQUISITIONS WE MIGHT MAKE IN THE FUTURE COULD DISRUPT OUR BUSINESS AND HARM OUR
FINANCIAL CONDITION.
We recently acquired JCA Technology, Inc. and Globe Y. Technology, Inc. The
efficient integration of these businesses into our organization will be
important to our success. If our integration efforts are unsuccessful, our
business will suffer. We expect to spend significant resources to integrate
these businesses into our organization. Our headcount increased by approximately
230 employees as a result of the acquisitions, and these new employees must be
integrated with our existing employees. Both JCA and Globe Y were privately held
and may require substantial investments in operational and financial
infrastructure to ensure that their systems and processes adequately support
operating as a publicly held organization. Each of these organizations will also
need additional investments in manufacturing infrastructure in order to ramp
production volumes. A key employee of JCA previously owned substantially all of
the stock of JCA, and a key employee of Globe Y previously owned all the stock
of Globe Y. Although each of these individuals has executed employment
agreements with the Company, we cannot assure you that we can retain either or
both
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of these individuals. We have limited experience with integrating acquired
businesses into our organization. Our integration efforts may not be successful
and may result in unanticipated operations problems, expenses and liabilities
and the diversion of management attention. If we are unable to integrate these
companies into our organization in a timely and effective manner, our business
and our operating results will be adversely affected.
We 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 further 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.
COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS, OR
CAUSE US TO LOSE MARKET SHARE.
Competition in the optical component and module 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, the market capitalization and cash reserves of several of our
competitors are much larger than ours, and, as a result, these competitors 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 acquired E-Tek Dynamics in June 2000 and acquired SDL,
Inc. in February 2001. Such acquisitions could give our competitors a strategic
advantage. For example, if our competitors acquire any of our significant
customers, 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 component and module market. For example, Lucent Technologies has
announced that it intends to spin-off its microelectronics business, including
Lucent's 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. In addition, many of our potential
competitors have significantly more established sales and customer support
organizations, much greater name recognition, more extensive customer bases,
more developed distribution channels and broader product offerings 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
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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.
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 REVENUE AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CONTINUE TO 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 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 component and module market, we cannot predict
the length of these sales and development cycles. The recent slowdown in the
U.S. economy has resulted in order cancellations and extensions of product
shipment dates by our customers. These long sales cycles, coupled with the
uncertain affects of the slowdown in the U.S. economy, may cause our revenues
and operating results to vary significantly and unexpectedly from quarter to
quarter, which could continue to 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. Except for certain employment agreements entered into in connection
with our acquisitions of JCA and Globe Y, none of our officers or key employees
are bound by an employment agreement for any specific term and these individuals
may terminate
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their employment at any time. In addition, we do not have "key person" life
insurance policies covering any of our employees.
We recently furloughed approximately 260 direct production employees
currently in training at our operations in Shenzhen, China. We also reduced our
U.S. workforce by approximately 70 people, predominantly direct labor employees.
However, we will continue to hire selectively in the engineering, sales and
marketing and administrative functions. 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 develop and sell
our products.
WE HAVE LIMITED PRODUCT OFFERINGS, AND IF THE CURRENT DECLINE IN DEMAND FOR
THESE PRODUCTS CONTINUES 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 fiscal year ended December 31, 2000, we
derived approximately 37% and 14%, 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. Demand for these and other
optical component and module products has declined as a result of the recent
slowdown in the economy and we have recently experienced order cancellations and
delays in product shipment dates by our customers. Aside from the current
slowdown in the telecommunications industry, continued and widespread market
acceptance of our products is critical to our future success. We cannot assure
you that, once the telecommunication industry conditions improve, our current
products will achieve market acceptance at the rate at which we expect, or at
all, which could adversely affect our net revenues.
IF WE FAIL TO ACCURATELY TIME OUR MANUFACTURING CAPACITY WITH THE DEMAND FOR OUR
PRODUCTS, OUR BUSINESS MAY NOT SUCCEED.
We face a challenge in accurately timing the installation of our
manufacturing capacity with the demand for our products. Throughout 2000 we
aggressively expanded our manufacturing capacity in both the U.S. and China,
through the expansion of facilities and the hiring of employees. At December 31,
2000, we had a total of 1,622 employees, up from 289 employees at December 31,
1999. As a result of the recent, and sudden, order cancellations and extensions
of product shipment dates by our customers, we are slowing the rate of
production in our U.S. and China factories. We recently reduced our U.S.
workforce by approximately 70 people and furloughed approximately 260 direct
production employees currently in training at our China operations. We intend to
complete construction of facilities currently underway, but we are curtailing
efforts to install equipment in these facilities until market conditions
improve. We believe this approach will allow us to quickly ramp production if
unit demand for our products merits. However, if demand for our products
continues to decline, we may have more employees and facility space than
necessary to deliver our products, which would adversely impact our ability to
achieve profitability, and could require us to further reduce the size of our
operations.
Despite our recent announcement to slow down expansion of our business, we
still face challenges as a result of our rapid expansion over the past year. We
currently operate facilities in San Jose, California, Santa Clara, California,
Camarillo, California, Fremont, California, Middleton, Wisconsin and Shenzhen,
China. The increase in employees as a result of the acquisitions and the growth
in our operations over the past year, combined with the challenges of managing
geographically-dispersed operations, have 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 recent growth and to
accurately time any future growth with market demand for our products could
adversely impact our ability to manufacture and sell our products, which could
reduce our revenues.
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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.
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 in Santa Clara Superior Court. The former employee is alleging
wrongful termination in violation of public policy, breach of the covenant of
good faith and fair dealing and fraud. 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. In September 2000 the
parties participated in mediation but were unable to reach resolution. The
parties are currently in the process of completing discovery. The Company will
be filing a motion to dismiss shortly as to the causes of action for breach of
contract and fraud. A trial date has not yet been set. 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.
On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc. et al., Civil Action No. 01-1020, was filed against the Company
and several of its officers and directors in the United States District Court
for the Northern District of California. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions were filed thereafter against New Focus and several of its officers and
directors in the United States District Court for the Northern District of
California. Those actions are Rosen v. New Focus, Inc., et al., Civil Action No.
01-1065, Solomon v. New Focus, Inc., et al., Civil Action No. 01-2023, Speck v.
New Focus, Inc., et al., Civil Action No. 01-1093, Deutch v. New Focus, Inc., et
al., Civil Action No. 01-1123, and Connors v. New Focus, Inc., et al., Civil
Action No. 01-1148. We intend to vigorously defend against these claims.
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 "Part I, Item 3 -- Legal Proceedings."
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the fiscal year ended December 31, 2000, 30.7% 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.
Additionally, our international sales may be adversely affected if international
economies weaken. Even if we are able to successfully continue international
operations, we may not be able to maintain
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or increase international market demand for our products. Our international
operations are subject to risks including the following:
- 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.
ELECTRICAL BLACKOUTS AND OTHER BUSINESS INTERRUPTIONS COULD ADVERSELY EFFECT OUR
BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We do not
have a detailed disaster recovery plan and carry only a limited amount of
business interruption insurance to compensate us for losses that may occur. Our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power in the
state. We currently do not have backup generators or alternate sources of power
in the event of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our affected facilities. Any losses
or damages incurred by us as a result of blackouts or other business
interruptions could impair our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operations.
RISKS RELATED TO MANUFACTURING OUR PRODUCTS
IF WE DO NOT ACCURATELY PROJECT DEMAND FOR OUR PRODUCTS, WE WILL HAVE EXCESS
MANUFACTURING CAPACITY OR INSUFFICIENT MANUFACTURING CAPACITY, EITHER OF WHICH
WILL SERIOUSLY HARM OUR RESULTS OF OPERATIONS.
We currently manufacture substantially all of our products in our
facilities located in Santa Clara, San Jose and Camarillo, California and in
Shenzhen, China. Based on the recent and sudden change in U.S. economic
conditions, we now expect lower demand for our products in 2001. We recently
announced that we will slow the rate of production in our U.S. and China
factories to bring production in line with the lower unit demand anticipated for
the first half of 2001. To accomplish this goal, we will immediately furlough
approximately 260 direct production employees currently in training at our
operations in Shenzhen, China. We will further lower production output through
the adjustment of work schedules at our China manufacturing facilities. We plan
to complete facility construction projects that are currently underway, in
particular the second phase of our second and larger manufacturing facility in
Shenzhen, China, but will not add production equipment in these new facilities
until demand merits. These actions will allow us to lower production output
during the first half of 2001 while retaining flexibility to meet demand if it
should increase in the near future. We expect that the production slowdown will
negatively impact our gross margins during the first half of 2001. If we fail to
accurately coordinate our facility build out schedule with demand for our
products in the future, we will have excess capacity or insufficient capacity,
either of which will seriously harm our results of operations.
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Furthermore, we may experience delays, disruptions or quality control
problems in our manufacturing operations, and, as a result, product shipments to
our customers could be delayed beyond the revised shipment schedules requested
by our customers, which would negatively impact our revenues, competitive
position and reputation. For example, we have, in the past, 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 adversely affect our revenues, gross margins and results of
operations.
OUR FAILURE TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS COULD
CAUSE US TO INCUR ADDITIONAL COSTS, HAVE EXCESS INVENTORIES OR HAVE INSUFFICIENT
MATERIALS TO BUILD OUR PRODUCTS, ANY OF WHICH COULD HARM OUR RESULTS OF
OPERATIONS.
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. 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 results of operations. Recent order cancellations and extension of
product delivery dates by our customers have created a risk of material
obsolescence due to our overestimation of component and material requirements
for our manufacturing facilities. Additionally, in order to avoid excess
material inventories we may incur cancellation charges associated with modifying
existing purchase orders with our vendors.
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 in the
past experienced lower than targeted product yields, which have resulted in
delays of customer shipments, lost revenues and impaired gross margins. We may
experience lower than targeted product yields in the future which could
adversely affect our operating results.
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. pursuant to land use
certificates and agreements, each with terms of 50 years. We lease the smaller
of our manufacturing facilities from Shenzhen New and High-Tech Village
Development Co. pursuant to a lease agreement that will expire in November 2002,
subject to our option to renew for an additional three-year period. We purchased
the second facility in Shenzhen, China. 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.
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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 that 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 cannot 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 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.
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 currently purchase several key components and materials used in the
manufacture of our products from single or limited source suppliers. We may fail
to obtain required components in a timely manner in the future, or could
experience further delays from evaluating and testing the products of these
potential alternative suppliers. The recent softening of demand in the
telecommunications industry could adversely impact the financial condition of
our suppliers, many of whom have limited financial resources. We have in the
past, and may in the future, be required to provide advance payments in order to
secure key components or materials from financially limited suppliers. Financial
or other difficulties faced by these suppliers could limit the availability of
key components or materials. Additionally, financial difficulties could impair
our ability to recover advances made to these suppliers. 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.
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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 third
parties will not challenge any issued patents. 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.
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.
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.
On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, acquired by
E-Tek Dynamics, Inc., which was acquired by JDS Uniphase, filed a complaint
against us for patent infringement in the United States District Court for the
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.
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 for
negligent interference with contract against us and both of Kaifa's claims for
trade secret misappropriation and unfair competition against an individual
defendant.
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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 and expert discovery. A claim construction hearing
regarding the asserted patent claims was held in January 2001, however no ruling
has yet been delivered by the court. Trial is scheduled for October 2001.
To date, we have spent nearly $1.0 million defending this action. If we are
unsuccessful in defending this action, any remedies awarded 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 "Part I, Item
3 -- 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. 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 "Part II -- Other
Information, Item 1 -- 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.
ITEM 2. PROPERTIES
Our corporate headquarters facility of approximately 130,000 square feet is
located in San Jose, California. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in August 2007. We also have
facilities of 52,000 square feet in San Jose and 55,000 square feet in Santa
Clara, California.
We own a 243,000 square foot manufacturing facility in Shenzhen, China. We
have a second Shenzhen facility of approximately 20,000 square feet 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. In
addition, in January 2001, we purchased six acres of land in Shenzhen for future
development.
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Our newly acquired JCA Technology subsidiary leases 42,000 square feet in
Camarillo, California. In January 2001, we entered into a ten-year lease for a
new facility of 145,000 square feet in Camarillo. We plan to vacate the existing
Camarillo facility and occupy the new facility beginning late in 2001 or early
2002.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 1999, U.S.A. Kaifa Technology, Inc., or Kaifa, acquired by
E-Tek Dynamics, Inc., which was 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.
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 unenforceable. Currently, the
parties are engaged in fact and expert discovery.
We intend to defend the action vigorously. A claim construction hearing
regarding the asserted patent claims was held in January 2001; however, no
ruling has yet been delivered by the court. 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 intend to vigorously defend
against these claims. In September 2000 the parties participated in mediation
but were unable to reach resolution. The parties are currently in the process of
completing discovery. We will be filing a motion to dismiss shortly as to the
causes of action for breach of contract and fraud. We are currently in the
process of taking depositions. A trial date has not yet been set.
On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc. et al., Civil Action No. 01-1020, was filed against the Company
and several of its officers and directors in the United States District Court
for Northern District of California. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions were filed thereafter against New Focus and several of its officers and
directors in the United States District Court for the Northern District of
California. Those actions are Rosen v. New Focus, Inc., et al., Civil Action No.
01-1065, Solomon v. New Focus, Inc., et al., Civil Action No. 01-2023, Speck v.
New Focus, Inc., et al., Civil Action No. 01-1093, Deutch v. New Focus, Inc., et
al., Civil Action No. 01-1123, and Connors v. New Focus, Inc., et al., Civil
Action No. 01-1148. We intend to vigorously defend against these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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........................................... $158.00 $73.73
Fourth Quarter.......................................... $ 89.56 $17.13
2001
First Quarter (through March 20, 2001).................. $ 60.19 $13.75
On March 20, 2001 the reported last sale price of the common stock on the
Nasdaq National Market was $17.06. As of February 28, 2001 there were in excess
of 400 stockholders of record.
We filed a Registration Statement on Form S-1 that was declared effective
by the SEC on May 17, 2000. On May 18, 2000, New Focus shares commenced trading
and we completed the sale of all 5,650,000 registered shares of common stock at
a price of $20.00 per share in the initial public offering pursuant to the
Registration Statement. The net proceeds received by us after deducting
underwriting discounts, commissions and other issuance costs of approximately
$9.5 million were approximately $103.5 million.
Immediately prior to the closing of the offering, all of the outstanding
shares of convertible preferred stock were automatically converted into
42,060,284 shares of common stock.
We filed a second Registration Statement on Form S-1 that was declared
effective by the SEC on August 10, 2000. On August 11, 2000, we completed the
sale of all 4,025,000 registered shares of common stock at a price of $115.00
per share in the secondary public offering pursuant to the Registrant Statement.
The net proceeds received by us after deducting underwriting discounts,
commissions and other issuance costs of approximately $24.0 million were $438.9
million.
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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and
other operating information. The financial data and operating information is
derived from our consolidated financial statements and should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
FISCAL YEAR NINE MONTHS
ENDED ENDED FISCAL YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues...................... $ 80,358 $18,101 $17,285 $15,482 $10,543
Cost of net revenues.............. 64,346 12,525 9,225 8,186 5,946
-------- ------- ------- ------- -------
Gross profit................... 16,012 5,576 8,060 7,296 4,597
Operating Expenses:
Research and development,
net.......................... 26,391 7,352 7,379 3,721 3,115
Sales and marketing............ 5,880 2,982 2,987 2,193 1,662
General and administrative..... 9,813 2,704 2,360 1,355 1,269
Deferred compensation.......... 23,747 132 -- -- --
-------- ------- ------- ------- -------
Total operating
expenses................ 65,831 13,170 12,726 7,269 6,046
-------- ------- ------- ------- -------
Operating income (loss)........... (49,819) (7,594) (4,666) 27 (1,449)
Interest and other income
(expense), net................. 13,851 (81) (303) (303) (210)
-------- ------- ------- ------- -------
Loss before provision for income
taxes.......................... (35,968) (7,675) (4,969) (276) (1,659)
Provision for income taxes........ 6 2 2 10 2
-------- ------- ------- ------- -------
Net loss.......................... $(35,974) $(7,677) $(4,971) $ (286) $(1,661)
======== ======= ======= ======= =======
Basic and diluted net loss per
share.......................... $ (0.92) $ (3.11) $ (2.18) $ (0.25) $ (1.52)
======== ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per share..... 38,914 2,468 2,284 1,148 1,096
======== ======= ======= ======= =======
MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... $485,493 $28,067 $ 51 $ 196 $ 250
Working capital................... 501,983 29,026 479 1,166 616
Total assets...................... 600,944 44,852 8,240 8,197 5,564
Long-term debt, less current
portion........................ 111 368 588 79 129
Total stockholders' equity (net
capital deficiency)............ 567,110 35,013 (1,183) (702) (431)
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The following is a summary of our quarterly results for the calendar years
ended December 31, 2000 and 1999.
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
DEC. 31, OCT. 1, JULY 2, APRIL 2, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- -------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $ 33,875 $ 22,250 $ 14,451 $ 9,782 $ 6,845 $ 6,675 $ 4,581 $ 4,741
Cost of net revenues.................. 23,256 17,248 13,056 10,786 5,337 4,367 2,821 2,600
-------- -------- -------- -------- ------- ------- ------- -------
Gross profit (loss)................. 10,619 5,002 1,395 (1,004) 1,508 2,308 1,760 2,141
Operating Expenses:
Research and development, net....... 10,620 7,270 4,892 3,609 3,501 2,259 1,592 2,129
Sales and marketing................. 1,789 1,526 1,465 1,100 1,126 930 926 874
General and administrative.......... 3,483 2,538 2,368 1,424 1,159 940 605 636
Deferred compensation............... 4,812 5,879 7,508 5,548 94 29 9 --
-------- -------- -------- -------- ------- ------- ------- -------
Total operating expenses........ 20,704 17,213 16,233 11,681 5,880 4,158 3,132 3,639
-------- -------- -------- -------- ------- ------- ------- -------
Operating loss........................ (10,085) (12,211) (14,838) (12,685) (4,372) (1,850) (1,372) (1,498)
Interest and other income (expense),
net................................. 7,834 5,082 711 224 (19) 33 (95) (96)
-------- -------- -------- -------- ------- ------- ------- -------
Loss before provision for income
taxes............................... (2,251) (7,129) (14,127) (12,461) (4,391) (1,817) (1,467) (1,594)
Provision for income taxes............ 4 2 -- -- 2 -- -- 2
-------- -------- -------- -------- ------- ------- ------- -------
Net loss.............................. $ (2,255) $ (7,131) $(14,127) $(12,461) $(4,393) $(1,817) $(1,467) $(1,596)
======== ======== ======== ======== ======= ======= ======= =======
Basic and diluted net loss per
share............................... $ (0.04) $ (0.12) $ (0.45) $ (2.12) $ (1.74) $ (0.74) $ (0.61) $ (0.66)
======== ======== ======== ======== ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per share.......... 60,463 58,140 31,691 5,891 2,530 2,455 2,419 2,406
======== ======== ======== ======== ======= ======= ======= =======
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 advanced optics to develop
optical components and modules that enhance network performance by enabling
higher channel counts and data rates, longer reach lengths, new service
capabilities, and lower costs 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 product groups, telecom
products and photonics tools. Throughout fiscal 1999, comprised of the
twelve-month period ended March 31, 1999, substantially all of our revenues were
generated from sales of photonics tools products. Our photonics tools 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 fiscal year ended December 31, 2000, sales of our telecom
products accounted for 66.7% of overall net revenues and are expected to
continue to increase as a percentage of our overall net revenues. In the year
ended December 31, 2000, Corvis Corporation, Agilent Technologies and Corning
Incorporated accounted for 17.6%, 14.4% and 10.6% of our net revenues,
respectively.
In March 2001 we announced lower net revenue guidance for our fiscal year
ending December 30, 2001 from $240 million to $170-190 million due to the
unanticipated widespread softening of the U.S. economy and the
telecommunications industry. We currently expect net revenue for the first
quarter of 2001 to be approximately $38 - 41 million.
On January 16, 2001, we acquired JCA Technology, Inc., a designer,
manufacturer and marketer of a full line of fiber optic products for OC-48 and
OC-192 modulators, including high-speed clock amplifiers and broadband data
driver amplifiers, for a total purchase price of approximately $311.9 million in
a transaction to be accounted for as a purchase. The consideration consisted of
$75.0 million in cash and approximately 7,954,000 shares of our common stock for
a combined total fair value of $303.4 million in exchange for all of the
outstanding stock of JCA. In addition, we issued approximately 2,079,000 shares
of restricted stock subject to forfeiture. We will record $56.0 million of
unearned compensation related to the issuance of approximately 1,951,000 shares
of restricted stock. The remaining 128,000 shares of restricted stock will vest
upon meeting certain fiscal 2001 operating objectives. The value of these shares
will be measured and recorded as compensation at the time the contingency is
satisfied. JCA will operate as a wholly owned subsidiary of New Focus.
On February 15, 2001, we acquired Globe Y. Technology, Inc., a manufacturer
of fused fiber coupling machines, for a total purchase price of approximately
$45.2 million in a transaction to be accounted for as a purchase. The
consideration consisted of approximately 1,002,000 shares of our common stock in
exchange for all of the outstanding stock of Globe Y. In addition, we will
record approximately $2.3 million of unearned compensation related to the
issuance of approximately 53,000 shares of restricted stock subject to
forfeiture. Globe Y will operate as a wholly owned subsidiary of New Focus.
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 photonics tools
products through a combination of catalog sales, international distributors and
direct sales primarily in the United States, Europe
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and Asia. For the year ended December 31, 2000, 30.7% of our net revenues were
from international sales. Of our international sales, 60.8% were from telecom
products and 39.2% were from photonics tools 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 other expenses related 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 year 2000, the nine-month period
ended December 31, 1999 and fiscal year 1999, we received $774,000, $1.0 million
and $1.7 million, respectively, for research and development activities, which
was used to offset research and development costs. The majority of this funding
was from government agency contracts. We expect to focus less on funded research
and development projects and therefore expect such funding to continue to
decline in future periods. 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 will 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 will 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 will increase in absolute dollars as we continue to add personnel and
incur additional costs related to the growth of our business and our
acquisitions of JCA and Globe Y.
In connection with the grant of stock options to our employees, we recorded
deferred compensation of approximately $50.3 million through December 31, 2000,
representing the difference between the estimated fair market value of the
common stock for accounting purposes and the option exercise price at the date
of grant. These amounts are being amortized using the graded vesting method over
the vesting period of the stock options, which for us is generally five years
from the date of grant.
26
29
RESULTS OF OPERATIONS
You should be aware that we changed our fiscal year end to December 31 in
December 1999. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended on March 31, 1999.
FISCAL YEAR NINE MONTHS FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ -----------
SUMMARY OF OPERATIONS DATA:
Net revenues......................................... 100.0% 100.0% 100.0%
Cost of net revenues................................. 80.1 69.2 53.4
------ ------ ------
Gross profit...................................... 19.9 30.8 46.6
Operating Expenses:
Research and development, net..................... 32.8 40.6 42.7
Sales and marketing............................... 7.3 16.5 17.3
General and administrative........................ 12.2 14.9 13.6
Deferred compensation............................. 29.6 0.7 --
------ ------ ------
Total operating expenses..................... 81.9 72.7 73.6
------ ------ ------
Operating loss....................................... (62.0) (41.9) (27.0)
Interest and other income (expense), net............. 17.2 (0.5) (1.8)
------ ------ ------
Loss before provision for income taxes............... (44.8) (42.4) (28.8)
Provision for income taxes........................... -- -- --
------ ------ ------
Net loss............................................. (44.8)% (42.4)% (28.8)%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 31, 2000, THE NINE-MONTH PERIOD ENDED DECEMBER 31,
1999, AND FISCAL YEAR ENDED MARCH 31, 1999
Net Revenues
Net revenues increased to $80.4 million for the year ended December 31,
2000 from $18.1 million for the nine-month period ended December 31, 1999 and
$17.3 million in fiscal 1999 primarily as a result of increased sales of our
telecom products. We began shipping our telecom products in March 1999. Sales of
our telecom products were $53.6 million, or 66.7% of total net revenues for
fiscal year 2000, compared to $5.0 million, or 27.6% of total net revenues for
the nine-month period ended December 31, 1999.
Due to a widespread softening in the U.S. economy and the
telecommunications industry, we recently experienced order cancellations and
extensions in produc