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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 1, 2001
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 April 1, 2001, 75,869,550 shares of the Registrant's common stock, $0.001 par
value, were issued and outstanding.
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INDEX
NEW FOCUS, INC.
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheets--April 1, 2001 and December 31,
2000 ........................................................ 3
Consolidated statements of operations--Three months
ended April 1, 2001 and April 2, 2000 ....................... 4
Consolidated statements of cash flows--Three months
ended April 1, 2001 and April 2, 2000 ....................... 5
Notes to consolidated financial statements-- April 1, 2001 .. 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 14-19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ........................................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 36
Item 2. Changes in Securities and Use of Proceeds ................... 37
Item 3. Defaults Upon Senior Securities ............................. 37
Item 4. Submission of Matters to a Vote of Security Holders ......... 37
Item 5. Other Information ........................................... 37
Item 6. Exhibits and Reports on Form 8-K ............................ 37
SIGNATURES ................................................................. 39
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NEW FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 1, DECEMBER 31,
2001 2000
--------- ---------
(unaudited) (see note)
ASSETS
Current Assets
Cash and cash equivalents $ 148,260 $ 363,375
Short-term investments 221,318 122,118
Trade accounts receivable, less allowances of
$760 in 2001 and $517 in 2000 14,852 13,835
Inventories:
Raw materials 11,328 15,218
Work in progress 6,278 10,226
Finished goods 4,616 4,941
--------- ---------
Total Inventories 22,222 30,385
Deferred tax assets 5,480 --
Prepaid expenses and other current assets 5,734 4,805
--------- ---------
Total current assets 417,866 534,518
Property, plant and equipment:
Land and building 16,514 13,214
Manufacturing and development equipment 39,760 26,304
Computer software and equipment 6,430 5,205
Office equipment 2,268 1,782
Leasehold improvements 9,627 3,857
Construction in progress 17,433 11,033
--------- ---------
92,032 61,395
Less allowances for depreciation and amortization (9,037) (6,651)
--------- ---------
Net property, plant and equipment 82,995 54,744
Goodwill and other intangible assets, net of accumulated amortization
of $21,690 in 2001 and $152 in 2000 334,752 577
Other assets 4,225 11,105
--------- ---------
Total assets $ 839,838 $ 600,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,887 $ 21,556
Accrued expenses 18,178 10,355
Deferred research and development funding 343 343
Current portion of long-term debt 238 281
--------- ---------
Total current liabilities 37,646 32,535
Long-term debt, less current portion 92 111
Deferred rent 1,302 1,188
Deferred tax liability 20,886 --
Commitments and contingencies
Stockholders' equity:
Common stock 76 64
Additional paid-in capital 983,517 652,184
Notes receivable from stockholders (7,207) (7,281)
Deferred compensation (59,498) (26,453)
Accumulated other comprehensive income 801 80
Accumulated deficit (137,777) (51,484)
--------- ---------
Total stockholders' equity 779,912 567,110
--------- ---------
Total liabilities and stockholders' equity $ 839,838 $ 600,944
========= =========
Note: The December 31, 2000 consolidated balance sheet has been derived
from audited financial statements.
See notes to consolidated financial statements.
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NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
Net revenues $ 40,762 $ 9,782
Cost of net revenues (1) 55,442 10,786
-------- --------
Gross profit (14,680) (1,004)
Operating Expenses:
Research and development (2) 12,807 4,144
Less funding received from research
and development contracts (12) (535)
-------- --------
Net research and development 12,795 3,609
Sales and marketing (3) 2,447 1,100
General and administrative (4) 6,204 1,424
Amortization of goodwill and other intangibles 21,437 --
In-process research and development 13,400 --
Deferred compensation 25,324 5,548
-------- --------
Total operating expenses 81,607 11,681
-------- --------
Operating loss (96,287) (12,685)
Interest and other income, net 4,994 224
-------- --------
Loss before provision (benefit) for income taxes (91,293) (12,461)
Provision (benefit) for income taxes (5,000) --
-------- --------
Net loss $(86,293) $(12,461)
======== ========
Basic and diluted net loss per share $ (1.22) $ (2.12)
======== ========
Shares used to compute basic and
diluted net loss per share 70,460 5,891
======== ========
- ----------
(1) Excluding $3,491 and $1,283 in amortization of deferred stock
compensation for the three months ended April 1, 2001 and April 2, 2000,
respectively.
(2) Excluding $18,639 and $1,013 in amortization of deferred stock
compensation for the three months ended April 1, 2001 and April 2, 2000,
respectively.
(3) Excluding $1,400 and $205 in amortization of deferred stock compensation
for the three months ended April 1, 2001 and April 2, 2000,
respectively.
(4) Excluding $1,794 and $3,047 in amortization of deferred stock
compensation for the three months ended April 1, 2001 and April 2, 2000,
respectively.
See notes to consolidated financial statements.
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NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
APRIL 1, APRIL 2,
2001 2000
--------- --------
OPERATING ACTIVITIES
Net loss $ (86,293) $(12,461)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,439 559
Amortization of goodwill and other intangibles 21,437 --
Acquired in-process research and development 13,400 --
Amortization of deferred compensation 25,324 5,548
Deferred rent 114 35
Changes in operating assets and liabilities:
Trade accounts receivable 3,443 (1,606)
Inventories 11,110 (2,531)
Prepaid expenses and other current assets (493) (670)
Accounts payable (4,827) 1,733
Accrued expenses 4,721 218
Deferred tax liability and income tax payable (5,005) --
Deferred research and development funding -- (250)
--------- --------
Net cash used in operating activities (14,630) (9,425)
INVESTING ACTIVITIES
Purchase of available-for-sale investments (116,872) --
Proceeds from sales and maturities of investments 18,393 --
Acquisition of businesses and related expenses, net of cash acquired (81,693) --
Acquisition of property, plant and equipment (27,373) (5,463)
Increase (decrease) in other assets 6,893 (1,290)
--------- --------
Net cash used in investing activities (200,652) (6,753)
FINANCING ACTIVITIES
Payments on equipment loan (63) (57)
Proceeds from issuance of common stock, net of repurchases 156 560
Proceeds from payment of notes receivable with shareholders 74 --
--------- --------
Net cash provided by financing activities 167 503
--------- --------
Decrease in cash and cash equivalents (215,115) (15,675)
Cash and cash equivalents at beginning of period 363,375 28,067
--------- --------
Cash and cash equivalents at end of period $ 148,260 $ 12,392
========= ========
See notes to consolidated financial statements.
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NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 1, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three months ended April 1, 2001, are not necessarily indicative of the results
that may be expected for the year ending December 30, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 2001.
Beginning in 2000, the Company maintains a fifty-two/fifty-three week
fiscal year cycle ending on the Sunday closest to December 31. The three-month
periods ended April 1, 2001 and April 2, 2000 contained 91 days and 93 days,
respectively.
NOTE 2 - COMPREHENSIVE LOSS
Comprehensive loss for the three months ended April 1, 2001 is $85.5
million, comprised of the Company's net loss of $86.3 million and $801,000 of
net unrealized holding gains on marketable equity securities. Comprehensive loss
for the three months ended April 2, 2000 is the same as the Company's net loss.
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NOTE 3 - LOSS PER SHARE
The following table sets forth the computation of net loss per share.
THREE MONTHS ENDED
---------------------------
APRIL 1, APRIL 2,
(in thousands, except per share amounts) 2001 2000
-------- --------
Net loss (numerator) $(86,293) $(12,461)
======== ========
Shares used in computing basic and diluted
net loss per share (denominator):
Weighted average common shares outstanding 73,541 9,384
Less shares subject to repurchase (3,081) (3,493)
-------- --------
Denominator for basic and diluted net loss
per share 70,460 5,891
======== ========
Basic and diluted net loss per share $ (1.22) $ (2.12)
======== ========
The Company has excluded the impact of all convertible preferred stock,
common shares subject to repurchase, warrants for convertible preferred stock
and common stock, and outstanding stock options from the calculation of diluted
loss per common share because all such securities are antidilutive for all
periods presented. The total number of shares, including options and warrants to
purchase shares, excluded from the calculations of diluted net loss per share
was 7,047,000 for the three months ended April 1, 2001 and 50,180,000 for the
three months ended April 2, 2000, respectively.
NOTE 4 -- INCOME TAXES
The benefit for income taxes of approximately $5.0 million for the
three months ended April 1, 2001 relates to the deferred tax benefit associated
with the amortization of other identifiable intangible assets and deferred
compensation resulting from the JCA and Globe Y acquisitions. Excluding the tax
benefit associated with these acquisitions, we recorded a provision for income
taxes of approximately $175,000, primarily for alternative minimum taxes and
foreign withholding taxes.
NOTE 5 -- SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has two reportable segments: Telecom and Photonics Tools.
The Telecom segment performs research and development, manufacturing, marketing
and sales of fiber amplifier products, wavelength management products,
high-speed opto-electronics and tunable laser modules, which are primarily sold
to manufacturers of networking and test equipment in the optical
telecommunications markets. The Photonics Tools segment performs research and
development, manufacturing, marketing
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and sales of photonics tools, which are primarily used for commercial and
research applications.
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes, excluding gains and losses
on the Company's investment portfolio. The accounting policies for the
reportable segments are consistent with those described in the summary of
significant accounting policies. There were no intercompany sales or transfers.
The Company does not segregate assets or interest expense by segment.
THREE MONTHS ENDED APRIL 1, 2001
-------------------------------------------------
TELECOM PHOTONICS TOOLS TOTAL
------- --------------- -----
(IN THOUSANDS)
Revenues from external customers $ 32,308 $ 8,454 $ 40,762
Depreciation expense $ 2,143 $ 243 $ 2,386
Operating segment profit (loss) $(36,095) $ (31) $(36,126)
THREE MONTHS ENDED APRIL 2, 2000
-------------------------------------------------
TELECOM PHOTONICS TOOLS TOTAL
--------- --------------- --------
(IN THOUSANDS)
Revenues from external customers $ 4,885 $ 4,897 $ 9,782
Depreciation expense $ 319 $ 229 $ 548
Operating segment profit (loss) $ (7,794) $ 657 $ (7,137)
Operating segment profit and loss excludes amortization of deferred
stock based compensation.
THREE MONTHS ENDED
------------------------------
APRIL 1, APRIL 2,
2001 2000
--------- ---------
(IN THOUSANDS)
LOSS
Total loss for reportable segments $(36,126) $ (7,137)
Interest and other income, net 4,994 224
Amortization of goodwill and other intangibles (21,437) --
In-process research and development (13,400) --
Amortization of deferred compensation (25,324) (5,548)
-------- --------
Loss before income taxes $(91,293) $(12,461)
======== ========
GEOGRAPHIC INFORMATION
REVENUES
United States $ 25,680 $ 6,886
Asia 1,997 568
Europe 13,085 2,328
-------- --------
Consolidated total $ 40,762 $ 9,782
======== ========
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Revenues are attributed to countries based on the location of customers.
NOTE 6 - SIGNIFICANT CUSTOMERS
In the three months ended April 1, 2001, Alcatel, Agilent Technologies,
and Corvis Corporation accounted for 15.6%, 12.8%, and 11.6% of the Company's
net revenues, respectively.
NOTE 7 -- CONTINGENCIES
On March 12, 2001, a putative securities class action, captioned Mandel
v. New Focus, Inc., et. al., Civil Action No. C-01-1020, was filed against New
Focus 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 captioned Rosen v. New Focus, Inc., et. al., Civil Action No. C-01-1065;
Solomon v. New Focus, Inc., et. al., Civil Action No. C-01-2023; Deutch v. New
Focus, Inc., et. al., Civil Action No. C-01-1123; Connors v. New Focus, Inc.,
et. al., Civil Action No. C-01-1148; Spanos v. New Focus, Inc., et. al., Civil
Action No. C-01-1328; Patton v. New Focus, Inc., et. al., Civil Action No.
C-01-1413, and Naiditch v. New Focus, Inc., et. al., Civil Action No. C-01-1689
have also been filed against New Focus and several of its officers and directors
in the United States District Court for the Northern District of California. The
Naiditch action asserts a class period from October 25, 2000 to March 5, 20001.
The cases are in the process of being consolidated. The Company believes it has
meritorious defenses to the claims and intends to contest the lawsuits
vigorously. An unfavorable resolution of the actions could have a material
adverse effect on the business, results of operations or financial condition of
the Company.
On April 10, 2001, a shareholder derivative action purportedly on
behalf of the Company, captioned Sherman v. Harris et. al., Civil Action No.
18797-NC, was filed in Delaware Chancery Court. The complaint alleges that the
Company's directors breached their fiduciary duties to the Company by engaging
in alleged wrongful conduct including conduct complained of in the securities
litigation described above. The Company is named solely as a nominal defendant
against whom the plaintiff seeks no recovery.
On March 10, 2000, a former employee filed a lawsuit against the
Company in Santa Clara Superior Court alleging three causes of action for
wrongful termination in violation of public policy, breach of the covenant of
good faith and fair dealing and fraud. The claims stem from the termination of
his employment with the Company in February 2000. The former employee seeks
unspecified general and special damages, punitive damages, attorneys' fees and
costs in the form of cash and shares of the Company's
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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. The Company plans to vigorously defend against these claims.
In December 1999, U.S.A. Kaifa Technology, Inc., acquired by E-Tek
Dynamics, Inc., which was acquired by JDS Uniphase Corporation, filed a
complaint against the Company for patent infringement in the United States
District Court, Northern District of California. In May 2001, the Company and
Kaifa reached a confidential settlement agreement that will terminate the
litigation pending between the two companies. The settlement is not expected to
have a material impact on the Company's results of operations.
In addition, the Company is subject to various claims that arise in the
normal course of business.
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NOTE 8 -- BUSINESS ACQUISITIONS
Acquisition of JCA Technology, Inc.
On January 16, 2001, the Company acquired JCA Technology, Inc. (JCA), a
privately held designer and manufacturer of fiber optic products for modulators,
for a total purchase price of approximately $311.5 million in a transaction to
be accounted for as a purchase. The Company paid $75.0 million in cash and
exchanged approximately 7,954,000 shares of common stock with a combined total
fair value of $303.4 million for all of the outstanding stock of JCA. In
addition, the Company issued approximately 2,079,000 shares of restricted stock
subject to forfeiture. The common stock was valued using the Company's average
stock price for the seven-day period ending December 27, 2000. The average price
was $28.71. Direct transaction costs related to the merger are estimated to be
approximately $8.1 million. In addition, the Company recorded $56.0 million of
unearned compensation related to approximately 1,951,000 shares of restricted
stock. The balance of 128,000 shares of restricted stock will vest contingent
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.
The acquisition has been accounted for as a purchase and accordingly,
the accompanying financial statements include the results of operations of JCA
subsequent to the acquisition date. The purchase price has been allocated to the
tangible net assets acquired based on management's estimate of their fair
values, and to the intangible assets acquired and in-process research and
development based on their estimated fair values as determined by an independent
appraisal. The purchase price allocation is as follows (in thousands):
Tangible net assets acquired $ 6,660
Intangible assets acquired:
Current technology 31,300
Customer base 4,000
Workforce 3,560
In-process research and development 13,400
Goodwill 267,777
Net deferred tax liability (15,200)
---------
Total purchase price allocation $ 311,497
=========
Tangible net assets acquired include cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued expenses and a note payable. Intangible assets acquired and
goodwill are each being amortized on a straight-line basis over estimated useful
lives ranging from two to four years. In-process research and development, which
has not reached technological feasibility and
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therefore has no alternative future use, has been expensed during the three
months ended April 1, 2001.
Acquisition of Globe Y. Technology, Inc.
On February 15, 2001, the Company acquired Globe Y. Technology, Inc.
(Globe Y), a privately-held 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 Company exchanged approximately 1,002,000
shares of common stock with a fair value of $44.4 million for all of the
outstanding stock of Globe Y. In addition, the Company issued approximately
53,000 shares of restricted stock subject to forfeiture. The common stock was
valued using the Company's closing stock price of $44.31 on February 15, 2001.
Direct transaction costs related to the merger are estimated to be approximately
$800,000. In addition, the Company recorded $2.3 million of unearned
compensation related to the approximately 53,000 shares of restricted stock.
The acquisition has been accounted for as a purchase and accordingly,
the accompanying financial statements include the results of operations of Globe
Y subsequent to the acquisition date. The purchase price has been allocated to
the tangible net assets acquired based on management's estimate of their fair
values, and to the intangible assets acquired based on their estimated fair
values as determined by an independent appraisal. The purchase price allocation
is as follows (in thousands):
Tangible net assets acquired $ 1,577
Intangible assets acquired:
Current technology 7,100
Customer base 2,400
Non-compete agreement and workforce 1,960
Goodwill 37,567
Deferred tax liability (5,381)
--------
Total purchase price allocation $ 45,223
========
Tangible net assets acquired include cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued expenses, income taxes payable and customer deposits.
Intangible assets acquired and goodwill are each being amortized on a
straight-line basis over estimated useful lives ranging from two to four years.
Unaudited Pro Forma Information
The following unaudited pro forma information presents the consolidated
results of operations of the Company, excluding the charge for acquired
in-process research and development, as if the acquisitions of JCA and Globe Y
had occurred at the beginning of fiscal 2000. The pro forma 2001 and 2000
results of operations combine the consolidated
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results of operations of the Company, excluding the charge for in-process
research and development attributable to JCA, for the three months ended April
1, 2001 and April 2, 2000 with the historical results of operations of JCA and
Globe Y for the three months ended April 1, 2001 and March 30, 2000,
respectively. The unaudited pro forma information does not purport to be
indicative of what would have occurred had the acquisitions been made as of the
beginning of fiscal 2000 or of results which may occur in the future.
Three Months Ended
----------------------------------
(In thousands, except per share amounts) April 1, 2001 April 2, 2000
------------- -------------
Revenues $ 42,364 $ 14,390
Net loss (56,414) (55,286)
Net loss per share (0.70) (3.69)
Goodwill and intangible assets are generally evaluated on an individual
acquisition, market, or product basis whenever events or changes in
circumstances indicate that such assets are impaired or the estimated useful
lives are no longer appropriate. Periodically, the Company reviews its goodwill
and other intangible assets for impairment based on estimated future
undiscounted cash flows attributable to the assets. In the event such cash flows
are not expected to be sufficient to recover the recorded value of the assets,
the assets are written down to their estimated fair values. No such charges have
been recorded in 2001 related to the JCA or Globe Y acquisitions.
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NEW FOCUS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following discussion contains predictions, estimates and other
forward-looking statements regarding the revenue outlook for the second quarter
of 2001, the anticipated gross margin performance for the second quarter of
2001, the projected pro forma net loss for the second quarter of 2001, planned
restructuring actions, expected improvements in our business during the second
half of 2001, progress on the development of new products and anticipated
shipment dates for products, and the positioning of the Company for future
success. These forward-looking statements are subject to risks and uncertainties
and actual results may differ materially from any future performance suggested
herein. The risks and uncertainties include the difficulty of forecasting
anticipated revenues due to weakness and uncertainties related to overall demand
within the telecommunications industry, inventory levels within the industry,
sudden and unexpected 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; the challenge of managing inventory
levels during periods of weakening demand; the difficulty of achieving
anticipated cost reductions due to unforeseen expenses we may incur in future
quarters, an inability to reduce expenses without jeopardizing product
development schedules and an inability to move sufficient volume of production
offshore; any unforeseen delays in completing the development of our new
products on a timely basis and achieving sufficient production to generate
volume revenues; our ability to gain customer acceptance of new products; and
our ability to generate future revenue from new products commensurate with prior
investments in research and development activities. Other risk factors that may
affect our financial performance are listed in "Risk Factors" elsewhere in this
document.
Overview:
Demand for products within the telecommunications industry, including
the market for fiber optic products, fell abruptly during the latter half of the
first quarter of 2001. We experienced order cancellations during this period and
the rescheduling of orders to later periods. The order cancellations and
delaying of orders continued into the month of April. As a result, we
anticipate lower revenues in the second quarter of 2001 as compared to the
first quarter of 2001.
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In April, we began to develop and implement a restructuring plan. Under
this plan, we are initiating a series of actions that will resize our operations
and result in a restructuring charge that will be reflected in our second
quarter of 2001 financial results. These actions will include closure and
consolidation of two smaller facilities and work force reductions in our U.S.
and China operations. We will also accelerate our efforts to move more
production, in particular subassemblies for our active products, offshore to
Asia. In addition to these longer-range actions, we will cut our capital
expenditures and continue to reduce discretionary spending. We will also
significantly reduce the manufacturing build schedule at our China operations
for the next two quarters to properly balance inventories with near-term demand.
In California, we will close our older Santa Clara facility and
transfer passive product development activities to our newer and larger facility
in San Jose. We anticipate work force reductions at our U.S. operations of
approximately 90 people, mostly manufacturing personnel. In China, we will idle
our smaller production facility and consolidate activities into our larger
factory. Work force reductions at our China operations will total approximately
450 people, mostly direct labor employees. These actions will result in work
force reductions of approximately 10% and 50% at our U.S. and China operations,
respectively. After this latest work force reduction, our worldwide operations
will employ approximately 1,200 people, down from a peak employment level of
2,100 people in early March 2001.
On January 16, 2001, we acquired JCA Technology, Inc. (JCA), 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 $311.5
million in a transaction 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 recorded $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 operates as a wholly owned subsidiary of New
Focus, and our financial statements for the three months
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ended April 1, 2001 include the results of operations of JCA subsequent to the
acquisition date.
On February 15, 2001, we acquired Globe Y. Technology, Inc. (Globe Y), 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
recorded approximately $2.3 million of unearned compensation related to the
issuance of approximately 53,000 shares of restricted stock subject to
forfeiture. Globe Y operates as a wholly owned subsidiary of New Focus, and our
financial statements for the three months ended April 1, 2001 include the
results of operations of Globe Y subsequent to the acquisition date.
Net Revenues:
Net revenues increased to $40.8 million for the three months ended April
1, 2001 from $9.8 million for the three months ended April 2, 2000 primarily as
a result of increased sales of our telecom products and net revenues related to
our acquisitions of JCA and Globe Y in 2001. Sales of our telecom products,
which include $10.9 million of JCA and Globe Y product sales, were $32.3
million, or 79.2% of total net revenues for the three months ended April 1,
2001. Telecom net revenues were $4.9 million, or 49.9% of total net revenues,
for the three months ended April 2, 2000.
Gross Margin:
Gross margin, including amortization of deferred stock compensation,
decreased to a negative 44.6% in the three months ended April 1, 2001 from a
negative 23.4% in the three months ended April 2, 2000. Excluding amortization
of deferred stock compensation of $3.5 million and $1.3 million, respectively,
gross margin decreased to a negative 36.0% in the three months ended April 1,
2001 from a negative 10.3% in the three months ended April 2, 2000. Cost of net
revenues for the three months ended April 1, 2001 includes a $28.5 million
charge for the write-down of excess inventories and related charges, reflecting
lower customer demand for our products and a current lack of visibility into
future order flow resulting from the sudden and sharp decline in capital
equipment expenditures by telecommunications carriers. This write-down more than
offset the positive effects of improved yields for our telecom products, sales
of higher margin products from our acquisitions of JCA and Globe Y, and improved
absorption of our fixed manufacturing costs. In addition, the three months ended
April 2, 2000 include start-up costs for our China operations, which did not
begin production until June 2000.
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Research and Development Expenses:
Research and development expenses, including amortization of deferred
stock compensation, increased to 77.1% of net revenues, or $31.4 million, in the
three months ended April 1, 2001 from 47.3% of net revenues, or $4.6 million, in
the three months ended April 2, 2000. Excluding amortization of deferred stock
compensation of $18.6 million and $1.0 million, respectively, research and
development expenses decreased to 31.4% of net revenues, or $12.8 million, in
the three months ended April 1, 2001 from 36.9% of net revenues, or $3.6
million, in the three months ended April 2, 2000. Research and development
expenses, excluding amortization of deferred stock compensation, decreased as a
percentage of net revenues for the comparable periods, but increased in absolute
dollars as a result of continued development of existing telecom products and
development of new telecom products. We will continue to make significant
expenditures in research and development and expect that, while research and
development expenses may vary as a percentage of net revenues in future periods,
the absolute dollar amount of these expenses will increase as we invest in
developing new active and passive products and continue to enhance our existing
products.
Sales and Marketing Expenses:
Sales and marketing expenses, including amortization of deferred stock
compensation, decreased to 9.4% of net revenues, or $3.8 million, in the three
months ended April 1, 2001 from 13.3% of net revenues, or $1.3 million, in the
three months ended April 2, 2000. Excluding amortization of deferred stock
compensation of $1.4 million and $205,000, respectively, sales and marketing
expenses decreased as a percentage of net revenues to 6.0%, or $2.4 million, in
the three months ended April 1, 2001, from 11.2% of net revenues, or $1.1
million, in the three months ended April 2, 2000. Although sales and marketing
expenses decreased as a percentage of revenues, they increased in absolute
dollars for the comparable periods primarily as a result of hiring of additional
sales and marketing personnel and the expansion of our sales and marketing
efforts.
General and Administrative Expenses:
General and administrative expenses, including amortization of deferred
stock compensation, decreased to 19.6% of net revenues, or $8.0 million, in the
three months ended April 1, 2001 from 45.7% of net revenues, or $4.5 million, in
the three months ended April 2, 2000. Excluding amortization of deferred stock
compensation of $1.8 million and $3.1 million, respectively, general and
administrative expenses increased as a percentage of net revenues to 15.2%, or
$6.2 million, in the three months ended April 1, 2001, from 14.6% of net
revenues, or $1.4 million, in the three months ended April 2, 2000. The increase
in general and administrative expenses in the comparable periods was primarily
due to increased staffing and associated expenses necessary to manage and
support our increased scale of operations, increased legal costs, and
integration costs associated with our acquisitions of JCA and Globe Y.
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Amortization of Goodwill and Other Intangibles:
Amortization of goodwill and other intangibles totaled $21.4 million in
the three months ended April 2, 2001, and arose from our acquisitions of JCA and
Globe Y in January and February 2001, respectively. Goodwill and other
intangibles are being amortized over estimated useful lives of two to four
years.
In-process Research and Development:
A one-time in-process research and development charge of $13.4 million
related to our acquisition of JCA was recorded in the three months ended April
1, 2001. In-process research and development represents the value assigned in a
purchase business combination to research and development activities of the
acquired business that had not yet reached technological feasibility and have no
alternative future use.
Interest and Other Income, net:
Interest and other income, net totaled $5.0 million for the three months
ended April 1, 2001, compared to $224,000 for the three months ended April 2,
2000. Interest income was the largest component in 2001, totaling $5.8 million.
The increase in interest income for the comparable periods was primarily due to
higher average cash balances as a result of the $542.4 million proceeds received
from our May 2000 initial public offering and August 2000 follow-on public
offering. Interest income was partially offset by a $750,000 expense to
write-down to fair market value our investment in a Southern California Edison
debt security.
Income Taxes:
The benefit for income taxes of approximately $5,000,000 for the three
months ended April 1, 2001 relates to the deferred tax benefit associated with
the amortization of other identifiable intangible assets and deferred
compensation resulting from the JCA and Globe Y acquisitions. Excluding the tax
benefit associated with these acquisitions, we recorded a provision for income
taxes of approximately $175,000, primarily for alternative minimum taxes and
foreign withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES:
Our cash, cash equivalents and short-term investments decreased to
$369.6 million at April 1, 2001 from $485.5 million at December 31, 2000. The
decrease in cash, cash equivalents and short-term investments was primarily due
to $14.6 million of cash used in operating activities, $81.7 million used in the
acquisitions of JCA Technology and Globe Y Technology and $27.4 million used in
the acquisition of property, plant and equipment. Net working capital was $380.2
million at April 1, 2001.
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Cash used in operating activities was $14.6 million in the three months
ended April 1, 2001, primarily due to our net loss of $86.3 million, decreases
in accounts payable of $4.8 million and decreases in deferred taxes and income
taxes payable of $5.0 million, partially offset by non-cash charges of $62.7
million, decreases in accounts receivable and inventories of $14.6 million, and
increases in accrued expenses of $4.7 million. Cash used in investing
activities, excluding net purchases of available-for-sale investments, was
$102.2 million in the three months ended April 1, 2001, and was primarily used
to acquire JCA Technology and Globe Y Technology, as well as property, plant and
equipment. Cash generated by financing activities, primarily proceeds from the
exercise of stock options, was $167,000 in the three months ended April 1, 2001.
We currently expect to incur approximately $70 million of capital
expenditures in fiscal year 2001 to purchase equipment for our operations in the
United States and China. We believe that our current cash, cash equivalents and
short-term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK:
We are exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. The Company currently does not
utilize derivative financial instruments to hedge such risks.
Interest Rate Sensitivity:
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We maintain our cash and cash equivalents primarily in money
market funds. Our short-term investments consist of debt securities such as
commercial paper, corporate bonds and notes, euro dollar bonds and asset-backed
securities with original maturity dates between three months and one year. We do
not have any derivative financial instruments. Accordingly, we do not believe
that our investments have significant exposure to interest rate risk.
Exchange Rate Sensitivity:
A substantial majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, we do enter into these
transactions in other currencies, primarily the Chinese yuan renminbi (CNY).
Since late 1997, the CNY has been trading at a conversion rate of approximately
8.28 CNY to the U.S. dollar. Accordingly, we have experienced no material
foreign currency rate fluctuations.
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RISK FACTORS:
You should carefully consider the risks described below and all of the
information contained in this Form 10-Q. 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 $86.3 million for the three months ended April
1, 2001, $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 April 1, 2001, we had an accumulated
deficit of $137.8 million. Due to the current economic climate and associated
uncertainty within the telecommunications industry, we are reassessing our prior
financial guidance but are currently unable to provide meaningful forecasts
beyond the second quarter of 2001. 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 has recorded 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
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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.
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. Due to the current economic climate and associated
uncertainty within the telecommunications industry, we are reassessing our prior
financial guidance but are currently unable to provide meaningful forecasts
beyond the second quarter of 2001. We believe that net revenue for the second
quarter of 2001 will fall in the range of $28-32 million. Many of our expenses
are fixed in the short term, and we may not be able to quickly reduce spending
if our revenue is lower than we project. Major new product introductions will
also result in increased operating expenses in advance of generating revenues,
if any. Therefore, net losses in a given quarter could be greater than expected.
We may not be able to address the risks associated with our limited operating
history in an emerging market and our business strategy may not be sustainable.
Failure to accurately forecast our revenues and future operating expenses could
cause quarterly fluctuations in our net revenues and may result in volatility or
a decline in our stock price.
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF THESE CUSTOMERS OR A
SIGNIFICANT REDUCTION IN SALES TO THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR
REVENUES.
In the three months ended April 1, 2001, Alcatel, Agilent Technologies
and Corvis Corporation accounted for 15.6%, 12.8% and 11.6% of our net revenues,
respectively. 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. We have recently experienced order
cancellations and extensions of product
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shipment dates by several of our customers. The loss of any of these key
customers or further reductions in sales to these key customers could materially
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 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.
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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 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. For example, we delivered samples of our new tunable laser
product to systems provider customers in April 2001, and expect 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
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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. Although this individual
has executed an employment agreement with the Company, we cannot assure you that
we can retain this individual. 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.
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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 recently spun-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 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:
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- 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 costs and 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.
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Except for certain employment agreements entered into in connection with our
acquisitions of JCA, none of our officers or key employees is bound by an
employment agreement for any specific term and these individuals may terminate
their employment at any time. In addition, we do not have "key person" life
insurance policies covering any of our employees.
Recent work force reductions at our China operations will total
approximately 450 people, mostly direct labor employees. We also anticipate work
force reductions at our U.S. operations of approximately 90 people, mostly
manufacturing personnel. 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 DEMAND 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 three months ended April 1, 2001, we
derived approximately 37% and 16%, 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, whether 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. In early March 2001, we had a peak employment level of 2,100 people. 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 will significantly reduce the
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manufacturing build schedule at our China operations for the next two quarters
to properly balance inventories with near-term demand.
In California, we will close our older Santa Clara facility and transfer
passive product development activities to our newer and larger facility in San
Jose. We anticipate work force reductions at our U.S. operations of
approximately 90 people, mostly manufacturing personnel. In China, we will idle
our smaller production facility and consolidate activities into our larger
factory. Work force reductions at our China operations will total approximately
450 people, mostly direct labor employees. These actions will result in work
force reductions of approximately 10% at our U.S. operations and 50% at our
China operations. After this latest work force reduction, our worldwide
operations will employ approximately 1,200 people.
We intend to complete facility construction projects that are 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 will continue to operate facilities in San Jose, 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 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.
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
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not be able to increase market awareness or sales of our products, which would
prevent us from increasing our revenues.
WE MAY IN THE FUTURE, AND WE HAVE IN THE PAST 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, the Company is a defendant in certain putative
securities class actions filed in the United States District Court for the
Northern District of California. In addition, in March 2000, a former employee
filed a complaint against us in Santa Clara Superior Court, alleging wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. Litigation is subject to inherent uncertainties, and
an adverse result in these or other matters that may arise from time to time
could have a material adverse effect on the business, results of operations or
financial condition of the Company.
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
II -- Other Information, Item 1 - Legal Proceedings."
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the three months ended April 1, 2001, 37.0% of our net revenues were
from international sales, and 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 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;
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- 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 AFFECT 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. Most of these facilities 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. In particular, we will significantly reduce the
manufacturing build schedule at our China operations for the next two quarters
to properly balance inventories with near-term demand. We will also accelerate
our efforts
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to move production, in particular subassemblies for our active products,
offshore to Asia and will cut our capital expenditures and continue to reduce
discretionary spending.
In California, we will close our older Santa Clara facility and transfer
passive product development activities to our newer and larger facility in San
Jose. We anticipate work force reductions at our U.S. operations of
approximately 90 people, mostly manufacturing personnel. In China, we will idle
our smaller production facility and consolidate activities into our larger
factory. Work force reductions at our China operations will total approximately
450 people, mostly direct labor employees.
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.
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 excess inventories
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due to our overestimation of component and material requirements for our
manufacturing facilities. Further, in order to avoid additional excess material
inventories we have incurred cancellation charges associated with modifying
existing purchase orders with our vendors. As a result of these excess
inventories and cancellation charges, we recorded a significant charge in the
first quarter of 2001. If we fail to accurately predict both the demand for our
products and the lead times required to obtain the necessary components and
materials in the future, we could incur additional inventory write-downs or
cancellation charges.
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 the results of our 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.
Currently, we operate two manufacturing facilities located in Shenzhen,
China. We expect to close our smaller leased facility as part of our recently
announced restructuring plan, and consolidate China operations into our larger
owned facility. Our ability to operate in China 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. Our 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.
Our assets and facilities located in China are subject to the laws and
regulations of China and our results of operations in China are subject to the
economic and political situation there.
We believe that our operations in Shenzhen, China are in compliance with
China's applicable legal and regulatory requirements. However, there can be no
assurance that China's central or local governments will not impose new,
stricter regulations or interpretations of existing regulations 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,
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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 and the U.S.-China political
relations in general.
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
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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.
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. We have defended such
claims in the
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past. 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.
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.
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RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued FAS 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The adoption of FAS 133 did not have
a significant impact on the Company's operating results or cash flows.
On February 14, 2001, the FASB issued a limited revision of its September
7 Exposure Draft, "Business Combinations and Intangible Assets", that proposes
to significantly change the accounting for goodwill acquired in a purchase
business combination. Under the revised proposal, goodwill would not be
amortized but would be reviewed for impairment, using a complex methodology
different from the original proposal, when an event occurs indicating the
potential for impairment. Goodwill impairment charges would be presented as a
separate line item within the operating section of the statement of operations.
The nonamortization approach would apply to previously recorded goodwill as well
as goodwill arising from acquisitions completed after the application of the new
standard. Amortization of the remaining book value of goodwill would cease and
the new impairment-only approach would apply. The FASB expects to release the
final statement in June 2001. The provisions of the proposed statement are to be
applied at the beginning of the first fiscal quarter following its issuance.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 10, 2000, a former employee filed a lawsuit against the Company
in Santa Clara Superior Court alleging three causes of action for wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. The claims stem from the termination of his
employment with the Company in February 2000. The former employee seeks
unspecified general and special damages, punitive damages, attorneys' fees and
costs in the form of cash and shares of the Company's common stock. 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. The Company plans to
vigorously defend against these claims.
On March 12, 2001, a putative securities class action, captioned Mandel
v. New Focus, Inc., et. al., Civil Action No. C-01-1020, was filed against New
Focus and several
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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,
captioned Rosen v. New Focus, Inc., et. al., Civil Action No. C-01-1065; Solomon
v. New Focus, Inc., et. al., Civil Action No. C-01-2023; Deutch v. New Focus,
Inc., et. al., Civil Action No. C-01-1123; Connors v. New Focus, Inc., et. al.,
Civil Action No. C-01-1148; Spanos v. New Focus, Inc., et. al., Civil Action No.
C-01-1328; Patton v. New Focus, Inc., et. al., Civil Action No. C-01-1413, and
Naiditch v. New Focus, Inc., et. al., Civil Action No. C-01-1689 have also been
filed against New Focus and several of its officers and directors in the United
States District Court for the Northern District of California. The Naiditch
action asserts a class period from October 25, 2000 to March 5, 20001. The cases
are in the process of being consolidated. The Company believes it has
meritorious defenses to the claims and intends to contest the lawsuits
vigorously. An unfavorable resolution of the actions could have a material
adverse effect on the business, results of operations or financial condition of
the Company.
On April 10, 2001, a shareholder derivative action purportedly on behalf
of the Company, captioned Sherman v. Harris et. al., Civil Action No. 18797-NC,
was filed in Delaware Chancery Court. The complaint alleges that the Company's
directors breached their fiduciary duties to the Company by engaging in alleged
wrongful conduct including conduct complained of in the securities litigation
described above. The Company is named solely as a nominal defendant against whom
the plaintiff seeks no recovery.
In addition, the Company is subject to various claims that arise in the
normal course of business.
ITEM 2. Changes in Securities and Use of Proceeds - Not Applicable.
ITEM 3. Defaults Upon Senior Securities -Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders -Not
Applicable.
ITEM 5. Other Information -Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K--
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-Form 8-K filed on January 24, 2001 regarding the completion
of New Focus' acquisition of JCA Technology, Inc.
-Form 8-K filed on February 20, 2001 regarding the
completion of New Focus' acquisition of Globe Y. Technology,
Inc.
-Form 8-K/A filed on March 16, 2001 regarding the historical
financial statements of JCA Technology, Inc. and unaudited pro
forma financial information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW FOCUS, INC.
(Registrant)
DATE: May 9, 2001 BY: /s/ Kenneth E. Westrick
--------------- -------------------------
Kenneth E. Westrick
President and
Chief Executive Officer
DATE: May 9, 2001 BY: /s/ William L. Potts, Jr.
--------------- ---------------------------
William L. Potts, Jr.
Chief Financial Officer
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